MAKING a momentous decision, the government honoured an international treaty obligation it made 64 years ago, by officially announcing that it would accord India the awkwardly phrased Most Favoured Nation (MFN) status.
Few in Pakistan are aware that both India and Pakistan were among the 23 countries that were the original signatories to the General Agreement on Trade and Tariffs in 1947 (GATT), which enshrined the trade-liberalising MFN principle.
In fact, recognising that the two countries had previously constituted the same economic unit, the original GATT included an exceptional clause permitting the two newly independent countries to enter into “special arrangements with respect to trade” between each other. History, of course, had other plans.
Now that the original framers of GATT have finally been heard, we must assess what this necessary shift in trade policy means for Pakistan. First, according India the MFN does not mean that India is being given any unique or ‘favoured’ status.
It merely means that any concessions and tariff reductions that are given to other member countries of the World Trade Organisation (WTO) will also be granted to India. Thus, Pakistan is granting the same market access to India which it provides to most countries in the world.
For that very reason, the Pakistan Business Council (PBC), which represents the 35 largest companies in the country, has been urging Islamabad to liberalise trade with India.
Local industrialists feel that since they have had to compete with the MFN-granted products from all other WTO members, they can compete favourably with Indian products. The PBC estimates that increased trade with India would improve Pakistan’s GDP growth rate by one to two per cent.
Given India’s proximity to Pakistan, the lower transportation costs would mean that certain competitive Indian goods will gain access to our market. However, such cost-savings are contingent upon the improvement of road and border infrastructure to facilitate trade, including highways and loading zones for products, as well as freight trains.
But at the same time, cheaper Indian goods will mean cheaper inputs for goods manufactured or assembled here, which would help make our exports of finished goods more competitive. Pakistani consumers, of course, will be the biggest beneficiaries with more competitively priced Indian goods.
Second, take a look at India and Pakistan’s MFN profile: according to the latest WTO statistics, India’s average MFN rate is at 13 per cent, while Pakistan’s is at 13.9 per cent. This means that on average, India applies a 13 per cent baseline duty on imported goods, while Pakistan’s is almost as liberal.
However, India’s average MFN rate for agricultural imports is much higher, at 32 per cent. Pakistan, which has a strong agricultural sector and would benefit from increased market access of its agri-goods to India, applies a much more liberal average MFN rate for agricultural products of 17 per cent.
Given this large discrepancy, the Pakistan government should seek to reduce India’s protectionist agri-import policy, in order to reap the benefits of more ‘free’ trade, in the ensuing negotiations.
Indian media reports claim that in return for receiving MFN from Islamabad, New Delhi has pledged to grant preferential, even zero-duty access, on certain textile goods, similar to the access they grant to Bangladeshi goods. Our Ministry of Commerce (MoC) negotiators would be wise to include agricultural goods in that list.
Third, granting MFN does not mean that Pakistan is obliged to open the floodgates for all inexpensive Indian goods. The MoC is currently undertaking the exercise of including goods from those industries that would unduly suffer in a ‘negative’ or ‘sensitive’ list of products which are exempted from the MFN obligation, and would be barred from importation.
Fourth, India is renowned for numerous non-tariff barriers (NTBs), such as Byzantine licensing requirements, which serve protectionist purposes, and have helped keep Pakistani exports into India unfortunately low.
There is pressure from many countries on India to reform its arduous bureaucratic procedures, and Pakistan must now join this group.
Fifth, the capacity of our MoC must be bolstered to help negotiate the elimination of Indian non-tariff barriers and gain the maximum possible market access concessions on an ongoing basis. Sixth, and very significantly, the capacity of the National Tariff Commission needs to be augmented, as this is the organisation which administers Pakistan’s trade defence laws, including anti-dumping duties, countervailing measures for unfair subsidies, and safeguards against surges in imported goods which threaten to cause serious injury to any domestic industry.
Last, in order to reap the true benefits of granting each other MFN status, Pakistan and India must resuscitate the South Asian Free Trade Agreement (Safta), which has legally been in force since 2006.
Now that the critical stumbling block from Safta achieving its potential has been removed, improving regional trade is a prize that should be in sight.
An emerging and strong Safta would send a very positive signal to the world that South Asia is committing to get its act together and will, as a trading bloc, be a force to reckon with in the world economy. The writer is an associate professor of law and policy at LUMS and teaches international trade law.