Understanding the Most Favoured Nation (MFN) Status and Trade between India and Pakistan

Understanding the Most Favoured Nation (MFN) Status and Trade between India and Pakistan
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Showkat Ahmad

Following attack on a large paramilitary convoy of Central Reserve Police Force (CRPF) in Jammu and Kashmir that claimed the lives of 49 CRPF personnel, the NDA government has decided to withdraw the Most Favoured Nation (MFN) status to Pakistan. The issue of revoking MFN status to Pakistan by India under the WTO provisions had been in the limelight lately. What MFN really means under the WTO agreements? What could be the possible repercussions if India revokes the Pakistan’s MFN Status?
The idea of Most Favoured Nation treatment has a long history. An embryonic version of an MFN clause has been traced as far back as 1417, but the origins of the Most Favoured Nation commitment in international commercial matters are generally considered to stem mainly from the seventeenth and eighteenth centuries. The early clauses were quite broad, applying to a wide range of issues such as “rights, privileges, immunities and exceptions” with respect to trade, commerce and navigation, or to “duties and prohibitions” with respect to vessels, importation or exportation of goods. These early clauses were often conditional, meaning that the benefits granted by one State were dependant on the granting of the same concessions by the beneficiary State.
The unconditional approach emerged during the second half of the eighteen century. The Treaty of Commerce signed in 1869 between Great Britain and France (the Chevalier-Cobden Treaty) is a prominent example. This trend was reversed after World War I and during the 1929 economic depression, when protectionist approaches prevailed. Nonetheless, after World War II, tariff and trade agreements were negotiated simultaneously by all interested parties through the General Agreement on Tariffs and Trade (GATT), which ultimately resulted in the World Trade Organization in 1995. The World Trade Organization requires members to grant one another “most favoured nation” status. A “most favoured nation” clause is also included in the majority of the numerous bilateral investment treaties concluded between capital exporting and capital importing countries after World War II. Today, MFN treatment in WTO agreements extends beyond its original application to trade in goods also to the areas of trade in services and trade-related aspects of intellectual property rights.
MFN treatment is defined by the Draft articles on MFN as the:
“[…] treatment accorded by the granting State to the beneficiary State or to persons or things in a determined relationship with that State, not less favourable that treatment extended by the granting State to a third State or to persons or things in the same relationship with that third State.”
In the context of international trade, MFN treatment is essential for ensuring a level playing field between all trading partners and is therefore the central pillar of the international trading system. The term means the country which is the recipient of this treatment must nominally receive equal trade advantages (which include low tariffs or high import quotas) as the “most favoured nation” by the country granting such treatment. In effect, a country that has been accorded MFN status may not be treated less advantageously than any other country with MFN status by the promising country. The importance of MFN is lies in the fact that it is the first clause in the General Agreement on Tariffs and Trade (GATT). According to Article 1 of the General Agreement on Tariffs & Trade (GATT), no nation would discriminate against any other with respect to trade. This meant that any favour, immunity or privilege extended by one country to another would be extended to all other members of the WTO. For example, if one nation reduces tariffs by 5% for one nation, the MFN clause states that all WTO members will have their tariffs cut by 5% into that nation. It is pertinent to mention here that both India and Pakistan are part of the WTO; both are required to grant MFN status to each other and other partner countries. While India granted MFN status to Pakistan in 1996, just a year after the formation of the WTO; the latter has not reciprocated likewise. The reason behind Pakistan’s abstinence from granting the status to India lies in a history of decades of conflict, mistrust and war.
Repercussions of revoking MFN status to Pakistan
Those who favour India’s revocation of MFN status to Pakistan are of the opinion that revoking the MFN status to Pakistan will mean that India can increase custom duties on goods imported from Pakistan up to the bound level duty rates. Currently, India’s customs duties on goods to WTO members are below the bound level rates. The current customs duties imposed are called applied rates and the level at which the duties can be increased are known as bound rates. It needs to be pointed out here that India’s official trade with Pakistan stood at $ 2.29 bn for the FY17 representing a minuscule 0.35% of India’s overall trade. In terms of numbers, India imported goods worth $489 million in 2017-18 from Pakistan and exported goods worth $1.92 billion. While both governments have facilitated a degree of industry outreach and have recently sought a moratorium on new trade agreements, progress on the ground has been subdued. These restrictions notwithstanding, India continues to maintain a substantial trade surplus with Pakistan. Revoking MFN status won’t have any significant trade fallout considering the fact that there are hardly any strong trade ties between the two neighbouring countries. From a political perspective, the move could not only result in India losing goodwill in the South Asian Region, it could also lead to increased illegal trade between two neighbours.

—The author is an Assistant Professor at Government Degree College, Tral. He can be reached at: ahmadshowkatamu@gmail.com