May 12, 2003	Monday	Rabi-ul-Awwal 9, 1424

Now that talks have started for resumption of peace talks between India and Pakistan, New Delhi is likely once again to try to score points over Pakistan at bilateral and international forums on the issue of Most Favoured Nation (MFN) status.

India has given Pakistan the status of MFN but Pakistan has not reciprocated so far. Interestingly, despite having not been accorded the MFN status by Pakistan, New Delhi during the last four years of military rule in Pakistan has been enjoying a favourable balance of trade with Islamabad.

This balance went down from an average of over $150 million in the three years upto 2001-02 to about less than $70 million in the first nine months of the current financial year mainly because of the snapping of all kinds of communication links between the two countries in early 2002. But even then, it is still in favour of India.

Pakistan has not granted MFN status to India and instead maintains a list of 1800 goods(the other day 78 more items were added to this list) that may be legally imported from India. However, major items which Pakistan legally imported from India in normal times included only tea,spices,oil meals, iron ore, other ores/minerals, and basic chemicals, pharmaceuticals and cosmetics. Major items which Pakistan exported to India included only fruits and nuts (excluding cashew), raw wool, other oil seeds, other crude minerals, metalifers ores and metalscrap, textile yarn, fabrics, madeups and leather.

India has granted MFN treatment to Pakistan, but meagre imports from Pakistan suggests that India has found ways of imposing a de facto ban on most Pakistani items.

On the other hand, despite continuous high tension between the two countries since December 13, 2001, indirect trade between the two countries is said to have remained at its usual level of a $1.5 billion annually. The clandestine trade includes items such as chemicals, medicines, videotapes, cosmetics, and viscose fibre. More interestingly, Pakistani dates and rock salt supplies continue unabated to India and Indian soyabean waste to Pakistan through Dubai but with costs going up. Even dry fruits which used to be legally exported to India are now being smuggled to India through Afghanistan.

So, first of all those who are against giving India the MFN status should know that despite not being our most favoured trading partner, India is still one of our most favourite exporters because there are only a few countries with which we have such a large negative trade balance in percentage terms.

Secondly, India like most other Saarc countries is an importing country. This becomes too obvious if one looked at the statistics of how much and what is coming into Saarc countries including India from outside and how much and what is traded among themselves. Pakistan itself is importing from Saarc countries good worth only $600 million annually which is only 2 per cent of its annual import bill of $12 billion. India’s export to Saarc region in 2000-01 amounted to less than four per cent and import from the region was too nominal compared to its export earnings.

So, there is a limit to what India can export to Pakistan. And if we could get raw materials and intermediaries of comparable quality from India like iron ore, chemicals and even machinery at more economic prices we could also save a lot on freight and produce better quality items for our own people and for export to Afghanistan, Iran and Central Asia, a region which we can reach faster than the Indians. And despite all its technological advantages, it would take India a long, long time to produce better quality sports goods,surgical tools,cutlery, leather products, cotton fabrics and denim than Pakistan.

The highly protective walls that it had erected against imports for over 40 years has turned India into a nation of utilitarians and big savers. So, it is highly unlikely that consumer goods made in India would be able to make inroads into Pakistani markets in the short run. Pakistani consumers are by and large highly quality conscious because most of them have had the advantage of using imported items over the years.

Therefore, it is more than likely that it would not take them long to produce better quality goods with Indian raw materials and intermediaries and sell them at more economical prices domestically as well as in the export markets. There is this fear that since the Indian industrialists has the advantage of low cost energy, low interest rates, flexible taxes, low wages and huge size of the economy, it can always produce cheaper goods and wipe out our industry if we ever entered into free trade arrangement with it.

This was certainly true to an extent until about a couple of years ago. But now the situation in Pakistan has improved a great deal. Interest rates are now comparatively low, export re-finance is cheaper, rupee is stable and wages are low. And once the process of converting the power stations from furnace oil to gas is nearly completed, even the cost of energy would come down substantially. And meanwhile, we could always go to the WTO against cheeper imports from India because of the presence of a heavy component of subsidy in the energy input cost.

Meanwhile, reports reaching here from Afghanistan reveal a very interesting situation. Pakistani and Indian businessmen engaged in rehabilitation and reconstruction ventures in that country are said to be collaborating with each other by getting their supplies from each other at competitive prices motivated mainly by margins rather than ideology.

Therefore,once one starts looking at things concerning India-Pakistan trade realistically, a lot of cobwebs would vanish quickly. And it is time now also to remove the cobweb which has clouded our vision on the issue of the MFN status.

What does this status mean in the first place? Well under the WTO, MFN status is extended by all countries to all their trading partners irrespective of any consideration other than trade.This is a rule of non-discriminatory treatment between trading partners according to which any concessions granted by any one country must be granted to all trading partners without discrimination.

However, in Pakistan there is a commonly held perception about the term “ most favoured” which gives rise to the public perception of an aversion to granting a “ most favoured” status to a country with which Pakistan is in perpetual confrontation.

Technically, the reality is different as there is no “most favoured” element in this provision, which only means a non-discriminatory treatment to all trading nations of the WTO system.

In fact, the United States’ Congress has since 1998, replaced the MFN treatment with Normal Trade Relations (NTR). This was primarily done as legislators had grown tired of a misunderstanding regarding granting of MFN status to China. They were obliged to explain this term to irate but ill-informed constituents who demanded to know why China should be “ The Most Favoured Trading Partner” of the US.

Ironically, India continues to raise hue and cry about the absence of grant of MFN status by Pakistan, and effectively uses this pretext to malign Pakistan on every forum. She has been using this to block Pakistan’s entry into the Indian Ocean Rim Organization, Bangkok Agreement, etc, and also made a lot of noise about this in the second meeting of the fourth round of SAPTA held in October 2002, refusing to exchange concessions with Pakistan.

The Indo-Pakistan trade is heavily dominated by exports from India both formally and informally, and India has no problem from the trade perspective as far as the issue of MFN status is concerned. In fact sub-article 11 of article XXIV provides a cover to Pakistan which takes into account the exceptional circumstances, allowing that the provisions of the GATT agreement shall not prevent the two countries from entering into special arrangements with respect to the trade between them, pending the establishment of their mutual trade relations on a definitive basis.