New Delhi: India’s decision to finally withdraw the non-discriminatory market status it granted to Pakistan in 1996 – more commonly known as ‘most favoured nation’ (MFN) status – in the wake of the Pulwama terror attack will have little economic impact, according to experts and government officials.
The move will instead serve more powerfully as a political signal, especially if the Narendra Modi government decides to opt for a complete ban on imports from Pakistan or decides to prohibit a certain number of items from direct trade.
Despite what its name suggests, bestowing MFN status on a trade partner doesn’t imply that India gives them special treatment. The term, in World Trade Organisation (WTO) parlance, refers to the principle of non-discrimination and is a clause that is applicable to all members of the WTO.
As the global trade organisation notes, if a “country increases the benefits that it gives to one trading partner, it has to give the same ‘best’ treatment to all the other WTO members so that they all remain ‘most-favoured’”.
While India accorded MFN status to Pakistan over two decades ago – which is when both countries became members of the WTO – Islamabad never reciprocated fully.
Currently, India has no Pakistan-specific restrictions in terms of imports or exports — all goods can be exported and imported. The only items that India has banned for export or import is a general list that New Delhi applies to all countries.
Pakistan, on the other hand, places curbs on imports from India but. Until November 2011, the country operated what it called a limited ‘positive list’, which allowed nearly 2,000 items to be imported from India. Since then, it has shifted to a ‘negative list’ approach, which allows all items to be imported except what is there on the list.
Nisha Taneja, an expert on Pakistan-India trade, points out that its currently unclear what the repercussions of rescinding MFN status will be.
“We don’t know what exactly it means yet. We don’t know what it means when we un-make this announcement [rescinding MFN status]. Does that mean there is a complete ban on imports? Does that mean there is a complete ban on land route? Sea and land routes?” Taneja, Professor, ICRIER told The Wire.
“When the 2001 attack happened, the government said that no land-based trade would take place. But trade continued throughout the sea,” Taneja added.
In the aftermath of the Uri terrorist attack in 2016, India considered revoking Pakistan’s MFN status and even withdrawing concessions given to Islamabad under the South Asian Free Trade (SAPTA) agreement. The Modi government, however, ultimately decided not to take any trade-related countermeasures.
This time around, it’s different. Commerce ministry officials who The Wire spoke to indicated that revoking MFN status could ultimately mean two different things: some imports could be restricted or customs duties could be slapped on a number of goods.
“Revoking MFN status is usually something that is frowned upon at the WTO or in multi-nation trade discussion forums, but in this case it should not be a big problem as Pakistan had never reciprocated fully also,” one senior official, who declined to be identified, said.
Taneja believes that the more likely possibility is that some items will be targeted and restricted.
Either way, even in the event of a full ban on Pakistani imports, the economic impact will not be significant.
In 2017-18, bilateral trade between the two nations stood a paltry $2.4 billion, which accounted for just 0.3% of India’s overall merchandise trade in the same year.
Exports to Pakistan are a little less than $2 billion, or 0.63% of the total Indian outward shipments. Imports from Pakistan were $488 million, or 0.10%of the total inward shipments.
Cotton, organic chemicals and plastics are the major export items while edible nuts, plastering materials and mineral fuels account for top imports.
A recent Business Standard analysis noted how India had gained far more from trade ties with Pakistan than the other way around.
“Indian exporters earned five times more from trade than Pakistani traders did. Pakistan’s exports to India have barely crossed the half-a-billion-dollar mark since being granted the MFN status by India. While there has been a surge in trade between the two nations since 2006, the benefits of trade have more often accrued to India than to Pakistan,” the report noted.
Indirect, informal and diverted trade
One fallout of revoking the MFN status could be that ‘informal’ or ‘diverted’ trade between both countries increases.
As The Wire has reported and analysed earlier, trade that is routed between India and Pakistan through third countries such as the United Arab Emirates or Singapore is estimated to double existing formal and direct trade at $4.71 billion.
A few reasons why informal trade is higher than formal trade are infrastructure weakness, political tension, Pakistan’s negative list and difficulty in making payments.
If India’s revoking of the MFN status is accompanied by a ban on certain items that can be imported into India from Pakistan, experts say that it is likely that diverted trade through Dubai and Singapore will increase.