In a significant development, India has rescinded the Most Favoured Nation (MFN) status granted to Pakistan. This decision was a direct response to the terrorist attack in Pulwama.
Understanding the Most Favoured Nation Status
The term ‘Most Favoured Nation’ originates from Article 1 of the General Agreement on Tariffs and Trade (GATT) 1994. It mandates every member of the World Trade Organization (WTO) to extend MFN status to all other member nations. This essentially means offering preferential trade conditions concerning tariffs and trade barriers.
India, following this rule, had granted MFN status to all WTO member countries, including Pakistan, since signing the Marrakesh Agreement that established the WTO. It’s worth noting that the WTO, founded in 1995, replaced the General Agreement on Trade and Tariffs (GATT), a body operational since 1946 to support international trade post-World War II.
While the name suggests it may offer special treatment, the MFN chiefly guarantees non-discriminatory trade. It ensures that any nation with the MFN status isn’t disadvantaged in comparison to other trade partners of the granting country.
WTO Rules and Implications
According to WTO regulations, member nations cannot usually discriminate between their trading partners. For instance, if a country grants a trading concession like lower import duties to one member, it must extend the same to all members. This principle is known as the Most Favoured Nation treatment.
Despite several commitments, Pakistan never granted the MFN status to India. Regardless, MFN is essentially a policy promoting non-discriminatory trade, ensuring equal trade among all WTO members.
Since both India and Pakistan are WTO members, they are obligated by default to grant each other the MFN status.
Revoking the MFN Status
When a country revokes the MFN status to another, it holds the right to impose any import tariffs it wishes. In India’s case, this could potentially allow the country to make it prohibitively expensive for Pakistan to export goods or services.
Immediate Consequences of Revoking
The immediate step following the revoking is expected to be the Indian commerce ministry writing to the WTO to officially revoke Pakistan’s MFN status. This would involve invoking Article 21 of WTO, also known as the Security Exceptions Article.
Potential Impact on Pakistan
| Year | Total Indian Trade with Pakistan | Pakistan’s Exports to India |
|---|---|---|
| 2017-18 | $2.4 billion | $488.56 million |
As of now, India has only withdrawn the MFN status but has not reassessed import duties. Should they decide to increase these, it could have some effect on Pakistan. The extent of this impact is debatable, as Indian trade with Pakistan stands merely at $2.4 billion in 2017-18, and imports from Pakistan amount to a modest $488.56 million.
Therefore, the rescindment symbolises more than tangible trade implications. It may inadvertently encourage illegal trade via border gaps and third countries, and offer extremist Pakistani factions a reason to escalate anti-India rhetoric.
However, the intended motivation behind India’s decision to withdraw the MFN status aims to diplomatically alienate Pakistan and squeeze its industry. This move may tarnish Pakistan’s reputation as a reliable trade partner and investment hotspot.
