Ahead of the November 10-11 South Asian Association for Regional Cooperation (Saarc) Summit in the Maldives, Pakistan on November 2 decided to grant Most Favoured Nation (MFN) status to India after dilly-dallying for more than 15 years. It will play a significant role in improving bilateral ties and boosting two-way trade, which currently stands at $2.6 billion per annum.
Members of the World Trade Organisation (WTO) agreed to accord MFN status to each other after the implementation of the WTO on January 1, 1995. Exceptions allow for preferential treatment of developing countries, regional free trade areas and customs unions. Together with the principle of national treatment, MFN is a cornerstone of WTO trade law.
The MFN Clause of WTO stipulates that “with respect to custom duties and charges of any kind imposed on, or in connection with, importation or exportation, or imposed on the international transfer of payments for import or exports, and with respect to the method of levying such duties and charges, and with respect to all rules and formalities in connection with the importation and exportation, any advantage, favour, privilege or immunity granted by any contracting party to any product originating in, or destined for, any other country shall be accorded immediately and conditionally to the like product originating in, or destined for, the territories for all contracting parties.”
India had given Pakistan the MFN status in 1996 but Islamabad did not respond positively, saying that the Kashmir issue had not yet been resolved. Ties between the two countries deteriorated after the Mumbai terror attack in 2008, for which Pakistan was blamed. Political quarrels, exacerbated by repeated terrorist attacks on India, and originating in Pakistani territory, were another cause.
The anti-MFN lobby in Pakistan believes that liberalisation of trade with India will open the floodgates to cheap Indian goods and that non-tariff products will play havoc with the local industrial scene. It fears that local industry will be gradually eliminated if Indian goods are available in abundance. They also subscribe to the theory that more trade means less emphasis on Kashmir.
Consequently, India did not want to file a complaint in the Dispute Settlement Body of the WTO against Islamabad for not granting MFN status to New Delhi, because granting of MFN status to member countries was the major condition under the WTO agreement and it wanted Pakistan to do so without any “external pressure.”
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Pakistan has at last realised that it will be a gainer by according the MFN status to India in matters of trade and commerce for which two factors are believed to have influenced the Pakistani thinking on the issue.
Firstly, Pakistan’s relations with the US have been under tremendous strain after the Taliban attack on the US Embassy in Kabul, in which Washington sees the hand of Inter Services Intelligence (ISI). This has given strength to the argument advanced by some influential people in Pakistan, like Maulana Fazlur Rehman of the Jamiat-ul-Ulema Pakistan, that Islamabad’s attitude towards India must soften in view of the changing regional and global reality.
Secondly, the business community of Pakistan made a strong recommendation for MFN status to India, saying that it could confidently compete with Indian business houses in the changed scenario. This new-found confidence was noticed during recent Indo-Pak trade talks at various forums.
The Pakistani Cabinet, chaired by Prime Minister Yousuf Raza Gilani, on 2 November unanimously approved the granting of MFN status, which will now allow India access to Pakistani markets in ways that were not possible before. The die had already been cast when Pakistan moved from a positive list to a negative against India (that is, everything may be imported except items on the negative list; a positive list means only those items on the list can be imported) and vowed to keep the list short. The unanimous approval by the Pakistani Cabinet speaks of the sea change in the relationship between the two countries, and hopefully it will translate into greater trade and cultural ties between them.
India-Pakistan trade was worth $2.6 billion in 2010-11, and the two countries are targetting to double this in the next five years. When a country grants a foreign country MFN status, it signifies that import barriers are lowered and import quotas raised for goods originating from that country. Pakistan will now loosen import restrictions on Indian goods.
The Confederation of Indian Industry (CII) claimed that Pakistan’s decision would send bilateral trade soaring and reach a volume of $8 billion in less than five years. “The MFN status will substantially reduce illegal and third-country trade with the potential of raising official bilateral trade to $8 billion in less than five years,” said Chandrajit Banerjee, Director General of CII.
The Ficci Secretary General, Rajiv Kumar said, “the stage is now set for direct exports to Pakistan. Earlier, India used to export to Pakistan via Dubai (third country exports). The reciprocal trade barriers will now disappear.”
Once India and Pakistan develop a greater stake in economic growth, Saarc will be in a better position to realise its dream of growing into a grouping like the European Union. The time has now come for focussing on economic issues. People in South Asia, home to a vast majority of the world’s poor, need to be provided with employment opportunities more than anything else.
The writer is author of World Trade Organisation: Its Implications on Indian Economy (Pearson Education). He can be reached at vasu022@gmail.com