A JOINT statement issued by President Hamid Karzai and Indian premier Manmohan Singh in Kabul on August 29 gives some indication about their discussions on General Pervaiz Musharraf’s liberal approach on the issue of grant of transit trade facility to Indian goods bound for Afghanistan and Central Asian States.
Earlier, the Indian Commerce Secretary Mr S. N. Menon had stated that “MFN is a non-issue as under South Asian Free Trade Agreement (SAFTA). Pakistan would be required to lower tariffs on items agreed under ‘most favoured Nation’ (MFN)” regime. Should Pakistan allow transit trade to India for goods destined for Afghanistan and Central Asian States and what would be its legal and economic implications on Pakistan’s trade and industry? Will the issue of the grant of MFN status to India become a “non-issue” once SAFTA becomes operational?
Pakistan is holding back the grant of MFN status to India under paragraph 11 of GATT Article XXIV - “Territorial Application - Frontier Traffic - Customs Union and Free Trade Areas”.
Clause 11 reads “taking into account the exceptional circumstances arising out of the establishment of India and Pakistan as independent states and recognizing the fact that they have long constituted an economic unit, the contracting parties agree that the provisions of this 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.”
Pakistan has taken a stand that it will not grant MFN status to India unless the issue of Kashmir is settled. However, India has unilaterally granted the MFN status to Pakistan. It is because of the non-grant of MFN status to India that renders the freedom of transit for it goods covered under Article 5 of GATT 1994 in-operative.
Under the article, every WTO member country (WMC) has to allow a passage through it to goods which a WMC decides to export to the third contracting country. Article V.1 reads “goods (including baggage), and vessels and other means of transport, shall be deemed to be in transit across the territory of a contracting party when the passage with or without trans-shipment, warehousing, breaking bulk, or change in the mode of transport, is only a portion of a complete journey beginning and terminating beyond the frontier of the contracting party across whose territory the traffic passes. Traffic of this nature is termed in this article ‘traffic in transit’”.
The principles of GATT / WTO enunciate that negotiations should be on the basis of reciprocity, mutually advantageous and conducted on a basis which affords opportunity to take into account (i) the needs of individual WMC and their individual industries, and (ii) other relevant circumstances, including the fiscal, developmental, strategic and other needs of the WMC concerned.
Even the Article 3.2(c) of the SAFTA states that the “SAFTA shall be based and applied on the principles of overall reciprocity and mutuality of advantages in such a way as to benefit equitably contracting states.
Allowing transit to Indian goods for Afghanistan and Central Asian States would result in one-sided benefits to the Indian economy. It may turn out to be disastrous for Pakistan if the Indian goods clandestinely find markets in Pakistan. It would be a one-way traffic. Such a market access is even against the principles of trade negotiations in terms of GATT / WTO.
Pakistan has a very long and porous border with Afghanistan. The misuse of ATTA is well known. The goods, both consumer and raw materials, destined for Afghanistan were either off-loaded in the transit territory or smuggled back to Pakistan, thus adversely affecting the domestic industry and depriving the government of the valuable revenue.
Afghanistan and the Central Asian States have not yet become the members of the WTO. Export of Indian goods at subsidized and dumped rates to these countries will face no countervailing and anti-dumping measures or duties. Nor there are protective tariffs in these countries. Eventually bulk of the goods may enter Pakistan as clandestine imports with zero rate of duty.
The Indian Ministry’s perception that the issue of the grant of MFN status by Pakistan would become a non-issue in the wake of enforcement of SAFTA w.e.f.June 1, 2006 is not legally covered under the GATT/WTO.
The SAFTA has been signed under Article XXIV of GATT 1994 on “Territorial Application - Frontier Traffic - Customs Union and Free Trade Areas (FTA)”. Under the article, a group of members may constitute themselves into a FTA and have totally free trade or reduced levels of duties and other trade-restrictive regulations among themselves without obligation of extending such preferential treatment to other WTO members.
The depth of such FTA varies from one FTA to another. It may involve only a few products / sectors or may apply to the whole range of trade relations among parties. Trade barriers may completely be abolished in intra-FTA trade or merely reduced. However, the benefits available under the GATT / WTO regime as such do not automatically become admissible to the countries that enter into FTA, unless included in the agreement.
The grant of MFN status to India by Pakistan and the SAFTA (a regional trade agreement) signed between the Saarc member countries does not mean the same. The grant of MFN status by a WTO member country to another WTO member country, covered under Article I of GATT 1994 on “MFN’ status” means that “any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties”.
There is not a single clause in the SAFTA which states or can be construed in a manner which enables India to avail itself of various benefits and legal rights under the GATT/WTO regime. On the contrary under the SAFTA, the contracting states, in terms of its clause 3.2(b), have affirmed to abide by their obligations with respect to each other under Marrakesh Agreement establishing the WTO and other Treaties/ Agreements to which such contracting states are signatories.
Therefore, the issue of grant of MFN to India does not automatically become a non-issue after SAFTA comes into effect. A separate extension of MFN status will be required in the SAFTA in this regard. The Indian commerce ministry may like to correct its interpretation of SAFTA on the MFN issue. At the same time, Pakistan need to be careful in its commitments under SAFTA as legal trade bindings can have serious impact on Pakistan’s trade and industry.
Indian economy is one of the most closed economies with highest tariffs in the region. There are still specific duty rates on textiles. Indian import policy excludes agriculture from the liberalization process. Maximum duty is generally 20 per cent but with many exceptions, e.g. dairy products, agricultural products, textiles, and carpets etc.
The other grey areas include, visa and travel restriction, problems in inter-provincial movement of goods, restrictions on ports and inland custom posts, excessive use of state trading enterprises and trade defence laws, tariff rate quotas, use of technical standards and regulations discriminating indigenous production and imported equivalents, local content requirements in contradiction to trade-related investment measures under the GATT/WTO rules etc.
Moreover, unpublished trade policy restrictions further complicate trade. Indian provincial states have in certain cases failed to consistently apply certain national laws and regulations e.g. products approved at the national level were banned at the state level. Pakistani consignments are subjected to more stringent checking and detailed security checks (e.g. Pakistani molasses is allowed only in one ton packs because of security reasons when exported to India).
Indian economy accounts for 80 per cent of GDP, trade, and population of the SAARC region. It is the major beneficiary of the regional trade with trade surplus with every country of the Saarc region. She is engaged in protecting this advantageous position in a very vigilant and swift manner.
Although India is far ahead in economic growth and performance, it is cautious in trade liberalization. Pakistan should learn lessons from Indian trade practices.
A JOINT statement issued by President Hamid Karzai and Indian premier Manmohan Singh in Kabul on August 29 gives some indication about their discussions on General Pervaiz Musharraf’s liberal approach on the issue of grant of transit trade facility to Indian goods bound for Afghanistan and Central Asian States.
