Last week, a Kashmiri boy in his early 20s rammed a vehicle packed with explosives into an Indian security forces convoy, killing himself and 40 Indian soldiers in Pulwama, just 12 miles from Srinagar. The Bharatiya Janata Party (BJP) government in India - instead of asking the important question that what could motivate a boy in the prime of his youth to carry out a suicide attack - reacted in haste (and nauseating jingoism), to blame Pakistan for sponsoring the attack. Soon, Minister for Finance and Corporate Affairs Arun Jaitley, stated via Twitter that India would be withdrawing the Most Favourite Nation (MFN) status for Pakistan, and consequently imposing a 200 percent duty on all products imported from Pakistan. In other words, this meant that imports from Pakistan would effectively be banned.
The impact of such a ban, if at all implemented, on Pakistan’s economy would be negligible at best. Bilateral formal trade between the two neighbours usually hovers around the USD 2 billion mark annually, out of which Pakistan’s exports to India make up about 400 to 500 million dollars. Raw materials and intermediate goods make up more than 70 percent of these exported goods, among which are mainly cement, petroleum products and chemicals and dried fruits. It therefore remains to be seen whether Indian businesses would be on-board when it comes to banning an important source of raw material and intermediate goods for their manufacturing and construction sectors. Furthermore, any retaliatory measures by Pakistan could end up hurting about $1.5 billion of India’s annual exports to Pakistan.
These figures relate only to the documented formal trade between the two neighbours. Informal, undocumented trade between India and Pakistan is in fact twice that of formal trade, estimated at about $4.5 to 5 billion annually. Most of this is conducted via third countries, such as the UAE, Singapore and some Central Asian States, while some of it is made up of goods smuggled across the border. The reasons for the volume of informal trade being almost twice that of formal trade are numerous, but all fall under the umbrella of the problematic historic relationship that the two countries have shared since Partition in 1947.
Traders on both sides of the border usually cite inadequate payment mechanisms, fears of trading directly, political tensions and harassment by customs officials as primary reasons for trading through informal channels. One would therefore expect that in the presence of an effective ban on imports from Pakistan (and increased border tensions), traders would route goods via third countries.
So, what really is the most-favoured nation status? MFN is a treatment extended to a trade partner country that ensures that trade between two countries is not discriminatory in comparison to other trade partner countries. Thus, a country is required to extend the same tariff regime it has for all trading partners to MFN countries. The term therefore points to non-discriminatory treatment, rather than preferential treatment. As signatories of the World Trade Organization, both India and Pakistan are required to accord the MFN status to all member countries, as stipulated in Article 1 of the General Agreement on Tariffs and Trade (GATT), 1994.
India granted Pakistan the MFN status in 1996, while Pakistan has still not reciprocated. The PPP government did announce in 2011 that MFN status would be granted to India by 2013, but the claim did not materialise, mainly due to political reasons as is usually the case when it comes to relations between the two countries. Pakistan did, however, move from a “positive list approach” to a “negative list approach” for trade with India in 2012; as per the positive list, only 1,946 items could be imported from India, which was replaced in 2012 with a negative list, according to which all but 1,209 items could be imported from India.
While this was a major step by Pakistan in liberalizing trade with its neighbor, it did not carry the same “political” weight as granting India the MFN status would have had.
While it was expected that India would trade with Pakistan in a non-discriminatory manner following award of the MFN status in 1996, this was not actually the case because of the issue of non-tariff barriers (NTBs). One must be honest – NTBs were used by both countries to hinder imports from across the border, all the while deceivingly claiming to have non-discriminatory tariff regimes. The issue of NTBs has received much attention in the past, so much so that the Bureau of Indian Standards and Pakistan Standards and Quality Control Authority had to sign a Mutual Recognition Agreement in order to overcome technical barriers to trade. However, progress on the agreement has been slow. Numerous infrastructural bottlenecks and cumbersome procedures still remain, in the presence of which bilateral trade between the two neighbours might never realise its true potential. The new GST regime in India has not helped either and has effectively increased - almost doubled in some cases - duties on all products imported from Pakistan.
Thus, the picture for Pakistan’s $400 million worth of exports to India had already been bleak, even before the knee-jerk reaction from across the border after the Pulwama attack. Besides, even the possibility of India invoking the Security Exceptions Article of the WTO agreement to revoke Pakistan’s MFN status is debatable at best, considering no formal investigation had been carried out before pointing the finger towards Pakistan. But that is not the issue.
The issue is that of South Asian cohesion, of regional integration, of improving the lives of the 350 million people that live below the poverty line in both countries, making up about a quarter of the total population of Pakistan and India. The true potential of bilateral trade between the two countries according to a World Bank study is about $37 billion, about ten times the current formal bilateral trade; and if we know anything about trade, it is that it leads directly to a significant increase in economic growth, productivity and living standards. We have the example of the European Union, whose members realised after fighting two World Wars that peace and regional integration was the only way forward; we have the example of China and Japan, countries who allowed trade to pave the way for peace following the Sino-Japanese wars.
Yet, South Asia remains hostage to elements that do not wish to see the region progress. And these “elements” now include Bollywood celebrities and cultural icons, who fail to act as ambassadors of peace and indulge in the most absurd cries for war. There are Indian journalists too, who refuse to challenge the hateful narrative of the BJP government, who fail to call out the excesses of the Indian State in Kashmir, and resultantly do not do justice to their profession. It would be overly optimistic of one to expect things to change for the better in such a scenario, but in times of darkness, to dream of light is sometimes the only option.
The writer is an economist and can be contacted on Twitter @SaadRajput22
The impact of such a ban, if at all implemented, on Pakistan’s economy would be negligible at best. Bilateral formal trade between the two neighbours usually hovers around the USD 2 billion mark annually, out of which Pakistan’s exports to India make up about 400 to 500 million dollars. Raw materials and intermediate goods make up more than 70 percent of these exported goods, among which are mainly cement, petroleum products and chemicals and dried fruits. It therefore remains to be seen whether Indian businesses would be on-board when it comes to banning an important source of raw material and intermediate goods for their manufacturing and construction sectors. Furthermore, any retaliatory measures by Pakistan could end up hurting about $1.5 billion of India’s annual exports to Pakistan.
These figures relate only to the documented formal trade between the two neighbours. Informal, undocumented trade between India and Pakistan is in fact twice that of formal trade, estimated at about $4.5 to 5 billion annually. Most of this is conducted via third countries, such as the UAE, Singapore and some Central Asian States, while some of it is made up of goods smuggled across the border. The reasons for the volume of informal trade being almost twice that of formal trade are numerous, but all fall under the umbrella of the problematic historic relationship that the two countries have shared since Partition in 1947.
Traders on both sides of the border usually cite inadequate payment mechanisms, fears of trading directly, political tensions and harassment by customs officials as primary reasons for trading through informal channels. One would therefore expect that in the presence of an effective ban on imports from Pakistan (and increased border tensions), traders would route goods via third countries.
So, what really is the most-favoured nation status? MFN is a treatment extended to a trade partner country that ensures that trade between two countries is not discriminatory in comparison to other trade partner countries. Thus, a country is required to extend the same tariff regime it has for all trading partners to MFN countries. The term therefore points to non-discriminatory treatment, rather than preferential treatment. As signatories of the World Trade Organization, both India and Pakistan are required to accord the MFN status to all member countries, as stipulated in Article 1 of the General Agreement on Tariffs and Trade (GATT), 1994.
India granted Pakistan the MFN status in 1996, while Pakistan has still not reciprocated. The PPP government did announce in 2011 that MFN status would be granted to India by 2013, but the claim did not materialise, mainly due to political reasons as is usually the case when it comes to relations between the two countries. Pakistan did, however, move from a “positive list approach” to a “negative list approach” for trade with India in 2012; as per the positive list, only 1,946 items could be imported from India, which was replaced in 2012 with a negative list, according to which all but 1,209 items could be imported from India.
While this was a major step by Pakistan in liberalizing trade with its neighbor, it did not carry the same “political” weight as granting India the MFN status would have had.
While it was expected that India would trade with Pakistan in a non-discriminatory manner following award of the MFN status in 1996, this was not actually the case because of the issue of non-tariff barriers (NTBs). One must be honest – NTBs were used by both countries to hinder imports from across the border, all the while deceivingly claiming to have non-discriminatory tariff regimes. The issue of NTBs has received much attention in the past, so much so that the Bureau of Indian Standards and Pakistan Standards and Quality Control Authority had to sign a Mutual Recognition Agreement in order to overcome technical barriers to trade. However, progress on the agreement has been slow. Numerous infrastructural bottlenecks and cumbersome procedures still remain, in the presence of which bilateral trade between the two neighbours might never realise its true potential. The new GST regime in India has not helped either and has effectively increased - almost doubled in some cases - duties on all products imported from Pakistan.
Thus, the picture for Pakistan’s $400 million worth of exports to India had already been bleak, even before the knee-jerk reaction from across the border after the Pulwama attack. Besides, even the possibility of India invoking the Security Exceptions Article of the WTO agreement to revoke Pakistan’s MFN status is debatable at best, considering no formal investigation had been carried out before pointing the finger towards Pakistan. But that is not the issue.
The issue is that of South Asian cohesion, of regional integration, of improving the lives of the 350 million people that live below the poverty line in both countries, making up about a quarter of the total population of Pakistan and India. The true potential of bilateral trade between the two countries according to a World Bank study is about $37 billion, about ten times the current formal bilateral trade; and if we know anything about trade, it is that it leads directly to a significant increase in economic growth, productivity and living standards. We have the example of the European Union, whose members realised after fighting two World Wars that peace and regional integration was the only way forward; we have the example of China and Japan, countries who allowed trade to pave the way for peace following the Sino-Japanese wars.
Yet, South Asia remains hostage to elements that do not wish to see the region progress. And these “elements” now include Bollywood celebrities and cultural icons, who fail to act as ambassadors of peace and indulge in the most absurd cries for war. There are Indian journalists too, who refuse to challenge the hateful narrative of the BJP government, who fail to call out the excesses of the Indian State in Kashmir, and resultantly do not do justice to their profession. It would be overly optimistic of one to expect things to change for the better in such a scenario, but in times of darkness, to dream of light is sometimes the only option.
The writer is an economist and can be contacted on Twitter @SaadRajput22