Explained: What is MFN status, how can India hurt Pak by withdrawing it

Note4students

Mains Paper 2: IR | India & its neighborhood relations

From UPSC perspective, the following things are important:

Prelims level: MFN status, General Agreement on Tariffs and Trade, WTO

Mains level: India-Pakistan trade relationship


News

  • In a major terrorist attack, 40+ CRPF personnel were martyred in J&K’s Pulwama district when a terrorist attacked with an explosives laden vehicle into one of the vehicles of the CRPF convoy.
  • In response to the effect, India withdrew MFN status accorded to Pakistan.

MFN status to Pakistan

  1. India granted MFN status to Pakistan in 1996, a year after the formation of WTO.
  2. 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.
  3. The reason Pakistan has chosen to adopt the NDMA with India is due to political mistrust and a history of border conflicts.
  4. On November 2, 2011, the Pakistani cabinet decided formally to accord India MFN status. But that decision remains unimplemented.

Trade between India and Pakistan

  1. Bilateral trade between India and Pakistan stands at $2.61 billion.
  2. The major commodities and goods in which both countries trade include cement, sugar, organic chemicals, cotton, man-made filaments, vegetables and certain fruits and tubers, mineral fuels, mineral oils, salts, earths, stone, lime, dry fruits, steel and plastering material.
  3. In FY17, India-Pakistan trade was a mere $2.29 billion, or about 0.35% of India’s overall trade.

Does MFN mean preferential treatment?

  1. In literal explanation, MFN doesn’t mean preferential treatment.
  2. Instead it means non-discriminatory trade that ensures that the country receiving MFN status will not be in a disadvantageous situation compared to the granter’s other trade partners.
  3. When a country receives MFN status, it is expected to raise trade barriers and decrease tariffs.
  4. It is also expected to open up the market to trade in more commodities and free flow of goods.

Pros of MFN

  1. MFN status is extremely gainful to developing countries.
  2. The clear upsides are access to a wider market for trade goods, reduced cost of export items owing to highly reduced tariffs and trade barriers.
  3. These essentially lead to more competitive trade.
  4. MFN also cuts down bureaucratic hurdles and various kinds of tariffs are set at par for all imports.
  5. It then increases demands for the goods and giving a boost to the economy and export sector.
  6. It also heals the negative impact caused to the economy due to trade protectionism.

Impact

  1. The decision by India to withdraw MFN status to Pakistan is intended to isolate Pakistan diplomatically and squeeze the country’s industry.
  2. Even though the low volumes of trade limit the impact that such a step can have, the stoppage of input materials such as chemicals and cotton from India will push up costs of production for the relevant Pakistani industries.
  3. However, it will also give a handle to extremist elements in Pakistan to scale up the rhetoric against India.

Back2Basics

What is MFN Status?

  1. 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.
  2. 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.
  3. Under WTO rules, a member country cannot discriminate between its trade partners.
  4. If a special status is granted to a trade partner, it must be extended to all members of the WTO.

Benefits of MFN

  1. MFN essentially guarantees the most favourable trade conditions between two countries.
  2. These terms include the lowest possible trade tariffs, the least possible trade barriers and very crucial to trade relations– highest import quotas.
  3. The WTO rules allow discrimination in certain cases like in cases when a country signs free trade agreements in a region.
  4. 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

  1. The main disadvantage is that the country has to give the same treatment to all other trade partners who are members of the WTO.
  2. This translates into a price war and vulnerability of the domestic industry as a result.
  3. 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.
Foreign Policy Watch: India-Pakistan
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