Pakistani cabinet’s decision of granting the Most Favoured Nation (MFN) status to India is the most talked-about issue in the corridors of trade and commerce. It can be called the most important chapter in the history of both the countries because it has been a social and political taboo on both sides of the Indo-Pak border since many decades. Tonnes of conciliatory and contradictory material have been printed over the economic issue that has been dragged into the realm of politics. Responding to a massive campaign against the pact on the Pakistani side of Indo-Pak borders, Pakistan government has linked the implementation of the pact to more agreements as an exercise to ensure level playing field to protect the interests of Pakistani traders who are threatened by the export potentials of a huge economy like India.
Reciprocal in nature
It is to be remembered that back in 1996 India gave Pakistan the MFN status and since then it has remained a subject of immense debate. As per WTO rules, Pakistan was obliged to reciprocate the Indian move and grant status to India but it declined to do so since 1996.
Generally speaking, trade experts consider MFN clauses to have the following benefits:
n A country that grants MFN on imports will have its imports provided by the most efficient supplier. This may not be the case if tariffs differ by country.
n MFN allows smaller countries, in particular, to participate in the advantages that larger countries often grant to each other, whereas on their own, smaller countries would often not be powerful enough to negotiate such advantages by themselves.
n Granting MFN has domestic benefits: having one set of for all countries simplifies the rules and makes them more transparent. It also lessens the frustrating problem of having to establish to determine which country a product (that may contain parts from all over the world) must be attributed to for customs purposes.
n MFN restrains domestic special interests from obtaining measures. For example, butter producers in country A may not be able to lobby for high tariffs on butter to prevent cheap imports from developing country B, because, as the higher tariffs would apply to every country, the interests of A’s principal ally C might get impaired.
Spirit of MFN
As a general rule, MFN clauses promote non-discrimination among countries. Therefore, they also aim to promote the objective of free trade in general. In international economic relations and international politics MFN is a status or level of treatment accorded by one to another in . The term means the country which is the recipient of this treatment must, nominally, receive equal trade advantages as the “most favoured nation” by the country granting such treatment. Trade advantages, among other things, include low or high. In effect, a country that has been accorded MFN status may not be treated less advantageously than any other country with MFN status by the promising country. There is a debate in legal circles whether MFN clauses include only substantive rules or also procedural protections. The members of the World Trade Organization (WTO) agree to accord MFN status to each other. Exceptions allow for preferential treatment of developing countries, regional free trade areas and customs unions. Together with the principle of national treatment, MFN is one of the cornerstones of WTO.
Briefing the Senate Standing Committee on Commerce about the MFN status to India Commerce Secretary Zafar Mahmood took the parliamentarians into confidence for the first time since the government’s decision. He was unequivocal that Pakistan would not implement the free trade regime without ensuring level playing field for its exporters. Islamabad has proposed three agreements be signed with New Delhi. The first is the Customs Cooperation Agreement to address Pakistani exporters’ complaints of Indians charging high taxes, Mutual Recognition Agreement for standardisation of quality standards and Grievances Agreements to address consumer protection issues, said Mahmood. It is learnt that the demand was made after exporters complained about Indian Non-Tariff Barriers (NTBs) which could hinder trade.
Generally speaking, Non Tariff Barriers refer to a range of actions, other than tariffs, that governments apply to restrict imported goods. Often bureaucratic in nature, the intention of Non-Tarriff Barriers is to raise the prices of imported products to make them less attractive to consumers, or to restrict their availability in favour of domestically produced versions of the same goods. Although most non-tariff barriers violate World Trade Organisation rules, their use is increasing. Pakistan’s trade and industry sources repeatedly criticise the deliberate impediments enforced by the Indian authorities in the name of formalities. They call it NTBs that included inordinate delays in customs clearance of Pakistani goods, frequent dispute over valuation of goods for determination of duties, strictly applying Indian standardisation laws and charging composite tariffs on textile and hardships in issuing visas to Pakistani traders. In September this year Pakistan decided to replace trade-able list, known as positive list currently comprising 1,958 items, with non-trade-able list, known as Negative list by February 2012. Pakistani traders have proposed to add 600 items to the negative list.
Pakistan is losing $300 million to $700 million annually due to the application of positive list. Currently, the balance of trade is in favour of India as Pakistan’s exports to New Delhi are $264 million against imports of $1.7 billion. At present many products are coming to Pakistan from India via Dubai with different brand names. This cost addition amount of $300 million to $700 million annually. Direct import of such raw materials and machinery from India would reduce its cost for the local industries. However, the trade balance would remain in favour of India. Before announcing to phase out negative list the government should take input from those industries that would be immediately exposed to competition.
Pakistani officials have openly admitted that trust deficit within Pakistan is ten times more than trust deficit between India and Pakistan. They suggest that a full fledge campaign must be launched soon to abreast local industries of the challenges and opportunities in the post-MFN trade regime with India.
Equal level playing
Pakistani traders have suggested ministry of commerce to probe the issue of state subsidy to Indian exporters. They are afraid that this could hurt the interest of local industries. They also pointed out that cost of production in Pakistan was much higher than that of India. It is also anticipated that giving MFN status to India would lead to flooding of local markets with Indian goods. But the supporters of MFN say that trade and economic activities with the neighboring country would benefit public by providing them with cheaper Indian products. They are positive that it would create a competitive environment for the industry and cheaper Indian products would be a relief for people. The industrialists, concerned about the dismal situation of power, fuel and poor infrastructure of industrial sector in the country, feared that giving incentives to India under the MFN would further damage economy of the country. They see it from another angle, taking it as a disadvantage. They argue that Pakistan need to protect its industry as international forces are facilitating India to capture the market of Afghanistan. Although giving MFN status to India has prohibited discrimination in trade, but still Pakistan needs to be careful as India may try to transit items to Afghanistan.
Ordinary consumers think that the opponents are inefficient businessmen; lacking drive to compete and would resist MFN status to India. They plead that MFN status would take the country towards liberalisation and hoped that both countries would get benefits form it. Agriculture, pharmaceuticals and auto sectors are likely to bear the burnt of MFN because Indian products in these sectors are much cheaper. But the plus point is that it will definitely benefit consumers and give them a choice and a sense of cost-quality scrutiny. A narrow slice of wise consumers believe that industrial development in Pakistan has only benefited the producers and these benefits of infrastructure development have not channeled to the grassroots of the society. They think that there must be a holistic approach to study the cons of MFN. It is because there are only two quarters who are against the promotion of trade with India. Firstly, the traders who are worried of losing their profits and secondly the hawks who never tolerate any sort of reconciliation with India. If we look at the recent statistics of volume of trade with Iran, India, China, Japan, EU countries, USA and Japan, it is evident that the balance of trade is in favour of all these countries except, America. Therefore, it will not be surprising if India gains in the deal. All that we need is that Pakistani authorities have to strike a balance while finalising the positive and negative lists. It is true that Pakistani traders must be protected from the giant companies of India, but it is equally true that Pakistani consumers also need protection against monopoly like situation in the domestic market.
Charter of peace
Renowned New York Times columnist and writer of a famous book, “The World is flat”, Mr Thomas Friedman gave the ‘No War Theory’ in his bestseller in 2005 and called it “The Dell Theory of Conflict Prevention”. The theory stipulated that, “No two countries that are both part of a major global supply chain, like Dell, will ever fight a war against each other, as long as they both are part of the same global supply chain.” Friedman supported his theory by citing China and Taiwan, two hostile neighbours, who gradually became economically integrated by virtue of shared supply chains thus, limiting the likelihood of territorial wars. Keeping in view the ideas of Friedman, it is positively presumed that MFN will prove to be a charter of peace between the two countries who have had disharmonious relationship in the past.
The last word
It is appropriate to quote here, Chairman of the Institute of Public Policy, former Federal Finance Minister and ex-VP of World Bank, Shahid Javed Burki who said, “MFN status to India would bring greater benefits to Pakistan, a smaller economy compared with India, as Pakistan would emerge as the greatest beneficiary out of MFN status to India.” Former finance minister said that the trade between the two countries could double from current level of $2.7 billion a year, simply by rerouting of goods currently sent via Dubai or through some other channels. He, however, cautioned that roadblocks such as stringent visa rules, non-tariff barriers and other likes still need to be dismantled for full benefits to be realised.