All you wanted to know about MFN status

Satya Sontanam SLate | Updated on March 11, 2019

India recently withdrew the Most Favoured Nation (MFN) status accorded to Pakistan in 1996, following the terrorist attack in Pulwama in Jammu and Kashmir that killed 40 CRPF officers. Following this, the government immediately hiked the basic customs duty on all goods originating from Pakistan to 200 per cent with immediate effect.

What is it?

While the term ‘Most Favoured Nation’ suggests special treatment to one country, the MFN clause in WTO’s General Agreement on Tariffs and Trade is intended to ensure the opposite — that member countries of the organisation do not discriminate between their trade partners. In trade contracts, the ‘most favoured customer clause’ is a clause by which the seller agrees to give a buyer the best terms he makes available to any other buyer. Thus, every WTO member nation usually grants MFN status to all other members, in effect promising that everyone will receive equitable treatment from it. The primary condition under MFN is that a country must charge the same tariff rate on imports irrespective of their origin.

Say country A accorded MFN status to all the members of WTO. Later, if country A grants a concession to country B as a part of negotiations between them, the same concession will be granted to all other WTO members by virtue of their MFN status, even if the latter offer no concession in return.

GATT does accommodate specific exceptions though. For example, two countries can enter into a preferential arrangement liberalising trade in services without extending this benefit to other members. Tariff differences arising from existing double taxation agreements are also permitted. This is expected to result in a tariff regime that is transparent and economically efficient.

Why is it important?

After becoming a part of WTO, India granted MFN status to Pakistan in 1996, but it was not reciprocated by the latter. After more than a decade, Pakistan offered to extend MFN status to India in 2012 but did not follow through.

However, both the countries have agreed to simplify customs procedures in trade with each other, liberalise visa rules and facilitate goods certification.

A working paper on World Bank’s Open Knowledge Repository (What does MFN Trade mean for India and Pakistan – De, Raihan and Ghani June 2013) estimated that MFN status between the two countries, supported by trade facilitation could help boost trade between the two countries.

It estimated that while MFN status to India would raise Pakistan’s imports from India by 32 per cent, MFN status plus enhancement of bilateral trade facilitation could lead to a 202 per cent jump in India’s exports to Pakistan. Trade facilitation involves implementing measures to reduce the cost of trading across borders by improving infrastructure, institutions, services, policies, procedures, and market-oriented regulatory systems.

Why should I care?

As per news reports, the government will now identify items imported from Pakistan on which duties can be raised, since MFN rules no longer bind it. Other measures such as import ban and port restrictions will also be considered. Revoking of MFN status given to Pakistan and slapping an import duty of 200 per cent on imports from it, will significantly increase the prices of the goods imported from that country and act as a deterrent to such imports. However, this move is not expected to impact India’s aggregate trade numbers or trade balance much, given that trade with Pakistan is less than one per cent of India’s total global trade.

But the move has raised concerns over a possible spike in illegal trade between the two countries, which takes place through border gaps and via third countries.

The bottomline

It takes two to tango.

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Published on March 11, 2019

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