Topic: India revokes Most Favoured Nation status granted to Pakistan
Topic in Syllabus: General Studies Paper 3: Security Issues
Less than 24 hours after the terror attack in Jammu and Kashmir’s Pulwama district, India withdrew the Most Favoured Nation (MFN) status accorded to Pakistan. While the withdrawal of the MFN status by India is negative in sentiment terms for the bilateral relations, the impact on trade is unlikely to be substantial given that volumes of merchandise trade are low.
More about on news:
- Union Finance Minister saying that the MFN status to Pakistan stands withdrawn.
- The decision by India to withdraw MFN status to Pakistan is intended to isolate Pakistan diplomatically and squeeze the country’s industry.
- Even though the low volumes of trade limit the impact that such a step can have, the stoppage of input materials such as chemicals and cotton from India will push up costs of production for the relevant Pakistani industries.
- It would also give a push to the illegal trade between the two countries, which takes place through border gaps and via third countries.
- It could also give a handle to extremist elements in Pakistan to scale up the rhetoric against India.
Pulwama terror attack
- Recently an explosive-laden SUV rammed into one of the buses out of a 70-vehicle CRPF convoy at Awantipora town in Jammu and Kashmir’s Pulwama district. The bus, carrying around 35-40 soldiers, was passing through Gundipoora section when it was attacked.
- Pakistan-based JeM has identified the suicide bomber responsible for the attack as Adil Ahmed Dar and released a video of him soon after the attack. He was reportedly part of the Pakistan-based terror group since 2018.
- Currently, the situation in the Valley remains tense as all police convoys have been halted and an NIA team will be sent to Kashmir soon.
- Prime Minister the forces will be given full freedom to avenge the attack, adding that “Pakistan has made a huge mistake”.
- Many including the United States have condemned the heinous attack that has claimed the life of over 40 paramilitary troopers and left many injured.
Most Favoured Nation:
- While the term suggests special preference for the country given MFN status, it actually means it would be treated equally as all others.
- Every member country of the World Trade Organization (WTO) is required to accord the MFN status to all other member countries as is specified under Article 1 of the General Agreement on Tariffs and Trade (GATT), 1994.
- The primary objective of WTO is to monitor trade and resolve trade related issues amongst the member nations. However, MFN itself is a misnomer; it actually means non-discrimination amongst member nations.
- It leads to equal treatment amongst countries and ensures a more stable, predictable, reliable and competitive international trade.
- MFN status is very desirable between trading partners because it allows each country the greatest access into the other’s domestic markets without the hindrances of tariffs or quotas.
- That means it receives the lowest tariffs, the fewest trade barriers, and the highest import quotas (or none at all).
- It reduces the ill effects of trade protectionism.
- MFN status is critically important for smaller and developing countries for several reasons.
- It gives them access to the larger market.
- It lowers the cost of their exports since trade barriers are the lowest given.
- That makes their products more competitive.
- The country’s industries have a chance to improve their products as they service this large market.
- Their companies will grow to meet increased demand.
- They receive the benefits of economies of scale. That, in turn, increases their exports and their country’s economic growth.
India and MFN:
- India has extended MFN status to member countries of WTO.
- As regards SAARC countries, Bangladesh, Maldives, Nepal, Pakistan and Sri Lanka are members of WTO and except the Pakistan, these countries have extended MFN status to India.
- India has extended MFN status to all these SAARC countries including Pakistan.
India, Pakistan and MFN status:
- In accordance with the MFN principle and its obligations under the WTO, India accorded Pakistan MFN status in 1996.
- Pakistan decided to accord the MFN status to India in 2011 with the objective to make it effective from 1 January, 2013, but failed to do so.
- In March 2012 it came out with a ‘Negative List’ of 1,209 prohibited product imports from India which means India is not allowed to export these items to Pakistan.
- In addition, Pakistan permits only 138 products to be imported from India through Wagah/Attari border land route.
- The main items India imports from Pakistan are cement, petroleum products, fresh fruits, finished leather, bulk minerals and ores. The export items include cotton, cotton yarn, chemicals, plastics, manmade yarn and dyes to Pakistan.
- Despite these restrictions, India continues to maintain a substantial trade surplus with Pakistan.
- India’s trade numbers with Pakistan are minuscule.
- Trade between the neighbours jumped nearly three-and-a-half times between 2000-01 and 2005-06 (from $251 million to $869 million per annum), but progress was slower in the decade that followed, with volumes rising a little over three times.
- India’s trade with much smaller Bhutan is over half that with Pakistan (In 2016, total India-Bhutan bilateral trade was Rs 8,723 crore; with Pakistan, it was around Rs 17,200 crore.)
- But in FY17, India-Pakistan trade was a mere $2.29 billion, or about 0.35% of India’s overall trade.
- In the 7th round of Commerce Secretary level talks with Pakistan, held in September 2012 in Islamabad, a roadmap was agreed for facilitating trade, identifying several actions to be taken by both the countries in a time-bound manner.
- The agreed roadmap could not be implemented since Pakistan did not notify the removal of trade restrictions through Wagah-Attari land route (which was the first step identified in the roadmap).
- The Commerce Ministers of India and Pakistan met in January 2014 on the sidelines of the 5th SAARC Business Leaders Conclave held at New Delhi.
- Then in the meeting between Prime Ministers of India and Pakistan on 27th May 2014, India stated that the two countries could move immediately towards full trade normalization on the basis of September 2012 roadmap worked out between the Commerce Secretaries of both countries.
- No bilateral trade meeting between India and Pakistan has taken place since then.
- The cement traders in Pakistan are ruing over the rising tension between both the countries. Cement demand was at its peak in India after the Modi government announced Rs 5,000 crore rehabilitation projects for flood-hit Kerala.
- Traders in Pakistan have been severely hit after India raised customs duty on the import of all Pakistani goods by over 200 per cent.
Exceptions for MFN:
- MFN at the same time allows some exemptions as well. One such exemption is the right to engage in Free Trade Agreements. This means members can participate in regional trade agreements or free trade agreements where there is discrimination between member countries and nonmember countries.
- Another exemption is that members can give developing countries special and differential treatment like greater market access. This special concession are in different forms like reduced tariff rates from developing country imports, concessions that allows developing countries to give subsidies to their production sectors etc.
- Another exemption is when a country raises trade barriers against products that are unfairly supported by the trade partner country (like dumping and export subsidy). Similar differentiations are also allowed in the case of service trade also, but in limited scale.
- All these exceptions are subjected to strict conditions. “In general, MFN means that every time a country lowers a trade barrier or opens up a market, it has to do so for the same goods or services from all its trading partners — whether rich or poor, weak or strong. Each member treats all the other members equally as “most-favoured” trading partners.
Does MFN status offer preferential treatment?
- Although it sounds as if MFN offers preferential treatment, it only ensures non-discriminatory trade.
- It makes sure that any country receiving MFN status avoids any disadvantageous situation in comparison to the granter’s other trade partners.
- An MFN status helps reduce trade barriers and results in a reduction in tariffs.
- An MFN status helps in the promotion of free trade between two or more countries.
What does revoking MFN mean?
Revoking it means India can levy whatever import tariffs it wants. India can now make it very expensive for Pakistan to export its goods to India. Pakistan has always retained this right.
MFN withdrawal process:
- India announced to initiate the process of revoking the MFN status of 23 years to Pakistan.
- It has been revoked for the first time since 1996 when India granted the status to Pakistan.
- The process of moving the communication to WTO has begun.
- According to Commerce Ministry sources, the ministry will now write to WTO to formally inform it of the withdrawal of MFN status to Pakistan by invoking Article 21 of WTO which is called the Security Exceptions Article.
- Pakistan cannot withdraw the status as it never gave India the MFN status.
- Since MFN entails least possible tariffs and highest import quotas, it is only beneficial for developing countries giving them wider access to the markets of the member countries at much lesser costs.
Impact of withdrawal of status of MFN:
- India’s decision to withdraw the ‘most favoured nation’ (MFN) status to Pakistan will adversely impact the neighbouring country’s economy which is already in “deep trouble”.
- India’s large market will now be closed for Pakistani exports.
- Withdrawal of the MFN status would significantly hit Pakistan’s exports to India, which stood at USD 488.5 million (around Rs 3,482.3 crore) in 2017-18.
- Withdrawal of the status would mean that India could impose heavy customs duties on Pakistani goods.
- Total India-Pakistan trade has increased marginally to USD 2.41 billion in 2017-18 as against USD 2.27 billion in 2016-17. India imported goods worth USD 488.5 million in 2017-18 and exported goods worth USD 1.92 billion in that fiscal.
- Pakistan exports fresh fruits, cement, petroleum products, bulk minerals and ores and finished leather to India.
- It is believed that the decision might have long-term consequences as it will further dim the chances of normalization of trade and tapping the potential of bilateral trade.
- The withdrawal of MFN status is going to hurt Pakistan to some extent. Withdrawal of this status means India can now enhance customs duties to any level on goods coming from Pakistan.
Critically examine how India’s decision to withdraw MFN status to Pakistan ‘adversely impact’ its economy.