Pros and Cons of MFN Status for India
The Nation
01 January 1996
The recent announcement by Trade and Commerce Minister Chaudhry Ahmed Mukhtar regarding the government’ s decision to give the status of MFN to India, has generated considerable debate in the country. Its opponents include some opposition leaders and media pundits who are trying to depict the government’s move as an India-specific arrangement. Why strengthen bilateral trade with India, an adversary? Why not with states of the Middle East? They argue.

The fact, however, is that the government has only decided to give the MFN status to India. The said status has not yet been accorded. Moreover, under the WTO charter, which Pakistan signed in April 1993, we are obliged to give MFN status to India. India had given this status to Pakistan well before signing of the WTO charter. MFN is a misnomer, a multilateral arrangement; which does not give any specific favor to any country. It means we are applying non-discriminatory rules and regulations concerning trade and commerce to every country.

In the past, whoever was a signatory to GATT had to follow non- discriminatory rules while trading with other GATT member-states. Under WTO, every signatory is obliged to extend MFN or non-discriminatory trade rules to all other WTO member states, with which it has diplomatic relations. Because India had been providing MFN status to Pakistan since GATT days, recently there was a lot of talk about whether it would take Pakistan to WTO for violating the organization’s basic principle. India has so far not approached the WTO.

Like Pakistan, the US had also violated the WTO charter by not granting MFN status to China. For about two years, it kept on accusing the communist regime of violating human rights. Some Chinese manufacturers of electronics were accused by American authorities of being engaged in wide-spread piracy of electronic items, primarily CDs, originally being produced in America. Since this activity was allegedly occurring illegally, and no patent from any American company concerned was issued to any Chinese manufacturing house, US authorities accused China of violating the Intellectual Property Rights of the American firms.

Due to these two reasons, the US kept on violating the WTO charter by not giving MFN status to China. Finally, the spirit of economic pragmatism prevailed and, last year, the US granted MFN status to China. The pragmatists’ argued that China had well over a billion people consumer market. How could US businessmen ignore this factor, especially when other trading nations such as Japan, Germany and France had given MFN status to China and were taking advantage of the American absence in the Chinese market?

In the debate over whether granting MFN status to India is a good thing or a bad thing, writers tend to take two extreme positions. The protagonists of the government’s move argue that so much illegal trade is already taking place between India and Pakistan. It is generally acknowledged that, each year, over $1 billion worth of illegal trade takes place between the two countries. The argument is that once MFN status is granted to India, this illegal trade will get regularized, as the two countries will start trading across their frontiers all the previously smuggled items.

Second, the protagonists say that a great volume of trade is already taking place between the two through third countries like Afghanistan, the UAE, Bangladesh, Hong Kong, and even Switzerland. Obviously, this means high markup. When intermediaries are involved, the cost of the item being traded naturally goes up. In the absence of direct trade, the taxpayer has to pay more for a product. The third reason the protagonists give for establishing a credible level of trade relationship between India and Pakistan is that we are importing many bulk commodities like coal and cement from far off states like Poland and Germany. Coal, for instance, is available at far cheaper rates that the one we get from Poland.

On the other hand, the antagonists fear that the moment we open up trade with India, cheap goods from India will flood Pakistani market. And, once cheaper goods are available in our market, the country’s industry will suffer a setback, for its failure to compete with the Indian industry which is said to be far ahead of Pakistan’s. The reason Indian goods are cheaper than Pakistan’s, they maintain, is that the labor cost there is also cheaper. Most importantly, the antagonists fear that Pakistan’s trade opening to India will mean it is narrowing its options on Kashmir.

For the improvement of bilateral relationship between India and Pakistan, the Indians have so far suggested a bottom-up approach; that is, let us first increase cultural and trade cooperation, and intensify people-to-people level contact between the two countries. This, in their view, will pave the way for the resolution of their political disputes, Kashmir being the foremost one. On the other hand, Pakistan argues for a top-down approach; that is, let us first settle the disputed political issues between the two, and then make some credible moves towards cultural and economic cooperation.

Contrary to these fears, following is the gist of what Shahid Javed Burki, the World Bank’s vice-president for Latin America, said on December 3 at a workshop on ‘Regional Economic Cooperation’ in Islamabad, organized jointly by the Institute of Regional Studies and Konard-Adenauer-Stiftung of Germany: “Political differences between India and Pakistan aside, there is no harm in trading with each other…Our leaders must take into consideration long-term benefits. India has a much better managed economy, but it cannot afford openness. On the other hand, Pakistan’s economy is not so closed, and it could take advantage in this regard. Pakistan, like other developing countries, has strong interest in the maintenance and strengthening of the multilateral rules-based trading system represented by the WTO. The current situation in South Asia indicates that there are large unexploited opportunities for intra-regional trade that could be mutually beneficial.”

Mr Burki’s remarks make sense if seen in the light of the prevailing international climate as well as the emerging global trends. Trade borders between states are fast opening up, giving way to soft barriers. Except South Asia, name any region of the world where some positive movement on the front of bilateral and multilateral trade and commercial cooperation has not been made! On the American Continent, we have North American Free Trade Agreement; in Europe, we have the European Community; and, in South- East Asia, we have the Association of South East Asian Nations. Unlike SAARC, these regional bodies are pursuing closer trade and economic cooperation. We have given MFN statuses to most of the WTO member-states, with whom our bilateral trade has been going on for many years. The question, thus, arises, if cheaper goods from Taiwan and Hong Kong, for instance, have not flooded our market, how can the same from India? Also, if we feel that cheaper goods from Taiwan or Hong Kong have indeed affected our indigenous industry, why can’t we withdraw MFN status from them?

If there is an Indian good which can flood our market—since there exists public demand for this item—this is something that will happen whether we grant MFN status to India or not. Take the case of Indian video films. Go to any corner of the country, people are crazy about them. The master copies of these films do not come from India directly; mostly form Dubai, where they are initially released and then sold to the video agents in Karachi, Lahore and Islamabad. This means that Pakistani taxpayer is paying more money to buy these films than what he will pay if they are made available here through official trade arrangement.

In case we legalize our trade with India—which, as per TWO obligations, we will have to do now or some timer later—we will have the chance to market our own videos in India. Who does not know that our television dramas are highly popular in India? So far, like us, the Indians are also getting our drama videos through business concerns stationed in a third country or these are being smuggled into India. The discussion here does not just pertain to video films. Our old bookshops, for instance, are filled with books (especially on law and medicine) printed in India and available at much lower rates than those in the world market. There are several hundred other small items which are being smuggled into Pakistan through the Wagha border or Rajhastan border.

Our trade with India is a matter which must not become the victim of the narrow ambitions of politicians at the expense of the country’s larger economic interest. Trade with India should be seen as an opportunity for us to exploit the huge market of India, having nearly one billion consumers. Nobody can deny the fact that, in comparison with India, we have a much smaller industrial infrastructure. But we should not forget that, particularly since the start of the 90s, we have been trying hard to attract foreign investment.

Perhaps not many among us are aware of the fact that Pakistan, as against India, offers much better facilities to foreign investors. For instance, 100 per cent investment repatriation—that is, the foreign investors can take back the money that is invested as well as its profit—and various tax concessions. Unlike ours, the Indian economy, during the Cold War period, was styled on the Soviet fashion. Much more attention was paid to strengthening heavy indigenous industries. India does not offer 100 per cent investment repatriation to foreign investors, and, unlike Pakistan, the tax rebates and other concessions it gives to foreign investors are marginal.

Thus, by opening up trade with India, we can lure many foreign investors who have already invested, or intend to invest, in India, We must understand that mere extension of MFN status does not mean that we are in any way creating a free-trade area—like that one that exists in the European Community, where member-states do not impose custom duties or trade tariffs on each other. Even after giving MFN status to India, we will retain the right to stop the trade of certain important items through various means.

Giving MFN status to India will also strengthen SAARC. The South Asian Preferential Treatment Agreement (SAPTA), which we signed along with India earlier this year, binds us to liberalize our trade with all the South Asian states, including India. For years, the two South Asian giants have failed to normalize their relations. The trade opening gives us and opportunity which the business community among us must be waiting keenly to exploit. With the trade opening, there will be increased level of people-to-people level contact. The two countries will be forced to liberalize their respective visa policies. More and more cultural contacts will take place.

The bitter reality is that India has one of the world’s largest developing economies. After the United States, it is the world’s largest exporter of software. With or without an MFN status from us, India will survive. In any case, in relative terms, India is not going to gain much from us. The issue at stake is that of our own economic survival. If not today, under the WTO requirement, we have no other option but to grant MFN status to India tomorrow. Better do it today. Tomorrow, the $1 plus billion worth of smuggling or trade between the two via any third country will be $2 billion. We already permit trade with India of some 574 items. The number of items actually being traded is around 100. Commerce Ministry officials confirm that even in this limited trade with India, the country enjoys favorable terms of trade.