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India and the World, Questions

OAS Mains Q&A: MFN status

Context

In response to Pulwama attack, India withdrew MFN status accorded to Pakistan.

India granted MFN status to Pakistan in 1996, a year after the formation of WTO. Pakistan still hasn’t granted India with MFN status. On the other hand, it came up with a dissimilar but globally popular Non-Discriminatory Market Access (NDMA) agreement.

The reason Pakistan has chosen to adopt the NDMA with India is due to political mistrust and a history of border conflicts. On November 2, 2011, the Pakistani cabinet decided formally to accord India MFN status. But that decision remains unimplemented.

Question

What is MFN Status? Discuss it benefits and shortcomings.

Sample Answer

Most Favoured Nation is a treatment accorded to a trade partner to ensure non-discriminatory trade between two countries vis-a-vis other trade partners.

Article 1 of the General Agreement on Tariffs and Trade (GATT), 1994, requires every member country of the World Trade Organisation (WTO) to accord Most Favoured Nation (MFN) status to all other member countries.

Under WTO rules, a member country cannot discriminate between its trade partners. If a special status is granted to a trade partner, it must be extended to all members of the WTO.

Benefits of MFN

  • MFN essentially guarantees the most favourable trade conditions between two countries.
  • These terms include the lowest possible trade tariffs, the least possible trade barriers and very crucial to trade relations– highest import quotas.
  • The WTO rules allow discrimination in certain cases like in cases when a country signs free trade agreements in a region.
  • In that situation, a country may grant special favours and trade concessions to a country as compared to non-member countries of that group.

Shortcomings

  • The main disadvantage is that the country has to give the same treatment to all other trade partners who are members of the WTO.
  • This translates into a price war and vulnerability of the domestic industry as a result.
  • The country is not able to protect domestic industry from the cheaper imports and in this price war, some domestic players have to face heavy losses or growth restrictions.

About WTO

The World Trade Organization (WTO) is an intergovernmental organization that is concerned with the regulation of international trade between nations. The WTO officially commenced on 1 January 1995 under the Marrakesh Agreement, signed by 123 nations on 15 April 1994, replacing the General Agreement on Tariffs and Trade (GATT), which commenced in 1948. It is the largest international economic organization in the world.

The WTO deals with regulation of trade in goods, services and intellectual property between participating countries by providing a framework for negotiating trade agreements and a dispute resolution process aimed at enforcing participants’ adherence to WTO agreements, which are signed by representatives of member governments:fol.9–10 and ratified by their parliaments. The WTO prohibits discrimination between trading partners, but provides exceptions for environmental protection, national security, and other important goals. Trade-related disputes are resolved by independent judges at the WTO through a dispute resolution process.

The WTO’s current Director-General is Roberto Azevêdo, who leads a staff of over 600 people in Geneva, Switzerland. A trade facilitation agreement, part of the Bali Package of decisions, was agreed by all members on 7 December 2013, the first comprehensive agreement in the organization’s history. On 23 January 2017, the amendment to the WTO Trade Related Aspects of Intellectual Property Rights (TRIPS) Agreement marks the first time since the organization opened in 1995 that WTO accords have been amended, and this change should secure for developing countries a legal pathway to access affordable remedies under WTO rules.

Studies show that the WTO boosted trade, and that barriers to trade would be higher in the absence of the WTO. The WTO has highly influenced the text of trade agreements, as “nearly all recent preferential trade agreements (PTAs)] reference the WTO explicitly, often dozens of times across multiple chapters… in many of these same PTAs we find that substantial portions of treaty language—sometime the majority of a chapter—is copied verbatim from a WTO agreement.”

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