Assignment # 1

MFN status to India Advantages and Disadvantages

Haider Ali MTO Batch XVI Askari Bank Limited

MFN status to India

MFN status to India Advantages and Disadvantages

Introduction
In international economic relations and international politics, Most Favoured Nation (MFN) is a status or level Granting MFN status to of treatment accorded by one state to another in India may be beneficial international trade. For the promotion of international for both countries. It trade in general and the reduction of tariff barriers in may expand the size of particular, contracting countries of the General Agreement on Tariffs and Trade (GATT) do meet time to the market because of time in negotiating conferences in which tariff trade creation and trade concessions are exchanged and try to give this status to diversion. This possibly all member nations. This rule is known as the can help expand Unconditional Most Favoured Nation Principle (MFN); it guards against discrimination in international trade. Most production on a large favoured nation relationships extend reciprocal bilateral scale and also infuses relationships following both GATT and WTO norms of competition into reciprocity and non-discrimination. In bilateral reciprocal markets. relationships a particular privilege granted by one party only extends to other parties who reciprocate that privilege, while in a multilateral reciprocal relationship the same privilege would be extended to the group that negotiated a particular privilege. The non-discriminatory component of the GATT/WTO applies a reciprocally negotiated privilege to all members of the GATT/WTO without respect to their status in negotiating the privilege. The World Trade Organization (WTO) members agreed to accord MFN status to each other. Exceptions allow for preferential treatment of developing countries, regional free trade areas and customs unions. Together with the principle of national treatment, MFN is one of the cornerstones of WTO trade law. The term means the country which is the recipient of this treatment (which is India in our case) must, nominally, receive equal trade advantages as the most favoured nation by the country granting such treatment (in this case Pakistan). Trade advantages include low tariffs or high import quotas. In effect, a country that has been accorded MFN status may not be treated less advantageously than any other country with MFN status by the promising country. There is a debate in legal circles whether MFN clauses include only substantive rules or procedural protections. The United States grants many countries a status known formally as that of most favoured nation (MFN), a guarantee that their exporters will pay tariffs no higher than that of the nation that pays the

2|Page

MFN status to India lowest. All countries granted MFN status pays the same rates. Tariff reductions under the GATT alwayswith one important exceptionare made on an MFN basis. The logic here seems to be legal rather than economic. Nations are allowed to have free trade within their boundaries: Nobody insists that California wine pay the same tariff as French wine when it is shipped to New York. That is, the MFN principle does not apply within political units. But what is a political unit? The GATT side-steps that potentially thorny question by allowing any group of economies to do what If Pakistan grants noncountries do, and establish free trade within some discriminatory access to defined boundary. Tariff reduction is a good thing India, India will provide a that raises economic efficiency. At first it might seem reciprocal market access to that preferential tariff reductions are also good, if not Pakistan at a 0-5% duty rate, similar to what is being as good as reducing tariffs all around. After all, isn't given to Bangladesh, half a loaf better than none? Currently, Pakistan is Indias Joint Secretary in the enjoying MFN status with almost 100 countries.

Background

Commerce Ministry Arvind Mehta said at the FCCI event, reported IANS.

In the early days of international trade, most Source: http://tribune.com.pk/ favoured nation status was usually used on a dualparty, state-to-state basis. A nation could enter into a most favoured nation treaty with another nation. With the Jay Treaty in 1794, the U.S. granted most favoured nation trading status to Britain. Generally bilateral, in the late 19th and early 20th century unilateral most favoured nation clauses were imposed on Asian nations by the more powerful Western countries. One particular example of most favoured nation status is the Treaty of Nanking as part of the series of unequal treaties. It was implemented in the aftermath of the First Opium War between Great Britain and Chinese Qing Dynasty involving the Hong Kong islands. After World War II, tariff and trade agreements were negotiated simultaneously by all interested parties through the General Agreement on Tariffs and Trade (GATT), which ultimately resulted in the World Trade Organization in 1994. The World Trade Organization requires members to grant one another most favoured nation status. A most favoured nation clause is also included in the majority of the numerous bilateral investment treaties concluded between capital exporting and capital importing countries after the Second World War.

3|Page

MFN status to India

Granting MFN status by Pakistan to India Pros and Cons

Pakistan and India want to work on roadmap for trade normalization, but the entire trade liberalization process is linked with the removal of non-tariff barriers (NTBs) by the Indian government. India granted Pakistan MNF status in 1996, but Pakistan was reluctant to reciprocate arguing that India maintained a long list of NTBs that restrict Pakistan's exports to India despite having the MFN facility. Statistics show that trade between the two countries was US$ 1.4 billion in the year 2009-10. Of these, Indian exports to Pakistan were of worth US$1.2 billion, while Pakistani exports to India were just US$268 million, which is a clear indication that India did not open its market for Pakistani goods. This is so because Pakistan trades with India under the positive trade list and allow 1,946 items to be imported from India while India allow import of all but 850 items. Because of this attitude of India, and pending Kashmir issue, Pakistan was reluctant to grant MFN status to India. Time has come now for Pakistan to reciprocate by granting MFN status to India. Granting MFN status to India may be beneficial for both countries. It may expand the size of the market because of trade creation and trade diversion. This possibly can help expand production on a large scale and also infuses competition into markets. India is a huge economy relative to Pakistan; opening up of trade between the two countries will expand the markets for both countries, stimulate investment both domestic and foreign, and thereby increase the growth rate of the economies of the respective countries. This in turn can create employment opportunities, increase income levels and lead to improvement in the standards of living in both the countries. Such investment creation can be partly offset by what might be called investment diversion when investments are diverted from the most rational location in the world to Pakistan and India. Since India has comparative advantage (low cost of production in many commodities) as compared to Pakistan, India will reap more benefit than Pakistan because of granting of MFN status to India. In sum, the impact of granting of this status needs a comprehensive study to consider various items to be traded between India and Pakistan to find out where the benefits lie before embarking upon all items free trade.
News Prime Minister Nawaz Sharif told the media in The Hague on Monday that Pakistan had postponed giving India the Most Favoured Nation (MFN) status, according to news reports. Speaking to the media on the sidelines of the third International Nuclear Security Summit, Mr. Sharif said there was no consensus on granting India MFN and he had asked all the stakeholders to discuss the matter. Last week on Friday the federal cabinet was slated to meet and approve MFN or non discriminatory market access(NDMA) to India but the cabinet meeting was not held. There has been opposition from various quarters on giving India this status and farmers had planned an agitation at the Wagah border from March 31 in protest. Farmers groups felt they would be at a disadvantage as India had subsidies for agriculture. The Prime Minister was quoted as saying in the news report that the granting of MFN was postponed because of the forthcoming general elections in India and Pakistan did not want to favour any one political party. Source: www.thehindu.com

The MFN status can benefit consumers, producers and workers in Pakistan because of more trade with India. Opening of trade will enable the consumers to buy variety of products at 4|Page

MFN status to India lower prices. Domestic industries that use cheap imported raw materials and other inputs will also benefit. Export industries, their workers, and their suppliers benefit from the sales to other countries. The government of the exporting country will earn foreign exchange. The losers as a result of trade with India will be import-competing industries and their workers and domestic consumers of export industries. The former suffers because it will adversely affect their volume of sales and their prices. The latter suffers because the export of part of the output of an industry tends to increase the prices of the goods to domestic consumers. The government of the importing country has to absorb capital and labour in alternative employment chances. If India plans to capture the Pakistani market for its products, the MFN status will enable it to dump her products in Pakistan. This will result in decline of Pakistani industries and cause of additional unemployment.
MFN status to India (in a nutshell) i. ii. iii. Advantages Illegal trade will stop Political differences will get positive direction Cheap Indian product will not flood Pakistani market e.g. same threat was when MFN was given to TAIWAN and HONG KONG Kashmir issue will take negotiation rout Proximity will reduce transport cost Roads and infrastructure will improve Cheap products SAFTA will be revived Pakistani market will get access to EU markets Cement and FFC factories will get trade liberation. 15. Legislation will improve economy i. ii. iii. iv. v. vi. vii. viii. ix. x. Disadvantages Threat that cheap Indian products will flood our market Option on Kashmir seems to be narrowed Anti Pakistan attitude from Hindus Trade will be affected by political decisions India strong industry will turn Pakistan to dump ground Religious prejudice may promulgate Imports will be more than exports Trade will lead to cultural diffusion Non tariff barriers (NTBs) promotion of protectionist attitude Security issues will always on hit-list

iv. v. vi. vii. viii. ix. x. xi.

5|Page