Media Coverage

Pakistan’s decision to grant India the MFN status would be a quantum leap in normalising trade between the two countries.

India granted Pakistan the Most Favoured Nation (MFN) status way back in 1996 when the World Trade Organisation (WTO) was formed and both Pakistan and India became its founder members. Pakistan took 15 years to decide in principle that it would also grant India the same status.

I am using the word “would”, because a decision by Pakistan’s federal cabinet would not automatically confer the MFN status on India. Pakistan, through its mission in Geneva, would have to formally inform the WTO that in compliance with multilateral trading system’s principle of non-discrimination among trading partners, it is conferring an MFN status on India.

Pakistan’s decision is a quantum leap in improving trade normalisation between the two countries — and a majority on both sides of the border has welcomed this move.

There is some resistance from certain corners in Pakistan against this decision: opposition parties, especially the PML(N), is dissatisfied as its leaders were not taken onboard; heavily protected and highly influential automobile industry is concerned about the possibility of import of competitive Indian automobiles that may challenge their monopoly; pharmaceutical industry is upset as Indian generic medicines are much cheaper (even at the existing exchange rate where Indian rupee is almost double in value than Pak rupee against the US dollar).

Also, a section in media and establishment is confused with the Urdu translation of MFN — pasandida tareen mulk or a hot favourite country. They question, how can the Pakistan government declare India its hot favourite when numerous issues including Kashmir remain unresolved? Confusing and contradictory statements from various federal ministers further aggravate the matter.

To me most of these concerns are a reflection of lack of understanding about this technical term — MFN.

So, what is MFN? How would it change the relations between Pakistan and India? First things first; MFN is a fundamental principle of WTO which contrary to its name means treating other nations equally. Under the WTO agreements, countries cannot normally discriminate between their trading partners — grant a country 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. It is so important that it is the first article of the General Agreement on Tariffs and Trade (GATT). MFN is also a priority in the General Agreement on Trade in Services (GATS) (Article 2) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) (Article 4).

MFN does allow some exceptions. For instance, Pakistan can negotiate a free trade agreement or regional trade agreements (such as the Pak-China free trade agreement or South Asia Free Trade Agreement (SAFTA). The tariff set for such trading arrangements would only apply to goods traded within the group — discriminating against goods from outside or Pakistan can give least developed countries special access (reduced tariff) to its market or it can raise barriers against products that are considered to be traded unfairly from specific countries (anti-dumping duties and provision of sensitive lists in certain cases etc.).

Though, in services the WTO members are allowed in limited circumstances to discriminate.

But the three WTO agreements mentioned above only permit these exceptions under 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.

The critics of MFN should also realise that Pakistan was obliged to grant this status to India under the WTO regulations and India could have dragged Pakistan to WTO’s dispute settlement body to demand this status as a legal right. Here one should also remember that this decision is not a spontaneous one and has been arrived at after a year’s homework between the commerce ministries officials in both the countries. In fact, if this decision could weaken our respective stances on bilateral disputes then India would have never given Pakistan this status 15 years ago.

So the pertinent question is: how would this decision change the Pak-India relationship?

At present, India maintains a negative list of 850 import items from Pakistan, which means everything else apart from those 850 items, can be imported from Pakistan by India. Pakistani exporters complain about the non-tariff trade barriers (NTBs) in India — that mere granting of the MFN status would not automatically boost trade unless trade facilitation measures are not adapted.

Pakistan is following a more restrictive arrangement (positive list approach) when it comes to imports from India. Only 1,946 items on Pakistan’s positive list can be imported from India. This is precisely why we see loads of Indian products, like toiletries and cosmetics, bearing the fake “made in UAE” labels in Pakistani markets. These products, though in demand in Pakistan, are not included in Pakistan’s positive list. Their importers are forced to take an indirect and expensive route via a third country. But once the MFN status is operationalised, direct access to Pakistani markets via India will cut transaction costs by as much as five per cent.

Besides, when Pakistan moves to a negative list system, it would allow trade in a greater number of goods, implying Pakistani consumers would have increased choices for quality and variety along with competitive prices — provided there are minimum NTBs. Currently trade volumes between Pakistan and India touch 2.6 billion dollars a year. The informal and indirect trade between the two countries is estimated to be another 2-3 billion dollars. Therefore, it is a safe assumption that implementation of MFN status to India would divert most of the informal trade to formal channels which means the bilateral trade would rise to 4-5 billion dollars in a couple of years.

In societal terms, it would mean increased business-to-business and people-to-people connectivity which would not only help in turning SAFTA — signed during the Islamabad SAARC summit in 2004 — operational but also help trust building on the people-to-people level. This would create a demand at the grassroots for resolution of bilateral disputes through dialogue. This demand is a must for generation of political will at the state-level for initiation of trade normalisation. Some of these steps include giving a human face to existing torturous visa regime; enhanced connectivity; flow of bilateral investment; permission to open bank branches and trade in other financial services; and mobile phone roaming arrangements etc.

Importantly, both the countries ought to find non-traditional trade partners and diversified export destinations especially in the aftermath of the Eurozone crisis and growing fiscal deficit in the USA. It is about time that Pakistan and India focus on regional trade for the stability of businesses and industries as well as for the welfare of their consumers who have been paying a very high cost for the economic non-cooperation.

Pakistan seems to gain more from giving the MFN status as the current exchange rate is in its favour. Indian importers would like to enjoy the purchasing power of Indian rupee while importing from Pakistan. In order to export to India or compete with the Indian imports, Pakistani industry would have to learn to be more dynamic and competitive now.

Yet, enhanced economic ties would not solve all our bilateral issues. We still need to resolve the issues of Kashmir and tit-for-tat allegations of terrorism. Nonetheless normalisation of trade would definitely help in trust-building between the two neighbours. This process would catalyse initiation of any meaningful dialogue to resolve these issues amicably.

We must give peace a chance. By living as friendly neighbours, we will be able to divert a substantial portion of our defense budgets to social sector development and turn this region into a hub of global growth.