Will India Pressurize Pakistan for MFN Status?
President Pervaiz Musharraf’s visit to India is expected to result in some important geopolitical and geo-economic decisions which could have far reaching impact on the subcontinent, SAARC member countries, China and even on Central Asian States. India will make a definite attempt to pressurize Pakistan for the grant of MFN status to her. United Nations, World Bank and even the European Union have also on various occasions asked Pakistan for the extension of the MFN status to India under the WTO rules and regulations. However, Pakistan has all along been taking a stand that decisions on all pending issues between her and India will follow the decision on Kashmir.
The grant of MFN status to India is no less important than the decision about Kashmir itself. The later involves geo-strategic importance whereas grant of MFN status to India would mean direct threat to Pakistan’s trade and industry and its economy. In order to understand the implications of the grant of MFN status to India it is important to understand what (i) is really meant by MFN?, (ii) are its legal and economic implications, and (iii) benefits a WTO member country gets once MFN treatment is accorded to it.
MFN Treatment is one of the general principles of GATT 1994 covered under Article I of the GATT 1994 (General Agreement on Tariffs & Trade). The Article basically lays the rule-principle of non-discrimination amongst the WTO Members with respect to (i) Customs duties and charges of any kind imposed on or in connection with importation or exportation or imposed on the international transfer of payments for imports or exports, (ii) the method of levying such duties and charges, (iii) all rules and formalities in connection with importation and exportation, and (iv) advantage, privilege or immunity granted to a WTO Member to any product originating in or destined for any other country and has to be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other WTO member countries.
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The issue of grant of MFN status to India is as much important, if not more and sensitive as the issue of Kashmir. The issue should not be decided in haste and as stated in the article proper detailed exercise should be conducted on this subject. Instead of straight away granting the MFN status the trade should be liberalized on sector basis and should be closely and carefully monitored to record the results. As there is every possibility of India cutting down its budgetary allocations for defense as soon as it is granted MFN Status and divert the huge funds to provide subsidy to its exports to Pakistan, Afghanistan and Central Asian States.
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However, there are some exceptions to the provisions of the Article I of GATT 1994. These are, inter alia, on account of Generalised System of Preferences (GSP), arrangements among developing countries as a whole or among a few of them on tariff preferences, Free-Trade Area, Customs Union (Article XXIV of GATT 1994), Government Procurement etc., Security Exception, Trade Remedy Laws (anti-dumping and countervailing duties, safeguard measures and retaliatory measures following the dispute settlement process.) etc.
There is, however, a special exception under the GATT law for Pakistan and India interms of paragraph 11 of GATT Article XXIV – “Territorial Application – Frontier Traffic – Customs Union and Free Trade Areas”. The clause provides a special provision for Pakistan and India entering into special arrangements with respect to the trade pending the establishment of their mutual trade relations on a definitive basis. The Clause 11 reads as “Taking into account the exceptional circumstances arising out of the establishment of India and Pakistan as independent States and recognizing the fact that they have long constituted an economic unit, the contracting parties agree that the provisions of this Agreement shall not prevent the two countries from entering into special arrangements with respect to the trade between them, pending the establishment of their mutual trade relations on a definitive basis.”
The paragraph 11 was added to Article XXIV of the GATT in September 1947 at the Geneva session of the Preparatory Committee. At the Review Session of 1954-55, the need for this provision was considered and it was retained at the request of both the countries. (Page 829 of the Analytical Index to GATT, Volume 2, Geneva, 1995). Since then neither Pakistan nor India has approached the GATT / WTO for the rescission of this clause. However, India unilaterally extended MFN status to Pakistan in 2000.
Under the Article-V of GATT each WTO member country has to allow a passage through it to goods which a WTO member country decides to export to the third WTO member country. Article V says: goods and also vessels and other measures of transport shall be deemed to be in transit across the territory of a WTO Member when the passage across such territory, with or without trans-shipment, warehousing etc. is only a portion of a complete beginning beyond the frontier of the WTO Member across whose territory, the traffic passes. Traffic of this nature is termed in this Article as “traffic in transit”.
At present the trade between India and Pakistan is restricted under the above mentioned paragraph 11 of Article XXIV. Besides the clause also does not permit India to transport goods to Afghanistan and the Central Asian States through land route of Pakistan.
Once India is granted MFN Status, the immediate benefit that it would get would be the entitlement of getting the passage for its goods to Afghanistan and Central Asian States via land routes of Pakistan under the WTO facility of “traffic in transit.” Pakistan has a very long and porous border with Afghanistan. Earlier and even now the goods are being exported to Afghanistan by other countries under the Afghan Transit Trade Agreement (ATTA). We are all aware of the misuse of the ATTA and the fact that the goods, both consumer and raw materials, destined for Afghanistan under the ATTA were either offloaded in Pakistan or smuggled back to Pakistan, thus adversely affecting the domestic industry and depriving the government of the valuable revenue which it could have earned in case the goods were entering Pakistan through normal channels. In addition it will have adverse effect on the industrial growth and economy of Pakistan.
Afghanistan and most of the Central Asian States have not yet become the Members of the WTO. Export of Indian goods at subsidized and dumped rates to these countries will face no countervailing and anti-dumping measures or duties. Nor there are protective tariffs in these countries. Eventually bulk of the goods will enter Pakistan as clandestine imports with zero rate of duty.
Since grant of MFN Status to India will have a far reaching impact on Pakistan’s industry and the economy. The following aspects have particularly to be looked into while considering the grant of MFN status to India (i) attributes of the Indian industry (comparative advantages are available to Indian industry in the shape of cheaper cost of raw material and components, natural resource-based endowment and its utilization, cheap skilled/unskilled labour force, low cost of doing business, low electricity cost, economies of large scale production, larger industrial base, higher efficiency levels, quality production at competitive rates and technological advantage etc.) (ii) India’s trade policies (incentives to export industry and consistent tariff policy, specific hidden subsidies granted to Indian industry for its export promotion, India’s higher level of duty bound rates under Market Access Negotiations of WTO etc.) (iii) weakness of Pakistan’s trade and industry (Pakistan’s industry has been exposed to international competition without adequately taking into account the optimal levels of protection required by the domestic industry, tariff structure is not adequately cascaded to cater for adequate level of protection, higher financial and utility charges, smaller industrial base, industries’ basic reliance upon imported raw material, Pakistan is not producing high value added goods specially in agriculture, textile sector and engineering goods sector etc.).
The situation demands that before granting MFN Status to India a detailed study be carried out in view of the above position which should, inter alia, consider (i) identification of the industrial sectors, with special emphasis on textile, engineering and agricultural goods, which are likely to be hit hard by opening up of the trade with India and which require adequate protection levels and initiation of the process to conduct sectoral protection studies, (ii) formulation of a protection policy for such indigenous industry to protect it from unfair competition from India, within the rules and regulations of GATT/WTO, (iii) the detailed study should be conducted to assess the level playing field between the Indian and Pakistani trade, industry and the services sector on account, inter alia, of the levels of tariff protection and non-tariff measures, industrial base, economic growth rates and patterns, financial and utilities charges, taxes and duties on inputs and raw materials. (iv) benefits and adverse affects of the grant of the status to either country should be quantified which can be used for decision making. The issue apparently looks simple but in fact it is a very complex one. Therefore the decision of grant of MFN status should be linked with the resolution of Kashmir issue and handled with utmost care.
It will be advisable if Pakistan initially opens trade with India on industry specific basis. In other words identify specific products of exports and imports to and from Pakistan which can be beneficial to us. Likewise invite requests from India on products of interest to them and assess its importance on Pakistan’s trade and Industry.
It will also be in the fitness of things to assess and evaluate the present position and professional capabilities required to check and control the import of dumped, subsidized and under-invoiced imports from India, which could have adverse affects on Pakistan’s economy, trade and industry. If required the professional capabilities and capacity building of those responsible for trade remedy laws and correct customs valuation will have to be upgraded to keep pace with the new challenges.
In the last analysis there is every possibility of India cutting down its budgetary allocations for defense as soon as it is granted MFN Status and divert the huge funds to provide subsidy to its exports to Pakistan, Afghanistan and Central Asian States. Thus creating threats and problems for Pakistan’s economy.
President Musharraf’s high hope from the economic cooperation between the two countries seems to be over ambitious and not based on ground realities.
By
- Abbas Raza
Email: abbasraza55@gmail.com
(The author is an analyst on trade and fiscal issues)
