The Indian Prime Minister Mr. Manmohan Singh paid a strategic visit to Afghanistan on 29 August, 2005. In joint statements issued by President Hamid Karzai and Prime Minister Mr. Manmohan Singh, published in various Pakistani news papers, have indicated about their discussion with General Pervaiz Musharraf and his liberal inclination on the issue of grant of transit trade facility to Indian goods destined for Afghanistan and Central Asian States. Earlier the Indian Commerce Secretary Mr. S. N. Menon in his address during Indo-Pak trade talks held on 8th August in New Delhi has stated that “MFN is a non issue as under South Asian Free Trade Agreement (SAFTA) Pakistan would be required to lower tariffs on items agreed under Most Favoured Nation (MFN)”.
The issues raised in Afghanistan and the Indian commerce ministry involve two major aspects of national importance (i) should Pakistan allow transit trade to India for goods destined for Afghanistan and Central Asian States or not and what would be its legal and economic implications on Pakistan’s trade and industry? (ii) will the issue of the grant of MFN status to India become a “non-issue” once SAFTA is operationalized?
The factual position is that Pakistan is holding back the grant of MFN status to India under Paragraph 11 of GATT Article XXIV – “Territorial Application – Frontier Traffic – Customs Union and Free Trade Areas” which provides a special provision in this regard. 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 government of Pakistan has rightly taken a stand that it will not grant MFN status to India unless the issue of Kashmir is decided. However, India has unilaterally granted the MFN status to Pakistan. It is because of the non-grant of MFN status to India that renders the freedom of transit for it goods covered under Article 5 of GATT 1994 inoperative.
Under Article-V of GATT 1994 each WTO member country (WMC) has to allow a passage through it to goods which a WMC decides to export to the third contracting country. Article V.1 reads “Goods (including baggage), and also vessels and other means of transport, shall be deemed to be in transit across the territory of a contracting party when the passage across such territory, with or without trans-shipment, warehousing, breaking bulk, or change in the mode of transport, is only a portion of a complete journey beginning and terminating beyond the frontier of the contracting party across whose territory the traffic passes. Traffic of this nature is termed in this article ‘traffic in transit’”.
The principles of GATT / WTO enunciate that negotiations should be on the basis of reciprocity, should be mutually advantageous and conducted on a basis which affords adequate opportunity to take into account (i) the needs of individual WMC and their individual industries, and (ii) other relevant circumstances, including the fiscal, developmental, strategic and other needs of the WMC concerned. Even the Article 3.2(c) of the SAFTA states that the “SAFTA shall be based and applied on the principles of overall reciprocity and mutuality of advantages in such a way as to benefit equitably all Contracting States, taking into account their respective levels of economic and industrial development, the pattern of their external trade and tariff policies and systems”
Allowing freedom of transit to Indian goods for Afghanistan and Central Asian States would result in one-sided benefits to the Indian economy which will even be more disastrous for Pakistan’s economy than the adverse affects which would result from granting her the MFN status. As freedom of transit will result in one way clandestine market access to Indian goods in Pakistan. Such a market access is even against the principles of trade negotiations in terms of GATT / WTO.
Pakistan has a very long and porous border with Afghanistan. Earlier and even now the goods being exported to Afghanistan by other countries under the Afghan Transit Trade Agreement (ATTA) affected Pakistan’s industry. 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.
Afghanistan and 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.
The Indian Ministry’s perception that the issue of the grant of MFN status by Pakistan would become a non issue in the wake of operationalization of SAFTA w.e.f. 1st June, 2006 is incorrect and not legally covered under the GATT / WTO. The SAFTA has been signed under Article XXIV of GATT 1994 on “Territorial Application – Frontier Traffic – Customs Union and Free Trade Areas (FTA)”. Under Article XXIV a group of Members may constitute themselves into a FTA and have totally free trade or reduced levels of duties and other trade-restrictive regulations among themselves without the obligation of extending such preferential treatment to other WTO Members.
The depth of such FTA varies from one FTA to another. It may involve only a few products / sectors or may apply to the whole range of trade relations among parties. The trade barriers may completely be abolished in intra-FTA trade or merely reduced. However, the benefits available under the GATT / WTO regime as such do not automatically become admissible to the countries that enter into FTA, unless they are specifically included in the agreement.
The grant of MFN status to India by Pakistan and the SAFTA (a regional trade agreement) signed between the SAARC member countries does not mean the same. The grant of MFN status by a WTO member country to another WTO member country, covered under Article I of GATT 1994 on “General Most Favoured Nation – Status” means that “any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties”.
There is not a single clause in the SAFTA which states or can be construed in a manner which enables India to avail it self of various benefits and legal rights under the GATT / WTO regime. On the contrary under the SAFTA the Contracting States, in terms of its clause 3.2(b), have affirmed to abide by their obligations with respect to each other under Marrakesh Agreement Establishing the World Trade Organization and other Treaties/ Agreements to which such Contracting States are signatories. Therefore, by operationalizing the SAFTA the issue of grant of MFN to India does not automatically become a non-issue. A separate extension of MFN status will be required in the SAFTA in this regard. The Indian commerce ministry may like to correct its interpretation of SAFTA on the MFN issue. At the same time the government functionaries of Pakistan also need to be careful in its commitments under SAFTA as legal trade bindings can have serious repercussions on Pakistan’s trade and industry.
It will not be out of place to state that Indian trade policy has many myths and realities which need to be understood, made transparent and brought in line with the WTO’s prescribed norms. Indian economy is one of the most closed economies with highest tariffs in the region. There are still specific duty rates on textiles and its entire tariff needs to be reformed in the same manner as Pakistan has done during the last couple of years on the instance of international donor agencies. The Indian customs valuation system is not sufficiently in line with WTO’s Transactional Price System. The Indian Customs Act (1962) gives vide powers to its customs officers in this regard.
Indian import policy excludes agriculture from the liberalization process. Maximum duty is generally 20% but with many exceptions, e.g. dairy products, agricultural products, textiles, and carpets etc.
The other grey areas include visa and travel restriction, problems in inter-provincial movement of goods, restrictions on ports and inland custom posts, excessive use of state trading enterprises and trade defense laws, tariff rate quotas, use of technical standards and regulations discriminating indigenous production and imported equivalents, local content requirements in contradiction to Trade Related Investment Measures under the GATT / WTO rules etc. Moreover, unpublished trade policy restrictions further complicate trade. Indian provincial states have in certain cases failed to consistently apply certain national laws and regulations e.g. products approved at the national level were banned at the state level. Pakistani consignments are subjected to more stringent checking and detailed security checks (e.g. Pakistani molasses is allowed only in one ton packs because of security reasons when exported to India).
Indian economy accounts for 80% of GDP, trade, and population of the SAARC region. It is the major beneficiary of the regional trade with trade surplus with each country of the SAARC region. She is engaged in protecting this advantageous position in a very vigilant and swift manner. Although India is far ahead in economic growth and performance, yet it is too slow and cautious in trade liberalization. The Indian trade regime can be termed as least transparent and most complicated riddled with highest trade barriers in the region.
Pakistan should learn lessons from Indian trade facets and characteristics and be on its guards before putting up its trade and industry at the mercy of the subsidized Indian goods. Under the given circumstances it would be rather advisable to also link the decision of giving freedom of transit to Indian goods with the main issue of the grant of MFN status to her, which Pakistan has decided to take after the Kashmir issue is decided.
The author is Director (WTO)
International Islamic University
