Explained: The concept of Most Favored Nation (MFN) status

In the wake of the heinous terrorist attack in Pulwama district of Jammu and Kashmir on 14 February 2019, Government of India (GoI) announced that it would revoke the most favored nation (MFN) status given to Pakistan. Following this announcement, India, under the Customs Tariff Act, increased customs duty to 200 percent on all Pakistani imports to India.

What is MFN?

According to WTO’s General Agreement on Tariffs and Trade’s (GATT) object, to which India is a Signatory/ contracting party, of treating all other member states as ‘most favored’ which is furthered in Article 1, it requires WTO Members to extend MFN treatment to like products of other WTO members with respect to tariffs, regulations on exports and imports, internal taxes and charges, and internal regulations.

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In other words, “like” products from all WTO Members must be accorded the same treatment as the most advantageous treatment accorded by a member to the products of any one state or territory under the jurisdiction of that member.

MFN is actually a misnomer therefore as it does not provide a nation favorite treatment but to manifest the idea that if you grant someone special favor (such as a lower customs duty rate) and you have to do the same for all other WTO members. Hence, though MFN sounds like special treatment, in effect it means non-discrimination.

India and MFN

In the case of goods, India has extended MFN status to member countries of WTO.

With respect to SAARC, all the nations – Bangladesh, Maldives, Nepal, Pakistan and Sri Lanka – have extended MFN to India and vice versa, except Pakistan.

How does MFN help a nation?

MFN status is critically important for smaller and developing countries for several reasons. It gives them access to the larger market. It lowers the cost of their exports since trade barriers are the lowest given. It also makes their products more competitive.

They receive the benefits of economies of scale. That, in turn, increases their exports and their country’s economic growth.

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MFN: India & Pakistan

India gave Pakistan the status in 1996, a year after the WTO was formed. Prime Minister Narendra Modi had put the status under review after the Uri attacks of 2016, but it was only revoked after the Cabinet Committee on Security met to discuss the security situation in Kashmir post-Pulwama attacks.

Pakistan, however, did not grant India the same status. In November 2018, Pakistan government officials had said they did not have any immediate plans to grant India the status but they were working on free trade agreements with many countries, including China.

Pakistan stands to lose concessions on the tariff, open markets and a free flow of goods that come with the MFN status. These perks are beneficial for the participating countries as they provide local goods with wider access to markets, but it may also lead to price wars and make domestic industries vulnerable.

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Can Pakistan challenge this decision?

Yes, Pakistan can challenge the decision taken by GoI in the WTO Dispute Settlement body and India can’t argue only on the basis of them not granting the same to us. The proper recourse could be only to place argument under exceptions to MFN under Article XX of National Security.

What will happen now that India has revoked Pakistan’s MFN status?

There won’t be any significant trade fallout as the level of bilateral trade is very low. India-Pakistan trade volume is less than one percent than India’s total trade. India’s decision to impose a 200% customs duty on all Pakistani goods will lead to a significant drop in Pakistani imports to India. However, given the low trade volume, it will not have any noticeable impact on Pakistan. However this might lead to a retaliation hike from Islamabad and such retaliatory tariffs will jeopardize Indian exports worth close to $2 billion, thus harming India more than it would harm Pakistan

(with inputs from Anubhav Kumar)

Image Sources:

Image 1 – Times of India

Image 2 – Slide Share

Image 3 – Slide Share

Image 4 – Hindustan Times


Kumar Lav Dibya Author

Author is a Special Project Correspondent with The Analysis.

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