What does India mean by revoking Pakistan's Most Favoured Nation status?

Under the MFN status, a country has to give an equal treatment in terms of tariffs and market access to its trading partner.

Published: 16th February 2019 12:22 AM  |   Last Updated: 16th February 2019 12:48 AM   |  A+A-

Arun Jaitley, Nirmala Sitharaman

Finance Minister Arun Jaitley and Defence Minister Nirmala leave after attending a meeting of the Cabinet Committee on Security CCS to discuss the security scenario in Jammu and Kashmir. (PTI photo)

Express News Service

NEW DELHI: In the wake of the terror attack in Jammu and Kashmir's Pulwama that claimed the life of 44 CRPF jawans, the government on Friday announced to revoke Pakistan's Most Favoured Nation (MFN) status on security grounds.

The decision was taken after a meeting of cabinet committee on securities on Friday morning and the commerce ministry would soon notify to the World Trade Organization (WTO) its decision to revoke the most-favoured-nation (MFN) status to Pakistan.

What is MFN?

The MFN status is governed by the World Trade Organization’s (WTO) General Agreement on Tariffs and Trade (GATT). Countries signatory to the agreement commit against discriminating each other and the rest of the WTO member countries.

Most Favoured Nation (MFN) is a status granted by a trading partner to the other country giving an equal treatment in terms of trading prices or tariffs, market access without discrimination in imports and exports. India has given MFN Status Pakistan in 1996 and is now extended to 200 countries so far, that means after entering India tariff on the product is the same as on the domestic product.

India had also threatened to revoke MFN in 2016, however it did not proceed then. As per the commerce ministry officials "It hardly means much in terms of trade than a strong political statement. India can cite non-reciprocation of MFN by Pakistan and terror funding and security invoking article 21(b)(iii) of GATT”.

“Nothing in this agreement shall be construed to prevent any contracting party from taking action it considers necessary for the protection of its essential security interests… Such measures can be taken under the UN charter for maintenance of peace and security,” says Article 21(b)(iii) of GATT.

Interestingly Pakistan had denied India MFN status based on this very security clause only.

What does it mean for Pakistan

This means now the government can take punitive actions under the Customs Act and the Foreign Trade (Development and Regulation) Act and can restrict trade of certain goods, significantly increase customs duties and impose port-related restrictions on Pakistani goods.

How it is going to impact trade

In the case of Pakistan, the MFN status was one-sided. Pakistan refused to grant most favoured nation to India. In fact, Pakistan maintained a negative list comprising 1,209 items that could not be imported from India. Pakistan allows only 138 items to be imported from India over the Attari-Wagah land route.

Withdrawal of MFN status is more rhetoric and is unlikely to impact Pakistan’s trade unless India stop bilateral trade, which is difficult under WTO rules but it can, however, impose customs duties on it and restrict certain items. Also, the import of Pakistan is too less in comparison to the imports and experts claim that this will impact Indian traders more. However huge trade takes place via indirect routes such as Dubai and gulf markets which will continue despite the ban.

According to Professor Biswajit Dhar of Jawaharlal Nehru University (JNU) said that Pakistan mainly exports to India through Dubai and Singapore, “so we need to target that also”.

The Bilateral trade

Indo-Pak direct trade stands at slightly higher than $2 billion as of now. As per the latest data, bilateral trade between the two nations stood at $ 2.4 billion, which is just 0.3 per cent of India’s overall merchandise trade in 2017-18.

While exports to the neighbouring country worked out to $ 1.9 billion, or 0.63 per cent, of the total Indian outward shipments, imports from Pakistan were $488 million, or 0.10 per cent, of the total inward shipments.

Item imports and exports

Major export items of India include cotton, organic chemicals, dyes and plastics, among others while mineral fuels, edible nuts and plastering materials account for top imports. While Indian exports covering textile, auto and agro products are restricted into the country, Pakistan exports to India including fresh fruits, cement, petroleum products, bulk minerals and ores and finished leather will cease.

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