Myths about granting MFN status to IndiaInpaperMagzine By Dr Manzoor Ahmad DAWN Under the current trade policy, Pakistan allows import of all items (except those which are not importable because of security, health or religious concerns) subject to customs duty and other import duties but for India it maintains a special positive list of about 1100 items, which can be imported.

This list would be replaced by a negative list of items whose import would remain restricted. This means that all other items that are not included in this list would be allowed to be imported at normal tariffs as is allowed for all other countries of the world. There may be some preferential tariff rates for Saarc countries including India under Safta but that is a separate issue.

Granting of MFN status would not mean that India will have preferential treatment over any other country.

Negative list: It is also wrong to assume that if Pakistan were to allow MFN status to India, it would not be able to keep a negative list to stop some sensitive items from import.

Maintaining a negative list for India only may not meet the obligations of WTO because under Article_I of the General Agreement On Tariffs And Trade_ (GATT), all WTO members have to extend the same treatment to one another.

However, there is a specific provision in the GATT rules for India and Pakistan. In terms of Paragraph 11 of Article XXIV of GATT, the two countries can enter into special arrangements with respect to trade between them, pending the establishment of their mutual trade relations on a definitive basis.

It should also be clarified that there are also exceptions from MFN rule for customs unions (e.g, the European Union for its members) or free-trade areas (like Nafta for the US, Canada and Mexico or Pakistan-China Agreement) where members of such arrangements can allow preferential treatment to each other.

Main beneficiary: The belief that Pakistan with a smaller economy may lose out while India may be the main beneficiary is also misplaced.

Experience of many other smaller economies which developed closer trade relations with bigger ones through Free Trade Areas or Customs Union or otherwise shows that it was a “win-win” situation for both sides but the smaller economies have in general benefitted more from such arrangements.

For example, when the customs union between the EU and Turkey came into effect in 1996, Turkey’s exports to the EU totaled $11.5 billion. Fifteen years later its exports to EU have grown more than 500 times and reached $61 billion last year.

Similarly, Mexican exports to the United States more than quadrupled since Nafta’s implementation in 1994, from $60 billion to $280 billion per year.

The agreement also brought many benefits for the Mexican consumers. The cost of basic household goods in Mexico has halved since Nafta’s implementation. While exports of Bangladesh to India have not increased substantially since it entered into Free Trade Agreement with India, but its economy has been doing rather well growing at over six per cent per year. It can get cheaper raw materials and export more competitive goods to the US and EU markets.

Non-tariff barriers: The fears that India has a stringent import policy (with many non-tariff barriers) and would be able to increase its exports at a greater pace than imports are not justified.

India has no Pakistan specific non-tariff barriers. Its economy was closed till 1990 but since it started on the liberalisation process in the early 90’s, its imports have been growing at a much faster pace than its exports. On average its imports have grown at an average of 34 per cent whereas its exports have grown by about 18 per cent. Its imports in 2008 reached $320 billion. Its trade could not have grown at such high rates if it had not substantially lowered its non-tariff and tariff barriers.

It is a fact that India is the world’s highest user of anti-dumping duties but most measures are applied against China. Despite frequent application of anti-dumping against Chinese imports, their mutual trade has grown from less than $1 billion in 1994 to over $43.4 billion in 2009. This is an increase of over 40-fold in 15 years.

Auto, pharma industry: The impression that some industries in Pakistan such as automobiles and pharmaceuticals may find it difficult to compete and may have to close down need to be dispelled.

While there may be some truth in the fact that Pakistan’s automobile and pharmaceutical industries are much less competitive
as compared to India’s and if Pakistan were to allow open competition, it may not be able to compete. But it does not have to open these sectors and can continue to maintain the same restrictions as it is doing for other countries.

Pakistan maintains high tariffs and non-tariff barriers on import of automobiles. It has a Free Trade Agreement with China but does not allow import of Chinese automobiles. It can continue to do the same for India. Similarly, despite its free trade agreement with China, it allows only a limited number of drugs from that country. Where it has allowed imports, it has greatly benefited the poor people.

For example, the Chinese brand of Ripambicine 450 mg costs Rs160 while its local one is three-times more expensive. If it allows imports of the same drugs from India as it doing for China, they would be competing against each other and benefitting local consumers. It is estimated that in many cases, cost of essential medicines could come down to one-third of our current prices.

The situation would be somewhat similar to allowing import of cheap shoes from China. Whereas the poor are able to benefit by being able to buy a pair of Chinese shoes for less than Rs300, Pakistan has been able to focus on higher end products and export its shoes for an average of Rs3000 and more. Moreover, if the two industries feel threatened, Pakistan can continue to keep tariff and other barriers against India for these sectors as it is doing for other countries.

However, were it to open these two sectors, it would benefit the consumers tremendously. In particular, having lower prices for medicines would benefit poor sections of our society.

Kashmir: Pakistan tried to link grant of MFN status with solution of Kashmir issue, but this strategy did not succeed. On the
other hand, Bangladesh opened trade and then has successfully resolved its long-standing border dispute. The two countries recently concluded a land boundary agreement to demarcate their 4,000km shared border and sort out 162 ‘enclaves.’ Bangladesh could never have got such a deal through keeping itself isolated from India.

Haste: It is argued that Pakistan is taking this decision in haste without considering the interest of its industry which may be harmed seriously This is not correct.

Pakistan has taken a long time to come to this decision. During the last 20 years, it conducted several studies to see the impact of opening trade with India. All studies and governments during the past 20 years including the two tenures of Nawaz Sharif, late Benazir Bhutto and Pervez Musharaf had openly favoured opening of trade with India. In fact, the late Mahbub-ul-Haq had stated, “Pakistan is totally wrong in denying non-discriminatory trade to India. It is an inferiority complex. If we can compete
with other developed nations, why can’t we compete with India.”

India granted MFN status to Pakistan in 1996 and it has taken over 15 years to consider giving reciprocal status. It is not a decision being taken in haste. In any event, granting of MFN status would not mean opening of trade overnight. It will take time to develop to its potential.

Dr Manzoor Ahmad is Pakistan’s former ambassador to WTO. E-mail: manzoor_ahmad@yahoo.com.