The attack on a large paramilitary convoy of Central Reserve Police Force (CRPF) in Jammu and Kashmir Thursday has invited sharp condemnation from the NDA government with Finance Minister Arun Jaitley announcing the withdrawal of the Most Favoured Nation (MFN) status to Pakistan. The decision has been taken to isolate Pakistan economically and diplomatically. But what is MFN and how will its withdrawal affect Pakistan economically?
What is MFN?
Every member country of the World Trade Organization (WTO) is required to accord the MFN status to all other member countries as is specified under Article 1 of the General Agreement on Tariffs and Trade (GATT), 1994.
The primary objective of WTO is to monitor trade and resolve trade related issues amongst the member nations. However, MFN itself is a misnomer; it actually means non-discrimination amongst member nations.
Being a WTO member, India accorded Pakistan MFN status in 1996 but Pakistan has not yet reciprocated with the same status to India. The main items India imports from Pakistan are cement, petroleum products, fresh fruits, finished leather, bulk minerals and ores. The export items include cotton, cotton yarn, chemicals, plastics, manmade yarn and dyes to Pakistan.
Pakistan decided to accord the MFN status to India in 2011 with the objective to make it effective from 1 January, 2013, but failed to do so. In March 2012 it came out with a 'Negative List' of 1,209 prohibited product imports from India which means India is not allowed to export these items to Pakistan.
How will the MFN withdrawal affect Pakistan?
The decision to revoke the MFN status to Pakistan will mean that India can increase custom duties on goods imported from Pakistan up to the bound level duty rates. Currently, India's customs duties on goods to WTO members are below the bound level rates. The current customs duties imposed are called applied rates and the level at which the duties can be increased are known as bound rates.
In terms of numbers, India imported goods worth $489 million in 2017-18 from Pakistan and exported goods worth $1.92 billion.
Meanwhile, the total imports from Pakistan increased 7.70 per cent from $454 million in the year 2016-17 to $489 million from April to November in 2017-18. The total exports to Pakistan also went up 5.59 per cent from $1.82 billion in 2016-17 to $1.92 billion in April-November in 2017-18. India accounts for 1.55 per cent of Pakistan's imports and 2.55 per cent of its exports.
The top five items India imported from Pakistan in the year 2017-18 were mineral fuels and oils, edible fruits and nuts, salt; sulphur; Earths and stones; plasting material, lime and cement, fertiliser and ores. Whereas, the top five items exported by India to Pakistan in the year 2017-18 include cotton, organic materials, plastic, dyes and pharmaceutical products.
Since the bilateral trade between India and Pakistan is low, many experts believe that MFN makes no difference to both the countries. This move is only symbolic and that the chances of illegal trade between the countries will increase.
MFN withdrawal process
India announced to initiate the process of revoking the MFN status of 23 years to Pakistan today. It has been revoked for the first time since 1996 when India granted the status to Pakistan.
The process of moving the communication to WTO has begun. According to Commerce Ministry sources, the ministry will now write to WTO to formally inform it of the withdrawal of MFN status to Pakistan by invoking Article 21 of WTO which is called the Security Exceptions Article. Pakistan cannot withdraw the status as it never gave India the MFN status.
Since MFN entails least possible tariffs and highest import quotas, it is only beneficial for developing countries giving them wider access to the markets of the member countries at much lesser costs.
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