Withdrawal of MFN Status to Pakistan: A Critical Analysis

Indo-Pak Trade

Following the Pulwama terror attack, India has withdrawn the Most Favoured Nation (MNF) status accorded to Pakistan. In this context let’s examine the Issue.

Present state of Indo-Pak Trade:

  1. India’s trade volumes with Pakistan are notably low. It 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.
  2. In the 2012 Commerce Secretary level talks with Pakistan, a roadmap was agreed for facilitating trade. But the agreed roadmap could not be implemented since Pakistan did not notify the removal of trade restrictions through Wagah-Attari land route. Despite Pakistan’s restrictions, India continues to maintain a substantial trade surplus with Pakistan.
  3. Pakistan’s exports to India have consistently been about only a fourth of what it imports from India.

Most Favoured Nation (MFN) Status:

The MFN status offers preferential trade terms with respect to tariffs and trade barriers. It is a provision under the World Trade Organisation (WTO) which requires every member country to accord MFN status to all other member countries. Though the term suggests special treatment, in the WTO it actually means non-discrimination/treating virtually everyone equally. As, under WTO rules, a member country cannot discriminate between its trade partners.

State of MFN Status between India and Pakistan

  1. India accorded MFN status to all WTO member countries including Pakistan in 1996, a year after the formation of WTO. However, Pakistan is yet to transition fully to MFN status for India. It maintains a Negative List of 1,209 products that are not allowed to be imported from India. In addition, Pakistan permits only 138 products to be imported from India through Wagah/Attari border land route.
  2. Instead of MFN, Pakistan 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 the political mistrust and a history of border conflicts.
  3. Despite domestic demands at various instances for withdrawal of MFN status to Pakistan, India has not done it before.

Aftermath

  1. The withdrawal decision is intended to isolate Pakistan diplomatically and restrict the country’s industry.
  2. It is negative in terms of the bilateral relations between the two neighbours.
  3. But the impact on trade is less likely to be substantial as the volumes of merchandise trade are low. Nevertheless, the stoppage of input materials such as chemicals and cotton from India will push up costs of production for the relevant Pakistani industries.
  4. On the downside, it would give a push to the illegal trade between the two countries through border gaps and via third countries.
  5. It could also drive the extremist elements in Pakistan to promote the rhetoric against India.

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