What is Most Favoured Nation (MFN) treatment? Why Pakistan is not extending MFN status to India?

      The WTO as the trade promoting body has certain key principles or philosophical themes for its working. National Treatment and Most Favored Nation (MFN) treatment are the two core principles of the WTO.

        The MFN is the principle that advocates non-discrimination win trade matters.

What is Most Favored Nation (MFN) treatment?

       MFN is a status or treatment given by one country to another in trade matters under the WTO. It means that the recipient country of MFN will nominally get equal trade advantage as the ‘most favoured nation’ by the country granting the treatment.

        MFN under WTO actually means non-discrimination and it doesn’t mean any special treatment to a specific country.

        Under the WTO agreements, countries cannot normally discriminate between their trading partners. If a special favour is granted to a particular country, it should be extended to all other WTO members. The MFN is so important that it is the first article of the GATT, which governs trade in goods.

The real meaning of MFN: trade without discrimination

     Though the MFN status says the receiving country is the most favoured by the issuing country; the meaning is slightly different. The real meaning is that the receiving country will not be treated disadvantageously by the issuing country in trade matters vis a vis other countries.

Exceptions for MFN

          MFN at the same time allows some exemptions as well. One such exemption is the right to engage in Free Trade Agreements. This means members can participate in regional trade agreements or free trade agreements where there is discrimination between member countries and non member countries.

      Another exemption is that members can give developing countries special and differential treatment like greater market access. This special concession are in different forms like reduced tariff rates from developing country imports, concessions that allows developing countries to give subsidies to their production sectors etc.

           Another exemption is when a country raises trade barriers against products that are unfairly supported by the trade partner country (like dumping and export subsidy). Similar differentiations are also allowed in the case of service trade also, but in limited scale.

      All these exceptions are subjected to strict conditions. “In general, MFN means that every time a country lowers a trade barrier or opens up a market, it has to do so for the same goods or services from all its trading partners — whether rich or poor, weak or strong. Each member treats all the other members equally as “most-favoured” trading partners.

What is the meaning of India’s withdrawal of MFN status to Pakistan?

           The Government has withdrawn the MFN status given to Pakistan after the Pulwama terrorist attack that taken the life of 44 jawans.

    Here, the MFN status withdrawal is actually withdrawal of lower import duty given to imports from Pakistan. Hence, India can increase the tariff on imports from Pakistan. Already, the government has raised tariffs to 200% as a follow up to the removal of MFN status.

   The extent of its implication is more applicable to India’s imports from Pakistan which is a meager of around half a billion (488 million in 2017-18). Imports during April-November 2018 was around $381 million indicating further decline in imports.

Import tariff increased to 200%

           On February 2019, (16th of February), the government raised customs duty on all import items from Pakistan to 200%. Hence, the imports from Pakistan is going to be negligible.

        The freshly introduced 200% tariff is well above the MFN rate of 32.8% for agricultural goods and 10.7%, for non-agricultural items.

          Though the MFN rate is much lower, India can still adopt a much higher bound rate (maximum rate on imports under WTO rules) of 113.5% on agricultural products and of 34.6% on non-farm products.

     According to the government statement, raising of import tariff is as per the security interest provision of the Foreign Trade Act. The Foreign Trade (Development and Regulation) Act allows government to prohibit, restrict or regulate the import or export of goods on various grounds. Since the tariff is raised on security grounds, there is no need for India to furnish any information or to make any disclosures about the rational for the tariff imposition.

Potential for retaliation

            Pakistan, in retaliation; may bring some trade measures including raising the tariff on India’s exports or increasing the number of goods in the negative list etc. In that case, India’s exports to Pakistan may come down. For 2017-18, India’s exports to Pakistan was around US $1.9 billion.

Table: India-Pakistan trade in 2017-18

Exports to Pakistan (US $ billion)Imports from Pakistan (US $ billion)Trade balance for India
1.9240.4881.436 (trade surplus for India)

Source: RBI database on Indian Economy

Potential decline in India’s export to Pakistan may adversely affect some of Pakistan’s industries that depends on Indian raw materials like cotton and chemicals. At the same time, exports from India through third countries (specifically, the gulf countries) and illegal channels to Pakistan will go up.

Altogether, there will come a trade disengagement between the two neighbours.

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