Pulwama attack fallout: India moves to remove MFN status to Pakistan

New Delhi: India is likely to invoke “security exceptions” under Article 21(c) of the World Trade Organization (WTO) to withdraw the unilateral non-discriminatory market status, popularly known as Most Favoured Nation (MFN) status, that it granted to Pakistan in 1996.

India has decided to withdraw the MFN status in light of Thursday’s Pulwama terror attack and the commerce ministry will do what is required to notify it, finance minister Arun Jaitley said after a meeting of the Cabinet Committee on Security (CCS).

Pakistan enjoys benefits of lower tariffs on its exports to India because of the MFN status even as it continues to impose higher tariffs on its imports from India than it charges other countries and restricts trade through land routes.

India should comprehensively review its economic relationship with Pakistan, said to Biswajit Dhar, a professor at Jawaharlal Nehru University, Delhi. “India should not only withdraw MFN status and increase tariffs vis-a-vis Pakistan to prohibitive levels, but should also stop exports to the neighbouring country. It’s anyway a signalling measure and India’s move is not going to hurt Pakistan in any significant way,” he said.

After the Uri attack in 2016, India had also reviewed the MFN status to Pakistan but decided not to withdraw it. The complex relations between India and Pakistan have adversely affected bilateral trade as well as trade within the region.

Total trade between the South Asian neighbours increased by 6% in 2017-18 to $2.4 billion, with $1.9 billion Indian exports and $500 million imports from Pakistan. Most Indian exports to Pakistan is actually routed either through the United Arab Emirates or Singapore to the tune of $3 billion—over and above the bilateral trade of $2.4 billion—because of trade restrictions imposed by Islamabad. Trade diversion is likely to increase after withdrawal of MFN status.

Trade between India and Pakistan can increase to $37 billion if both countries do away with artificial trade barriers, a World Bank report said in September last year.

Pakistan had agreed to grant MFN status during a secretary-level agreement in September 2012 but later changed its mind. The translation of most-favoured nation into Urdu (sabse pasandida mulk), Pakistan’s official language, was also said to be a problem.

Pakistan has, however, moved from a so-called positive list trade regime to a negative list-based regime with India in which it does not allow imports of 1,209 items from India. MFN status would mean abolishing the negative list altogether while maintaining a list of prohibited items that cannot be imported.

The two countries have a preferential trading arrangement under the South Asia Free Trade Area process. However, Pakistan has blocked some of these benefits to India through the negative list. It further restricts imports from India by allowing only 137 items through the land route via the Wagah-Attari border.