Most Favored Nation (MFN) Treatment for India An Analysis

The Pakistan-India Case

Since independence in 1947, Pakistan India trade has been conducted on the basis of a host of bilateral, regional and multilateral arrangements. Commercial relations, however, were blocked between 1965 and 1974, owing to two wars between the two countries. Trade resumed in 1974, and remained at negligible levels for the next two decades that followed.  

India had granted Pakistan the MFN treatment in 1995, soon after the WTO was formed, and the treatment is in force since 1996. However, Pakistan had not reciprocated so far, citing that despite giving Pakistan MFN treatment, India maintained a number of non-tariff barriers (NTBs) against imports from Pakistan. These NTBs include requirement of political/security clearance, sampling/customs inspection, requirements of technical/standard certification, labeling and marketing rules, packaging rules and specifications etc.  

Therefore, despite the grant of MFN treatment, Pakistan suffers a heavy trade deficit with India, which is continuously increasing as well. According to State Bank of Pakistan’s statistics, with imports payment of $1.033 billion and export receipts of $313.037 million, Pakistan faced a deficit of $719.857 million in fiscal year 2008-09 with India. The deficit in the next fiscal year 2009-10 surged to $802 million, up by 11 percent, with $1.061 billion imports payment and $260 million export receipts. The balance further deteriorated during the last fiscal year as Pakistan faced a deficit of $1.158 billion as compared to $802 million in fiscal year 2010, depicting an increase of 44 percent in fiscal year 2011.

Pakistan, though did not grant MFN treatment to India, has been maintaining a ‘positive list’ of importable items from India, which it has been continuously increasing. The list started with seven items when the trade was started again after a gap of 9 years in 1974, had reached 800 items in 1996 when India granted MFN treatment to Pakistan and had risen to 1945 items by the end of 2011 when Pakistani government moved forward towards granting India the MFN treatment.

Recent Developments

It was in November 2011 that Pakistani government announced that it has decided ‘in principle’ to give India the much awaited treatment. While there may have been some maneuvering behind the scenes, the public decision was so quick, apparently, that it surprised even the Indian officials, if the media reports are to be believed.  There prevailed a confusion in Pakistan over what actually will be the modus operandi of grant of this treatment, as much as this confusion is present in the not so clear interpretation of WTO/GATT documents that how this treatment is accorded, is it automatic or whether it has to be notified.

However, on February 29, Pakistani cabinet decided that the ‘positive list’ of importable from India will be replaced with a ‘negative list’ of 1209 item, in which trade will be restricted, implying that trade will immediately be opened for all of the items not listed in the ‘negative list’. Surprisingly, in the same session, the cabinet decided that even this ‘negative list’ will be removed fully, in phases, by December 31, 2012 and thus, trade with India will be on the basis of MFN treatment from January 01, 2013.  

The premise and the situation on ground

It was argued that as SAFTA already provides for a ‘sensitive list’ for the member countries, there will be no harm in granting the MFN treatment and removing the ‘positive list’, believing that ‘sensitive list’ will serve the purpose of restricting and undesired influx of imports from India that may be damaging for the local industry. However, ironically, the 6th ministerial meeting of SAFTA, held in Islamabad on February 15, also announced that member countries have agreed to continue reducing their respective ‘negative lists’ further with an aim to enhance regional trade.  

Another argument forwarded by Pakistani officials and picked up by the proponents of free trade between India and Pakistan was that in exchange for MFN treatment, India may be asked to remove NTBs against Pakistani exports. Thus, it was argued, Pakistani exports will also increase. Rather, Pakistan will gain more as Indian market of 1.2 billion people was much larger than Pakistani market of 180 million people. However, there has been no assurance or guarantee on part of India in this regard, despite the claims of Pakistani officials.

The evident reality is that even if India removes all or some of the NTBs on Pakistani exports, Pakistani industry at present is not in a position to benefit owing to the severe gas and electricity shortages and the damages caused to Pakistani economy by floods in 2010 and 2011, as well as the negative impacts of the decade long ‘war on terror’. Thus, timing of the decision is also questionable.

International Dimension – agenda beyond bilateral trade

The decision by Pakistani government comes in a peculiar environment at global and regional level, when India visibly is being promoted as ‘emerging power’ apparently to contain China’s rise in Asia. Hillary Clinton’s speech in Chennai during her visit to India in July 2011 made waves all over the world in which she publically invited India to come forward and assume the leadership role in Asia Pacific region.

There is no denying the fact that Pakistan has been under visible pressure to ‘normalize’ its relations with India, including opening of trade and providing transit to Indian goods and services, towards Afghanistan and Central Asian Republics (CARs). First, the country was cajoled into providing transit facility to India under Afghanistan-Pakistan Transit Trade Agreement (APTTA) that was signed in Washington in 2009. Hillary Clinton, in one of her interviews to a Pakistani journalist in October 2011, expressed her desire in the following words:  

“We share a vision of a sovereign, self-sufficient and democratic Pakistan; a Pakistan at peace and trading with its neighbors and full of opportunities for both men and women.”

The decision of grant of MFN treatment to India can also be linked with the much talked about New Silk Route Initiative of the United States of America, which also, apparently, seems to be an effort to provide India an unhindered access to Afghanistan and CARs. Pakistan is also under pressure to open more crossing points at the Line of Control (LoC) in Kashmir, for Cross LoC trade. All these moves seem to be in sync with each other, and make one assume that the decision to grant of MFN treatment to India has a lot to do with international agenda than just bilateral trade.