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


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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.


Tara Beteille

Senior Economist in the East Asia Pacific region

Kalpana Kochhar

World Bank Chief Economist for South Asia

Join the Conversation

November 19, 2011

Please permit me to tell you a story back in 1978. A delegation from Pakistan was visiting Mumbai and I was showing them around a large plant. I mentioned to them that India was manufacturing circuit breakers upto 220 kv for electric substations. An senior engineer in the group told me that they had breakdown of a system for immediate replacement of a 132 kc breaker which they had to import which will take about 9 months including shipment time from Europe. They could have got it from India in matter of weeks.

Hope this will happen now for the good of both the nations.

aprameya parida
November 20, 2011

India-Pakistan should behave as one nation,as they were till 13 th August 1947.Their lies the betterment of Indians & Pakistanis ( better called Hindus & Muslims ).Unlike cricket matches,trade brings economic prosperity to people ,more so if that is between immediate neighbours.
In the today's geopolitical world map ,Kashmir is being shown as a war zone (will bring a third world war ,where three Asian nations will be involved ,India,Pakistan & China) much to the detriment of the people .Still large section of these three countries are in poverty,especially Pakistan & India .Instead of devoting billions for war preparedness,they must allocate this amount for their mutual development.
Kashmir is a great cricket match for certain groups in New Delhi & Islambad .They want this match to continue forever ,inorder to pocket crores for their children to be safely kept in Swiss bank.Break this barrier by trade and alleviate the status of the poor of both countries.

Tara Beteille
November 22, 2011

Thank you for your comments -- and for highlighting the advantages for the average Pakistani and Indian person from better trading relations between the two countries. Pakistan has already taken first steps by removing import restrictions on 12 more items from India, including machinery and raw materials for leather and textile industries:…. Let's hope both countries eventually move away from a positive list approach, since this approach goes product-by-product and tends to be slow and lacks transparency.

Haroon Rashid
November 21, 2011

Glad to read blog of Tara and Kalpana its the head lines in the print, electronic media, with politicians, ex=army service men, bureacrats all concerned about dumping the protected market of automobiles, pharmaceuticals, agricultural products as vegetables tomato, chillies which due to floods has bad harvest. With all this hype I understand the MFN with India will be the best option. Pakistanis are paying the highest to acquire a Suzuki 800 c.c. Mehran which is the most emitting car with Euro standard mesuring zereo in terms of Euro standard. The wind screen is not even laminated. Hence Pakistan has strengths in Auto spare parts, in HVAC, electronics, etc. Pharmaceutical industry has to learn for R&D with India in bio-technology, genetic engineering, in drug trails, standardisation, homologation. Transport sector, services sector, water, liquid, petroleum pipeline, access, Mobile Roaming Access between India and Pakistan. Pakistan has access to ATA Carnet treaty ratified and may consider for transportation of goods thru silk route, thru trans asian highways, and trans asian railways.

Ali Nasir
December 08, 2012

Hi Tara,

I am a broadcast journo from Pakistan and would want to know the Total Trade between India and Pakistan for the Past 8 months after the granting of MFN status.

Where does the Trade balance stand between the two countries?

This campaign was spearheaded by the Textile sector of Pakistan, unfortunately there has been no growth / major trade boost. I can't claim that there has been no improvement but certainly not substantial.

I am a strong proponent of Free Trade, but India stands to gain a lot, and Pakistan stands to gain nothing.

Can you statistically prove that the agreement has benefited Pakistan with regard to trade balance and foreign exchange

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October 20, 2017

Given the market size available in the two countries, the current volume of trade between India and Pakistan is not commensurate with the existing potential. Some of the policy reasons, for low volume of trade between the two countries are the presence of non-tariff barriers in India and the absence of MFN status to India. While the first reason is quoted exclusively by the Pakistani exporters the second reason is shared by traders on both sides of the border. Economists suggest that both the nations can benefit not only by accessing a big market for their exports, but can save significantly by substituting its expensive imports from the rest of the world.