Guest post by RAZA RUMI
Reports suggest that Pakistan has decided, in principle, to grant the Most Favoured Nation (MFN) status to India. Much progress has taken place since the earlier announcement and several parleys between the officials suggest that trade relations may finally ‘normalise’. India already conferred MFN status to Pakistan in 1996. India and Pakistan have no formal trade agreement. Until now Pakistan maintained a Positive List of importable items from India consisting of 1075 items.
Most Favoured Nation: Under the WTO agreements, countries cannot normally discriminate between their trading partners. Grant someone a special favour (such as a lower customs duty rate for one of their products) and you have to do the same for all other WTO members. This principle is known as most-favoured-nation (MFN) treatment. It is so important that it is the first article of the General Agreement on Tariffs and Trade (GATT), which governs trade in goods. MFN is also a priority in the General Agreement on Trade in Services (GATS).
Thus, a move towards MFN implies that Pakistan will not discriminate against India as the MFN, and by extension will apply the same treatment to other countries. In 1998, the United States renamed MFN status to “permanent normal trade relations” as all but a handful of countries had this status already, making it a misnomer.
No alarmism: So what we see with Pakistan giving India MFN status is a normalisation of trade relations after a long history of protectionism against India. MFN is not a free trade agreement. It just means duty for India will be the same as for any other favoured nation contrary to what the alarmists are saying on national television and endless newspaper articles that have more emotions than facts. MFN by no means equals preferential treatment.
Issues with MFN: Trading with India on the MFN basis will not automatically translate into a rise in trade unless other obstacles are addressed. One of these is non-tariff barriers put up by India that may discourage Pakistani businessmen. These include issues such as packaging, labelling, certification and sundry testing requirements. Furthermore, another category of Indian non-tariff barriers concern transparency issues such as collation of precise information on tariffs, duties and concessions. Thirdly, the subsidies given by India to its farmers may turn our farmers uncompetitive.
Non-tariff barriers are mercantilist measures that need to be shunned so as take advantage of geographical proximity. In fact, the Kashmir dispute may be the only political hurdle to this.
China was given MFN status by Pakistan in the 1990s. However, opinion is that it seized the Pakistani market for consumer goods and destroyed its small-scale domestic manufacturing industry. Trade with India opens up the potential for a permanent market, and with regards to small-scale industry the competition differentials will not be as stark as with China to cause damage. There is no reason why India should not be given this status as the transport costs are much lower across the borders, our exporters stand to gain from reciprocal trade.
Policy shift: The recent policy shift has taken place in the context of our deteriorating economic situation. Since the recent escalation of tensions between Pakistan and the US our ‘aid’ inflows might fall. The IMF programme has ended and there are no prospects for renewal given our inability to reduce public expenditures and raise taxes. In any case, the political governments cannot do without public spending, especially on handouts. However, it is anticipated that cheaper imports from India work against the inflationary trends and the exports — if they grow consistently — will earn us vital foreign exchange to rectify our balance of payments’ crisis.
More importantly, the pressure from the US on Pakistan, especially its armed forces, means that making peace on the Eastern front will help us focus on the Western border, especially the insurgencies in FATA and Khyber Pakhtunkhwa; and the quest for a lead place at the policy table on the Afghanistan ‘endgame’.
Currently, the total volume of trade between India and Pakistan is a little over $2 billion. However, the real potential for increased intra-region trade is huge and estimated to grow to $20 billion if the restrictions are removed. It may take years for gains to register, but the outlook is positive.
Immediate gains are what can help Pakistan in the interim; and working towards regional trade can be a win-win situation for all concerned. India needs more oil, gas, and raw materials from the West and Central Asia and Pakistan can be in important route. It has been reported that India, Pakistan, and Bangladesh can work on gas pipelines and transport gas from Iran, Qatar, Turkmenistan, and Myanmar. A robust regional trading bloc would lead to stability and long-term prosperity and will require good diplomatic ties.
In September 2011, India announced that it would drop its objections lodged with the WTO against trade concessions which the European Union(EU) promised to Pakistan as part of its assistance package to recover from the harmful impacts of 2010 floods. The EU had promised to reduce tariffs on 75 Pakistani goods for a period of three years, including 67 items with zero duty facilities while entering its markets.
Regional imperative: India is expanding its trade links and economic cooperation with almost all the regional countries. New Delhi struck a high profile strategic partnership with Afghanistan just a fortnight ago. Recently, India assured Myanmar a $500 million credit line to improve infrastructure. Earlier, Indian Prime Minister signed ten agreements, including on trade, environment, power and road and rail connectivity with Bangladesh. Sri Lanka has also just revived economic partnerships with India on October 17. Pakistan cannot afford to ignore the regional climate.
Gains are clear: It is now a matter of common knowledge that India-Pakistan trade will benefit both the countries. One study undertaken a few years ago (by ICRIER) estimated a volume of over $10-11 billion (Pakistan 55 percent textiles; India 90 percent non-textiles) with clear net welfare gains. There may not be a trade surplus with India but the real issue is if the cost of imports from India is less than comparable quality imports from other countries. Given the research carried out in recent years, empirical evidence says that both our local industry and consumers are likely to gain by trading with the ‘enemy’.
(Raza Rumi is a well-known journalist based in Lahore. He tweets as @razarumi. This article first appeared in The News on Sunday in Pakistan.)
Previously in Kafila by Raza Rumi:
KAFILA - COLLECTIVE EXPLORATIONS SINCE 2006 
Thanks for the post. I am in principle quite in agreement with the granting of MFN status. Nevertheless, I do see one reasonable argument against this from Pakistan’s side: the normalization of trade results in Pakistan’s industry and markets become heavily dependent on India (the usual globalization vs. self-sufficiency argument), and then for the countless non-economic reasons between the two nations, relations deteriorate and India takes away the MFN and/or restricts trade, leading to a crisis in Pakistan. Any thoughts?
The sticking point for me seems to be the GATT itself, which acknowledges the “exceptional” nature of Indo-Pak trade and essentially provides a carve-out from normal GATT obligations, allowing the two countries to derogate from the MFN commitment. The issue is, once trade is normalized or liberalized, does GATT prohibit a roll-back to the the earlier situation of no-MFN. In other words, is granting MFN a one-way street that must lead to greater and “free-er” trade? Practice seems to suggest otherwise.
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