MFN is highly desirable between trading partners because it allows each country the greatest access into the other’s domestic markets either with minimum, or without any hindrance of tariffs or quotas.
As hostility with Pakistan deepens over Kashmir issue leading to India withdrawing the Most Favoured Nation status from Pakistan after Pulwama terror attack, the question is how will this move affect the economy of both the countries.
The MFN status was accorded to Pakistan under WTO’s General Agreement on Tariffs and Trade (GATT), to which both India and Pakistan are a signatory. The principal states that each of the WTO member countries should “treat all the other members equally as ‘most-favoured’ trading partners”.
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MFN is highly desirable between trading partners because it allows each country the greatest access into the other’s domestic markets either with minimum, or without any hindrance of tariffs or quotas. It must be noted that Pakistan has not granted the MFN status to India yet.
The withdrawal of the MFN status to Pakistan implies that now India can raise the custom duty to any level, on any goods coming from Pakistan.
The total India-Pakistan trade has increased marginally to USD 2.41 billion in 2017-18 from USD 2.27 billion in 2016-17. India imported goods worth USD 488.5 million in 2017-18 from Pakistan and exported goods worth USD 1.92 billion in that fiscal, said a recent PTI report.
India mainly exports cotton, dyes, chemicals, vegetables and iron and steel; while it imports fruits, cement, leather, chemicals and spices from Pakistan.
The immediate impact of such a move would be a sharp increase in taxes on goods coming from Pakistan to India, which may decrease Pakistan’s exports to India, said Defence Commentator Shashi Asthana to Financial Express Online.
The move can also slightly harm India; however, India, being a big economy can absorb the losses, Asthana said. On the other hand, Pakistan’s economy is fragile and therefore may suffer more economically, he said.
Pointing out that India has already tried military and diplomatic responses towards Pakistan sponsored terrorism, Shashi Asthana recommended to now use the economic response for raising economic cost for Pakistan. He further suggested to invest more in capacity building by procuring better arms and equipment and beat Pakistan in arms race. This would further raise economic cost for Pakistan, he said.