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DEFINITION Most favored nation status.

An agreement between two nations to levy tariffs on each other at rates as low as those levied on any other country. If one of these nations reduces tariffs on a third country, all of that nation's MFN partners also receive that lower tariff rate. Most Favored Nation The principle, fundamental to the GATT, of treating imports from a country on the same basis as that given to the most favored other nation. That is, and with some exceptions, every country gets the lowest tariff that any country gets, and reductions in tariffs to one country are provided also to others.

Pakistan’s Most Favored Nation Status to India: A Win-Win for the Region?
Submitted by Tara Beteille, co-authors: Kalpana Kochhar on Tue, 11/15/2011 - 13:35 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

which it could export to Pakistan. infrastructural. Himachal Pradesh and North Rajasthan stand to gain substantially. as FICCI secretary–general. This means that Pakistan's tariffs on Indian imports will have to be the same as the tariffs it imposes on imports from its other trading markets is tremendous. and the concomitant increase in trade from $8. Economic theory predicts that trade between the two largest economies in South Asia would be at least five to ten times greater than its current level of around $2 billion.1 billion in 1991 to $100 billion in 2010. single entry and short duration. In this context. as well as the US-Vietnam bilateral trade agreement in 2001. and air links. While both sides are fully aware of the advantages of trade. and long borders. • Ease restrictions. Rajiv Kumar notes. For instance. including warehousing facilities for perishables. resulting in the US being the leading investor in Vietnam today. a Government College University study suggests expanding Pakistan’s light engineering sector. the Pakistan government announced that it was ready to grant Most Favored Nation (MFN) status to India. a variety of political. such as the number of hours or the day of week when official trade across borders can occur. Consider the end of the China-Taiwan fray. • India and Pakistan’s political tensions will defeat smooth trade efforts: History suggests old enmities can be overcome by trade. 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. 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. legal. What needs to be done now? • Liberalize the visa regime for businessmen: Currently. 2011. . business visas granted by India to Pakistani nationals are city specific. This limits what can be accomplished in one business trip. • Improve infrastructure. Additionally. then traders in Haryana. better rail and cargo train services. Punjab. Why is MFN important? To answer this question one has to ask why India and Pakistan trade so little with each other despite the existence of common history. language. The same study suggests that India has a relative advantage in bicycle production. ANOTHER 1 On November 2. culture. if Indian goods are permitted to transit through Pakistan and access Central Asian markets. and regulatory impediments have essentially paralyzed bilateral trade relations between the two neighbors.

in particular Kashmir. estimated to be around $2-3 billion a year. the approval to grant MFN to India by the Pakistan cabinet is clearly a major breakthrough in trade relations between the two countries. . and most importantly the Pakistan military. The military is also a stakeholder. industries that could potentially lose out to Indian competition. there are still a host of other obstacles to trade that will have to be tackled even after MFN is in place to significantly boost trade between the two countries. it means that Pakistan has decided to separate trade issues from other major political issues. Pakistan will have to abandon the positive list of some 2000 items that it maintains on goods that can be imported from India. including nationalist politicians. textiles. The Pakistan Ministry of Commerce has prepared this negative list but needs to consult with stakeholders on the items to be covered. that have strained relations between the two countries since their independence in 1947. which articulated the MFN principle. It has taken Pakistan some 64 years to finally start implementing what it signed on to do. It is interesting to note that Pakistan and India were among the original 23 signatories to the General Agreement on Trade and Tariffs (GATT) in 1947. but it is very important symbol. To be consistent with the MFN principle this positive list is to be replaced by a negative or "sensitive" items list of goods that will still be restricted. they have come up against a formidable array of opponents. Higher levels of trade will benefit both countries and Pakistan more so than India. By itself granting MFN will not lead to the levels of trade that India and Pakistan should have with each other. bureaucrats. On the tariff side. and excessive red tape. thereby allowing the cabinet to vote unanimously in favor of granting MFN to India. While Pakistani businessmen have been pushing for liberalization of trade with India for some time. bureaucratic inertia. the MFN itself is symbolic. on agricultural products the average applied tariff is about 40 percent. Clearly. However. So some sizable increase in trade is very much in the cards. Thus. its tariffs on goods of particular interest to Pakistan such as agriculture. the military has now withdrawn its opposition to trading with India.One of the main constraints to trade has been that Pakistan did not reciprocate India's granting of MFN in 1996 to Pakistan. For example. The complete liberalization of trade between India and Pakistan is going to be a long and arduous process--but the granting of MFN by Pakistan to India is an important start to this process. and will naturally weigh into the discussion of the composition of the negative list. It is expected there will be a jump in trade as unofficial trade between the two countries going through Dubai. could than take place directly through official channels. This will take time as the sectors of the economy that feel that they would be adversely impacted by imports from India will lobby hard to have their products put on the negative list. Other constraints on trade between the two countries include significant non-tariff barriers. First. and leather goods remain high. there is still an enormous amount of work to be done to implement the cabinet decision. inadequate infrastructure. In some sense. even though India's average MFN applied tariff is 13 percent. And second. Pakistan has apparently moved away from its previous position of linking MFN with the removal on Indian non-tariff barriers on Pakistani exports. Not discounting the importance of the announcement. and finally fulfills Pakistan's obligations as a member of the World Trade Organization (WTO). not just from a defense standpoint but wearing its hat as a major industrialist.

Trade will of course not solve all the problems between the two countries. It is clearly in the interest of both countries. Pakistan has to hitch its wagon to the locomotive or risk getting left behind on the platform. and it seems finally also by the supposedly "India-centric" Pakistan military. This reality is now recognized and accepted by the Pakistan government. as India is the engine of growth in South Asia. to find a political resolution to India-Pakistan problems.Indeed. and increased trade can well be the starting point for this objective. and the world for that matter. . but it could be an important catalyst in reducing tensions.