Weekly Current Affairs

Pakistan’s MFN tag may stay for now [Economy, IR]

  • The Government of India is not considering any proposal to withdraw the Most Favoured Nation (MFN) status accorded to Pakistan, as even without the move, the level of bilateral trade is “very low”.
  • The MFN status was accorded in 1996 as per India’s commitments as a member of the World Trade Organisation (WTO).
  • According to the MFN principle of the WTO’s General Agreement on Tariffs and Trade (GATT) — to which India is a signatory/contracting party — each of the WTO member countries (including India and Pakistan in this case), should “treat all the other members equally as ‘most-favoured’ trading partners.”
  • According to the WTO, though the term MFN “suggests special treatment, it actually means non-discrimination.”
  • In the wake of the deadly attack on Indian soldiers in Uri, an incident for which India is holding Pakistan responsible, there have been calls in India for tough action against its neighbour, including the revocation of the MFN status.
  • Bilateral trade between two nations was just $2.6 billion in 2015-16 (of which $2.2 billion constituted India’s exports to Pakistan) which represented a minuscule 0.4 % of India’s overall goods trade worth $643.3 billion in same year.
  • Even if India revokes MFN status, it would only have “symbolic” impact.
  • It will hit India’s exports to Pakistan if there are retaliatory actions and it could also result in India losing goodwill in South Asian region (where it enjoys a trade surplus and is party to free trade pact called SAFTA, which also includes Pakistan).
  • The move may also not go down well at WTO-level.
  • The MFN concept is an integral part of the WTO agreements and is among the principles forming the foundation of the multilateral trading system. As per the WTO, whenever a country brings down a trade barrier or liberalises a sector, “it has to do so for the same goods or services from all its trading partners — whether rich or poor, weak or strong.” However, exceptions allowed to this rule include free trade pacts and special benefits to poor nations.
  • India now could consider making use of a ‘security exception’ clause in the GATT to deny the MFN status to Pakistan or bring in certain trade restrictions.
  • Article 21(b)(iii) of GATT states that “Nothing in this Agreement shall be construed to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests taken in time of war or other emergency in international relations.”
  • . Pakistan, a founding member of the WTO like India, is yet to grant the MFN tag to India (and Israel).