India withdraws MFN status to Pakistan: What it means & how it impacts trade

WION Web Team New Delhi, Delhi, India Feb 15, 2019, 02.11 PM(IST)

File photo: Pakistan PM Imran Khan. Photograph:( AFP )

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Pakistan still maintains 1,209 items on its list which it does not allow India to import, allowing just 137 products to cross the Wagah border through the land route.

In the wake of the Pulwama attack, the MFN status to Pakistan has been revoked by India signifying a dip in trade relations between the two countries.

India had granted Most Favoured Nation status(MFN) to Pakistan back in 1996, however, Pakistan in all these years has refused to grant reciprocal status to India. 

Pakistan still maintains 1,209 items on its list which it does not allow India to import, allowing just 137 products to cross the Wagah border through the land route.

According to the World Trade Organization(WTO) rules, every member has to accord the status to the other. In November 2011, the Pakistan cabinet had unanimously decided to grant India MFN trade status but it soon backtracked.

Pakistani officials complained that Indian goods flowed into the country hindering the flow of Pakistani goods into India. In 2009-2010, of the $1.4 billion in trade, exports to Pakistan stood at $1.2 billion while Pakistan exports to India totalled $268 million, according to official data, a fact disliked by Pakistani officials.

In 2014, during Nawaz Sharif's government, there was again a buzz on granting India MFN status which could cool political temperatures. The development occurred after both countries decided to have bilateral trade top $6 billion in 2014 but it has remained far off the mark.

The MFN status was accorded under WTO's General Agreement on Tariffs and Trade (GATT). Both India and Pakistan are signatories and are members of the World Trade Organisation (WTO), which means they have to treat each other and the other WTO member countries as favoured trading partners in terms of imposing customs duties on goods.

Removal of this status means India can now enhance customs duties to any level on goods coming from Pakistan, a trade expert said.

Total India-Pakistan trade has increased marginally to $2.41 billion in 2017-18 as against $2.27 billion in 2016-17. India imported goods worth $488.5 million in 2017-18 and exported goods worth $1.92 billion in that fiscal.

Under MFN pact, a WTO member country is obliged to treat the other trading nation in a non-discriminatory manner, especially with regard to customs duty and other levies.
India mainly exports cotton, dyes, chemicals, vegetables and iron and steel; while it imports fruits, cement, leather, chemicals and spices.

Last year, Pakistan's Commerce and Industry minister Abdul Razak Dawood had said the country had "no plans" to grant India MFN status although he added that Pakistan was working out free trade agreements(FTAs) with various countries, especially China.

Pakistan had signed a free trade agreement(FTA) with China in 2005 which came into effect in 2007. Despite China Pakistan Free Trade Agreement (CPFTA), Pakistan's trade deficit with China had grown from $4.1 billion Bn in 2012 to $12.1 billion in 2016.

According to a report by Pakistan's business council, "Pakistan in 2016 managed to utilize just four per cent of the tariff line on which concessions were offered under the CPFTA. China, on the other hand, utilised 60 per cent of the tariff line concessions."