Most Favored Nation (MFN) Treatment for India An Analysis

Implications for Pakistan

Granting MFN Treatment implies that while gains would be questionable, owing to India’s NTBs and current fragile state of Pakistani economy, there are worth pondering consequences considering the peculiar nature of relationship between the two countries and state of affairs of their economies at present.
Gains, perceived and actual: It is perceived, and as a general rule it is true to some extent, that enhanced trade leads to mutual gains and therefore the decision to grant MFN will have some positive results for Pakistan’s commerce and industry in particular, and overall economy in general. Some of these perceived benefits, which this government and its functionaries describe as the merits of this decision are following:
 
•    Opposition to MFN treatment for India is often based on misconception of the definition. It is wrongly believed that giving MFN treatment to India will mean zero rated and free trade, meaning free flow of goods and services. This is not the case, and MFN treatment means uniform tariff rate and structure for all WTO member states.   
•    Pakistan and India are two close neighbors, and trading with each other will save time and transportation costs. While direct trade between the two countries is not very high, the two countries trade via third markets (mostly Dubai, Sri Lanka and Hong Kong) in a higher volume, which certainly increases time and intermediary costs. These costs can be saved.
•    Geographic nearness, long border and lack of desired level of legal trade transactions results in illegal trade i.e. smuggling. Legalizing this illegal trade will result in enhanced revenues for both the countries, particularly Pakistan.
•    It would be beneficial for Pakistan to import the same items from India that it exports from the Western and other far away countries. Less costly items will be available for Pakistani consumers, and this will be in ‘consumer interest’.
•    Cheap raw materials will be available for Pakistani industries which can reach Pakistan in a relatively quick span of time.
•    Diplomatically, it is believed that Pakistan will be able to generate goodwill in India and globally as well. This decision will also result as a Confidence Building Measure (CBM) between the two countries.

The other side of the coin: The above mentioned ‘perceived gains’ present just one side of the coin. As is the case with every decision, the treatment will entail important pitfalls. There are some other considerations to be taken into account, for instance:  

•    There are many studies indicating that as compared to Pakistani manufacturing sector,  Indian industry is much more broad-based, subsidized and more competitive. This is because of easy and cheap availability of power and credit as against Pakistan’s industry operating in an environment of high cost of doing business and severe power shortages. MFN in these circumstances will mean that Pakistan’s already struggling industry will be wiped out.  
•    India’s NTBs and tariff rate quotas will continue to hinder Pakistan export potential, trade deficit with India will continue to rise.
•    Considering the nature of relationship between Pakistan and India, in which trade has been cut off many a time in the past due to hostilities and tensions, and considering the substantial issues between the countries are still unresolved, Pakistani industry and economy cannot afford to build any sort of dependence on supply of raw materials, even though the cost of import from other countries is relatively heavy. It must not be forgotten that India has opted out of proposed Iran-Pakistan-India gas pipeline because it does not want its industry/economy to depend on gas supplied through Pakistan.
•    Allowing inflow of cheaper goods only in the name of ‘consumer interest’ is not always advisable. A country will always have to find a balance between becoming a trading country and a manufacturing/industrial country.
•    The biggest demerit, which is being neglected in prevailing discourse on the subject, is that MFN does not merely mean an abolition of ‘negative list’ of tradable items from January 1, 2013. MFN also implies that Pakistan will have to allow free transit of Indian goods, services and their transportation through Pakistani territory towards other countries.  Soon after Pakistani announcement to grant the MFN treatment, Indians traders have already started asking for transit access to Afghanistan and CARs. Chairman Confederation of Indian Industry Amritsar Zone, Suneet Kochhar, has demanded that “now Pakistan must act on giving transit route to India for catering to Central Asia.”  

It is well known that most of the transit goods destined for Afghanistan, mostly subsidized, have been ending up in Pakistani market, severely damaging the local industry. This will be a major drawback in this arrangement. While Pakistan may get some transit fees, past experience of transit trade tells that most of the goods destined for Afghanistan are dumped in Pakistani market. Furthermore, if it so happens, Pakistan’s weak physical infrastructure, particularly the roads network that is already in shambles due to excessive use by containers carrying NATO supplies, cannot afford the unprecedented load of traffic from India to Afghanistan and Central Asian Republics.
•    Allowing inflow of cheaper goods in the name of ‘consumer interest’ is not always advisable. A country will always have to find a balance between becoming a trading country and a manufacturing/industrial country.
•    Trade, as the record shows, has not been able to build trust between Pakistan and India as the reasons of mistrust are deep-rooted in strategic issues. It is not simply a case of ‘trading for peace’ but essentially demands sustainable ‘peace for trade’. Also, the conduct trade between countries of the world in present times, including the world’s two largest economies, United States and China; trade cannot be fully isolated from the political issues between the countries involved.

The Reactions

The reaction to the decision in Pakistan has been varied, motivated by the commercial interest of the businessmen involved. It is quite natural that pure importers and those industrialists whose industries would benefit from cheap raw materials or machinery would welcome the decision. So has been the case. However, some objective voices have also emerged. Chairman of All Pakistan Textile Mills Association (APTMA), Mohsin Aziz says that “textile industry had no apprehensions about granting of MFN status to India but would like to be assured of level playing field”  citing the continuity of India’s NTBs. Pakistan Economy Watch, a Civil Society Organization based in Islamabad has cautioned that MFN status will be damaging for Pakistan’s largest export earner, the textile sector.  Rice exporters, the second largest export sector of Pakistan, have also demanded that rice should not be traded with India on MFN basis.

The budding auto and pharmaceutical industries have also expressed their concerns. Some of the leading trading bodies including Rawalpindi Chamber of Commerce have opposed the decision. It needs no mention that business sectors and bodies may have their particular business interest in any such decision by the government. However, it is quite clear that all the stakeholders have not been duly consulted – particularly in case of 10 months time frame for abolition of the ‘negative list”. Vice President of federation of Pakistani Chambers of Commerce and Industry, Khalid Tawab is of the opinion that 10 months period is insufficient and government should have given at least three years to the local industry .