Withdrawing Pakistan’s MFN status will divert trade

New Delhi: With India finally deciding to withdraw the unilateral non-discriminatory market status it granted to Pakistan in 1996 — popularly known as Most Favoured Nation (MFN) status in World Trade Organization (WTO) parlance — after the Pulwama terror attack, the already weak trade links between the two neighbours in South Asia is set to worsen.

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

After the Uri terror 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 two South Asian neighbours increased by 6% in 2017-18 to $2.4 billion, with $1.9 billion exports and $500 million imports from Pakistan. At present most of the trade between India and Pakistan is routed through either the United Arab Emirates or Singapore to the tune of $3 billion because of trade restrictions imposed by Islamabad. Trade diversion is likely to increase after withdrawal of the 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.

Although Pakistan had agreed to grant MFN status during a secretary-level agreement in September 2012, it 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 will mean abolishing the negative list altogether while maintaining a list of prohibited items that cannot be imported.

Both countries have a preferential trading arrangement under the South Asia Free Trade Area (Safta) 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.