Granting India Most-Favored Nation Status
Pakistan has once again put on hold a decision to grant India the long-awaited status of most-favored nation (MFN). The decision would have rescinded any current import bans on Indian goods and would also have allowed all goods to be traded through the Attari-Wagah border, a key border crossing. Initial reports suggested that Pakistan would take the decision during a special cabinet meeting on March 21 after years of delay, but this meeting did not occur. Instead, Pakistan went on record as saying it would strike some kind of trade deal with India once India’s general election is held and a newly elected government is in place. Whether Pakistan will make good on this pledge is uncertain, as the country was supposed to grant India MFN status by the end of 2012. In January of this year, even Pakistan’s Commerce Minister hinted that Pakistan would confer MFN status to India sometime soon as long as India reduced tariffs on a slew of Pakistani items. But this latest delay tactic could be construed as yet another example of Pakistan’s reluctance to normalize trade relations with neighboring India.
India, for its part, granted MFN status to Pakistan in 1996. Under the principle of MFN, a country must apply equal tariff treatment to all its trading partners. Pakistan first publicly announced it would return the favor in November 2011, but implementation has been held up for various reasons. Some in Pakistan allege that India continues to employ sizeable non-tariff barriers to trade, such as an overly strict visa regime. Others argue that MFN status should be linked to permanent resolution of the Kashmir dispute.
The fact is that the application of MFN status to India and the attendant removal of any existing tariff and non-tariff barriers on both sides of the border would not only triple bilateral trade in the next three years, but it would also provide Pakistani exporters with unhindered access to the vast and rapidly growing consumer market in India, and minimize the amount of trade routed through third-country ports like Dubai or Singapore. Total bilateral trade potential stands at $20-40 billion, far greater than the current level of $2-3 billion a year, most of it limited to just a few commodities such as cotton, tea, petroleum products, chemicals, and fruits and vegetables.
There are concerns that certain Pakistani goods, such as food items, would not enjoy a level playing field due to the large subsidies that India affords its farmers, and that cheaper, better-quality Indian products could saturate the Pakistani market as a result. But such concerns are outweighed by the tangible benefits that greater bilateral trade would bring to both economies, as deeper economic linkages could help foster cooperative efforts in other areas. The need for Pakistan to reciprocate MFN status to India is long overdue, and a favorable cabinet decision in the months ahead on this issue could go a long way toward optimizing market access for key industry sectors in both countries and strengthening regional connectivity. Normalizing trade ties could provide consumers with competitive prices and product choices, provide manufacturers with access to cheaper raw materials, and also establish new production networks that generate employment for people in both countries.
Pakistan’s growing focus on the militant threat emanating from its tribal areas has enabled greater engagement with India on the issue of MFN and has seen it dial back some of its usual rhetoric on India. Setting the process of trade normalization in motion would ultimately yield significant dividends for Pakistan’s own economy and ameliorate some longstanding economic pressures. Machinery, mechanical appliances, chemicals, textiles, jewelry, and precious metals have all been identified as having high import-export potential between the two countries. But many of these items are still found on “sensitive” or “negative” items lists that effectively ban or hinder their trade. For example, Pakistan has 1209 items on its negative list for India. These items are currently prohibited from being imported, and only by applying MFN status to India would such restrictions be lifted.
Increased trade should be seen as a starting point for building trust and reducing tensions between India and Pakistan. Granting MFN status to India could pave the way for resumption of the stalled composite dialogue process. With India ready to extend tariff concessions to Pakistani goods, it is now incumbent on Pakistan to fast-track the issue of MFN and steer the relationship in a more positive direction by focusing on bilateral trade and economic engagement.