Most Favoured Nation is a term used by the WTO. All the 164 members have to accord this MFN status to each other. Under this, the member countries would have to treat all its trading partners equally.
For example, if India increases or decreases import duty on a commodity say grapes, that duty would be applicable for all countries. One can not single out any country for this. The duty will be applicable for all the countries without any discrimination to any developed or developing or poor countries.
MFN aims at ensuring non-discriminatory trade between two countries vis-a-vis other trade partners.
As per the WTO rules, a member country cannot discriminate between its trade partners.
WTO is a Geneva-based body which frames rules for global trade.
India, Pakistan and MFN?
India granted MFN status to Pakistan way back in 1996, a year after the formation of WTO in January 1995. However, Pakistan has not yet granted the tag to India despite repeated attempts by India.
In 2015, Pakistan started the process of offering India Non-Discriminatory Market Access (NDMA) status to India. Under that, Pakistan stated that it would reduce its sensitive lists to 100 tariff lines or products.
NDMA is a nomenclature chosen by Pakistan to avoid political ramifications at home of giving India MFN (Most Favoured Nation) status.
Pakistan postponed grant of NDMA status due to lack of consensus at home.
In 2012, Pakistan had committed itself to give the MFN status but missed its own deadline of December 31, 2012 owing to domestic opposition.
The neighbouring country has to abolish the negative list of 1,209 tradable items. Abolition of the negative list items that cannot be imported from India would mean grant of NDMA status to India.
Bilateral trade between India and Pakistan stands at USD 2.61 billion. The major commodities and goods in which both countries trade include cement, sugar, organic chemicals, cotton, man-made filaments, vegetables and certain fruits and tubers, mineral fuels, mineral oils, salts, earths, stone, lime, dry fruits, steel and plastering material.
If Pakistan had reciprocated India’s gesture in the past, both countries would have been required to reduce trade tariffs and open trade in commodities. Pakistan is relatively closed in terms of trade. It will have to open trade in over a thousand commodities and India in at least 600.
Does MFN mean preferential treatment?
In a literal explanation, MFN doesn’t mean preferential treatment. Instead, it means non-discriminatory trade that ensures that the country receiving MFN status will not be in a disadvantageous situation compared to the granter’s other trade partners. When a country receives MFN status, it is expected to raise trade barriers and decrease tariffs. It is also expected to open up the market to trade in more commodities and free flow of goods.
MFN essentially guarantees the most favourable trade conditions between two countries. These terms include the lowest possible trade tariffs, the least possible trade barriers and very crucial to trade relations– highest import quotas. The disclaimer only requires equal treatment to all Most Favoured Nations.
The WTO rules allow discrimination in certain cases like in cases when a country signs free trade agreements in a region. In that situation, a country may grant special favours and trade concessions to a country as compared to non-member countries of that group.
What are the pros of MFN?
MFN status is extremely gainful to developing countries. The clear upsides are access to a wider market for trade goods, reduced cost of export items owing to highly reduced tariffs and trade barriers. These essentially lead to more competitive trade.
MFN also cuts down bureaucratic hurdles and various kinds of tariffs are set at par for all imports. It then increases demands for the goods and giving a boost to the economy and export sector. It also heals the negative impact caused to the economy due to trade protectionism. This irks the domestic industry. However, in the long run, it makes them more competitive and robust.
What are the disadvantages of MFN?
The main disadvantage is that the country has to give the same treatment to all other trade partners who are members of the WTO. This translates into a price war and vulnerability of the domestic industry as a result. The country is not able to protect the domestic industry from the cheaper imports and in this price war, some domestic players have to face heavy losses or growth restrictions.
What is the current status of India-Pakistan bilateral trade relations?
The bilateral trade between the countries has virtually stopped as India has imposed 200 per cent import duty on all the goods coming from Pakistan in February, following revocation of the ‘most-favoured nation’ status in the aftermath of the Pulwama terror attack.
The main items which Pakistan exports to India include fresh fruits, cement, petroleum products, bulk minerals and ores and finished leather.
In August 2019, Pakistan has formally suspended its trade relations with India after New Delhi revoked Jammu and Kashmir’s special status.
On Friday, the federal cabinet headed by Prime Minister Imran Khan endorsed the decisions taken by the National Security Committee and the joint session of parliament, which include suspension of trade ties with India, the Dawn reported
Trade relations between the two neighbours were already strained following the Pulwama terror attack as India imposed 200 per cent customs duty on all goods imported from the neighbouring nation
Imports from Pakistan declined by 92 per cent to USD 2.84 million in March this year compared to USD 34.61 million in March 2018, according to the commerce ministry data. During the January-March period of 2018-19 fiscal, imports from Pakistan declined by 47 per cent to USD 53.65 million.