MFN status – delayed or denied?

The year 2013 dawned with the news that Pakistan missed the target of granting most favoured nation (MFN) status to India and consequently abolishing the negative trade list, as committed, by December 31 2012, ending discrimination in trade with India. The process has been ‘delayed for a short time’ due to pressure from different trade lobbies. Only time will tell whether this delay is really ‘short’ or otherwise, but the issues involved in this matter definitely warrant a serious consideration; whether the concerns of trade lobbies about protection of their business interest are genuine and are in line with the substantial momentum of trade reforms being targeted and achieved in the last one year.

It is pertinent to mention here that Pakistan has been delaying its legal obligation to grant MFN status to India since the last 18 years – undermining its economic interests in the face of political and ideological pressures from time to time. For the first time in its history, the year 2012 was marked by conspicuous progress towards the goal of trade liberalisation between the two neighbouring countries. It was a breakthrough made possible by a coordinated political consensus; the rigid visa regime was relaxed, bank branches were opened, restrictions on foreign investment were removed, and an integrated check post at Attari-Wagah border was inaugurated to accommodate more trade. Most importantly, both countries signed agreements on three key issues that Pakistan thinks as major non-tariff barriers – customs clearance, standards and testing and dispute resolution.

Surprisingly when the stage was almost ready for achieving the timeline and granting MFN status, the government of Pakistan seemingly gave in to pressure by some groups once again. This time the most prominent were the trade lobbyists, who are believed to have political interest. The most vociferous opposition came from the agriculturists who claimed that they would be badly ‘hurt’ if subsidised Indian goods were to arrive in Pakistan (with a cost advantage). It will be relevant to objectively analyse whether or not their concerns are legitimate.

According to the Economic Survey of Pakistan, 55 percent of agricultural income originates from the livestock sector, which does not seem to be under threat from Indian producers. Another 37 percent income comes from major crops: wheat, sugar cane, rice and cotton. Pakistan is self-sufficient in sugar cane and wheat and hence faces no imminent threat from Indian imports in these two cases. Cotton output, already stagnating under bad governance and erratic policies for the last 20 years, would not have deteriorated further if imported from India. However, there may be exceptional instances, like a domestic crop failure, when major crops could be imported from India but even then the benefit to consumers in the form of low price of essential goods would far outweigh the cost to domestic manufacturers. Therefore, what remain as likely imports from India, in the present scenario, would be some minor crops; fruits, vegetables, grams, lentils, maize etc that comprises a minor 10 percent of farm income.

Interestingly, when almost 90 percent of agriculture income is insulated from risk of being ‘hurt’, there appears no sound rationale of delaying MFN on these grounds. Sceptical of their role, Dr Ishrat Hussain, the former governor of the State Bank of Pakistan commented that agriculturists, who comprise the majority of the membership of provincial and national legislatures, may use their political power in “reversing and derailing” the trade reforms and cause a “major setback to the economic revival of Pakistan.” This seems true today.

The other sector opposing the MFN is the auto-sector. Criticising such cartels of inefficient producers, Shahid Kardar, another former governor of the State Bank opined that such industries are not “likely to be competitive in foreseeable future” if they will miss the opportunities to improve efficiencies through economies of scale. In short, when prolonged protectionism bodes ill for economic efficiency of an industry, there is no reason to defer the MFN status.

There was no need to defer MFN at all because the interests of trade lobbies could have been legally safeguarded once trade had opened. Injury, if any, to the domestic industry could have been countered by imposing antidumping or countervailing duties in order to offset threat of directly competitive or subsidised Indian goods in market. These are trade remedy laws used by the majority of countries today under WTO regime and our trading community could use them as well, as their legal right, without compromising the economic interests of the country.

The decision of ‘delay’ in granting of MFN status ushers in more doubts. It is worrisome because the present year will see three kinds of governments – the incumbent, the caretaker and the post – reviving the economy, there is no reason to assume that others may deny it altogether due to policy inaction and missing political consensus. All efforts must be directed to allay the fears of these selected trade groups soon before time runs out and the commendable success of last year becomes a mere relic of the past.

The writer holds an LLM degree in international economic law from the University of Warwick, UK. Email: beelam_ramzan@ yahoo.com