Pakistan grants India Most Favoured Nation trade status. Few months back the Pakistan's cabinet unanimously decided to grant India Most Favoured Nation (MFN) trade status, a major breakthrough that could bolster efforts to improve relations between the nuclear-armed rivals.
WHAT- THE PRINCIPLE
Most favoured nation relationships extend reciprocal bilateral relationships. In international economic relations and international politics, "most favoured nation" (MFN) is a status or level of treatment accorded by one state to another in international trade.
The members of the World Trade Organization (WTO) agree 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 must, nominally, receive equal trade advantages as the "most favoured nation" by the country granting such treatment. (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.
WHY- THE PURPOSE
MFN treatment has long been a core standard of international economic relations. It provides for equal competitive opportunities between nations in respect to the matters to which the particular MFN clause applies, be they in the field of trade, investment, or any field of economic co-operation.
Bilateral and regional investment agreements have proliferated in the last decade and new ones are still being negotiated. Most-Favoured-Nation (MFN) clauses link investment agreements by ensuring that the parties to one treaty provide treatment no less favourable than the treatment they provide under other treaties in areas covered by the clause. MFN clauses have thus become a significant instrument of economic liberalisation in the investment area. MFN avoids economic distortions that would occur through more selective country-by-country liberalisation.
HOW- THE PROCESS
To provide MFN treatment under investment agreements is generally understood to mean that an investor from a party to an agreement, or its investment, would be treated by the other party “no less favourably” with respect to a given subject-matter than an investor from any third country, or its investment. MFN treatment clauses are found in most international investment agreements. While MFN is a standard of treatment which has been linked by some to the principle of the equality of States, the prevailing view is that a MFN obligation exists only when a treaty clause creates it. In the absence of a treaty obligation (or for that matter, an MFN obligation under national law), nations retain the possibility of discriminating between foreign nations in their economic affairs.
MFN treatment has been a central pillar of trade policy for centuries. It can be traced back to the twelfth century, although the phrase seems to have first appeared in the seventeenth century. MFN treaty clauses spread with the growth of commerce in the fifteenth and sixteenth centuries. The United States included an MFN clause in its first treaty, a 1778 treaty with France. In the 1800s and 1900s the MFN clause was included frequently in various treaties, particularly in the Friendship, Commerce, and Navigation treaties. The inclusion of MFN clauses became a general practice in the numerous bilateral, regional and multilateral investment-related agreements.
Its importance for international economic relations is underscored by the fact that the MFN treatment provisions of the GATT (Article I General Most-Favoured-Nation Treatment) and the GATS (Article II Most-Favoured-Nation Treatment) provide that this obligation shall be accorded “immediately and unconditionally”.
One of the basic principles of the international tax law is the rule of Non-discrimination between trade partners. This rule is presented in the World Trade Organization (WTO) Agreements. The principle of Non-discrimination is twofold. The first one is called national treatment which means that a WTO member country is obliged to treat other WTO members countries in the same way as they treat their own members. The second one reflects the most –favoured- nation treatment. This principle is incorporated into General Agreement on Tariffs and Trade (GATT), General Agreement on Tariffs in Services (GATS) and Agreement on Trade-Related Aspects of Intellectual Property Rights(TRIPS) subject to limited exemptions, countries cannot normally discriminate between trading partners.
INDIA –PAKISTAN MFN STATUS ANALYSIS- THE PROSPECT
During the last several years, opening up of trade between India and Pakistan has become the most sought after question at many policy forums and among concerned groups. The issue has gained particular importance after India granted the Most Favored Nation (MFN) status to Pakistan, to comply with the principles of World Trade Organization (WTO) regime in 1995, and Pakistan’s reluctance in reciprocating so far. It is believed that increased trade relationship can play a vital role in normalizing the political relationship between the two countries. This will, therefore, benefit millions of people living in both countries as the resources would be diverted from less desirable areas, such as defense spending, to poverty alleviation initiatives.
India-Pakistan Trade
(US $ Millions)
Source: Federal Bureau of Statistics, Pakistan; Reserve Bank of India
Of the US$1.4bn in trade recorded in 2009/10, Indian exports to Pakistan stood at US$1.2bn while Pakistan exports to India totaled US$268mn, according to official data.
With WTO becoming effective in 1995, it was expected that trade between the two countries would increase significantly as the two countries would be required to open their borders for trade, but this did not happen. Despite the fact that India gave the MFN status to Pakistan, exports to India could not witness a significant increase. In contrast, Pakistan has still not reciprocated the same status to India and allows only a select of items for import.
According to experts, given the market size available in the two countries, the current volume of trade between India and Pakistan is not commensurate with the existing potential. Some of the policy reasons, for low volume of trade between the two countries are the presence of non-tariff barriers in India and the absence of MFN status to India. While the first reason is quoted exclusively by the Pakistani exporters the second reason is shared by traders on both sides of the border. Economists suggest that both the nations can benefit not only by accessing a big market for their exports, but can save significantly by substituting its expensive imports from the rest of the world.
Prof.M.Guruprasad, AICAR BUSINESS SCHOOL
Sources:
Abid Qamar(2005), Trade between India and Pakistan: Potential Items and the MFN Status, SBP-Research Bulletin Volume 1, Number 1, 2005
Ishrat Husain(2011),Prospects and Challenges for Increasing India-Pakistan Trade, Atlantic Council
Organisation for Economic Co-operation and Development (OECD),MOST-FAVOURED-NATION TREATMENT IN INTERNATIONAL INVESTMENT LAW WORKING PAPERS ON INTERNATIONAL INVESTMENT
Reuters
www.wto.org