Pakistan’s Most Favored Nation Status to India: A Win-Win for the Region?

Trade relations between India and Pakistan appear set to improve significantly with Pakistan likely to grant India Most Favored Nation (MFN) status. The potential gains from easier trading relations are considerable for both countries. In 2009-10, official trade between the two stood at $2 billion. Studies suggest this volume could be much higher, absent formal and informal barriers. For instance, a recent SAARC report estimates trade potential to be $12 billion.

What exactly does MFN status mean?

All WTO members are bound to grant MFN treatment to member countries with respect to trade in goods. India granted Pakistan MFN status in 1996, but Pakistan held back, citing strategic considerations. Despite granting Pakistan MFN status, India continued to impose high tariffs on goods of interest to Pakistan—textiles and leather. Thus, merely according MFN status does not imply easier trade. So, does Pakistan’s offer matter? Yes, it does. It signals enthusiasm, goodwill, and a keenness to build peaceful and productive economic and political relations in the region.

Where will the gains come from?

The gains are likely to come from existing markets as well as new ones. The former includes informal (illegal) trade, conducted through cross border smuggling and personal baggage — and according to some estimates, worth $13 billion. It also includes trade to the tune of $3-3.5 billion conducted through third-parties, such as Dubai, since direct trade is difficult. The potential for new markets is tremendous. For instance, a Government College University study suggests expanding Pakistan’s light engineering sector. The same study suggests that India has a relative advantage in bicycle production, which it could export to Pakistan. Additionally, as FICCI secretary–general, Rajiv Kumar notes, if Indian goods are permitted to transit through Pakistan and access Central Asian markets, then traders in Haryana, Punjab, Himachal Pradesh and North Rajasthan stand to gain substantially.

Two common misconceptions

• Indian goods will flood Pakistani markets and ruin local producers: WTO provisions allow members to impose safeguards restricting imports (for temporary periods) should such imports unfairly or seriously injure domestic producers.

• India and Pakistan’s political tensions will defeat smooth trade efforts: History suggests old enmities can be overcome by trade. Consider the end of the China-Taiwan fray, and the concomitant increase in trade from $8.1 billion in 1991 to $100 billion in 2010, as well as the US-Vietnam bilateral trade agreement in 2001, resulting in the US being the leading investor in Vietnam today.

What needs to be done now?

• Liberalize the visa regime for businessmen: Currently, business visas granted by India to Pakistani nationals are city specific, single entry and short duration. This limits what can be accomplished in one business trip. In this context, the recent report that India is considering moving towards a Preferential Trade Agreement with Pakistan and that a liberalized visa regime would be one of the first steps is particularly encouraging.

• Improve infrastructure, including warehousing facilities for perishables, better rail and cargo train services, and air links.

• Ease restrictions, such as the number of hours or the day of week when official trade across borders can occur.