MFN status for India now

ThePakistan government had resolved in principle to give India MFN status by end of 2012. Regrettably, it has sought an extension in the implementation of this decision, an outcome that could have been avoided through better preparation on the management of this transition.

The Institute of Public Policy, Beaconhouse National University, has undertaken a major study (of which this writer was one of the authors) on the potential of, and gains from, further trade liberalisation with India. This article attempts to summarise the findings.

Both countries have made major concessions recently. Pakistan has eliminated its ‘positive list’ and opted for a shorter ‘negative list’ of 1,209 tariff lines, resulting in a sharp increase in tariff lines importable from India. This list will be replaced by a briefer ‘sensitive list’ following the granting of full MFN status to India. The latter has reduced the list of items that Pakistan cannot export to India by 30 per cent and declared its intention to reduce the sensitive list to 100 items and lower the duty rate to five per cent by April 2013.

However, our analysis shows that although India has ostensibly opened up its trade regime for products from Pakistan through a reduction in the number of items on its sensitive list, the concession is less liberal than it appears. When the items on the sensitive list are quantified on the basis of the eight-digit level of HS Code, the number of tariff lines in India’s list at 1,753 is significantly more than the number of tariff lines, 1577, in Pakistan’s sensitive list for India.

Furthermore, Pakistan has given preferential treatment to far more tariff lines for imports from India; India’s sensitive list only grants preferential treatment to 65 per cent of Pakistan’s exports, and is heavily loaded with agricultural and textile products in which Pakistan has a comparative advantage. Pakistani exporters also have to negotiate more than a dozen legislations, a plethora of standard setting and certifying agencies implementing multiple laws and regulations that make trade in agriculture more restrictive. Indian has high import duties, ranging from 30 per cent for most produce to 70 per cent on rice and 100 per cent on wheat.

This protection comes despite massive subsidies on agricultural inputs borne by the Indian and state governments of close to $50 billion per annum, amounting to 15.3 per cent of production and 5.2 per cent of GNP, compared with Pakistan’s agriculture-related subsidies of less than one per cent of GDP and tariffs ranging from five to 10 per cent with zero duty in the case of cotton.

On many of the value-added items of textiles in India’s sensitive list the duty is the higher of the rate of 10 per cent or a specific duty. For several products the ad valorem equivalent of the specific duties exceeds 100 per cent. The maximum duty, excluding automobiles, in Pakistan is 30 per cent,

The composition of India’s sensitive list is particularly important for Pakistan because India has reduced more sharply its sensitive list for Bangladesh and signed an FTA with Sri Lanka. For example, India’s sensitive list comprises only 25 items in the case of Bangladesh. This has helped Bangladesh increase its garment exports to India by 46 per cent in 2011/12, inducing fears that the exceptional access to India’s markets, while denying Pakistan a ‘level playing field’, could incentivise flow of investment capital outside Pakistan to Bangladesh and Sri Lanka to take advantage of the more liberalised trade environment for these two countries.

This is particularly important because India, with its more diversified industrial structure and export base, is likely to gradually move out of textiles, opening up opportunities for countries like Pakistan and Bangladesh in the large Indian market.

The study projects that India’s exports to Pakistan in the next three years will grow from $1.4bn to $6.3bn with a significant proportion of this increase representing the shift to formal trade of items that were being ‘informally traded’. Pakistan’s exports to India in the medium-term are projected to increase $300 million to $1.3bn

Trade liberalisation with the granting of MFN status to India, the implementation of tariff reductions under Safta and the induction of structural reforms in Pakistan is projected to push up the country’s GDP in the medium-term by a ‘moderately favourable’ 1.5 per cent to a healthy four per cent.

In the case of the more cautious assumptions for the ‘modestly favourable’ outcome: Pakistan’s private investment will rise from 1.25 per cent of GDP to 4.2; there will be a net increase in employment of approximately 170,000; prices will decline by around one percentage point; the current account will become a surplus of more than $1bn; fiscal deficit will increase by Rs130bn, even though tax revenues are expected to grow by Rs70bn; the average gain for consumers is estimated at Rs2,300 per household.

Therefore, Pakistan should grant India MFN status to exploit opportunities created by trade preferences under Safta as well as seek relaxation of India’s non-tariff barriers and tariffs; the latter mainly through a revision by India of its sensitive list, involving the removal of agricultural and textiles items in which we have a comparative advantage. However, India will only give these concessions as a reciprocal gesture for being accorded MFN status.

Moreover, by changing the composition of the sensitive list, employing appropriate safeguard measures provided for under WTO rules and Safta provisions and by lowering duties on raw material and intermediate goods used by industries likely to be threatened by imports from India, Pakistan can prevent any ‘serious injury’ to different manufacturing sub-sectors.

The instruments available to us to prevent ‘material injury’ to some of our industries include: amending the sensitive list by excluding the large number of tariff lines relating to textiles and clothing and substituting them with tariff lines from threatened industries; improved efficiency and competitiveness of threatened industries by reducing duties on their raw material and intermediate goods; providing some protection to agriculture by raising tariffs moderately and eliminating zero duties.

Checks on predatory behaviour by Indian entrepreneurs should entail strengthening the legal framework pertaining to safeguard measures. Some industries outside the sensitive list may end up getting ‘negative protection’. Pakistan should establish a tariff anomalies commission to avert material injury to such industries The timing of this trade liberalisation coincides with a tricky period for Pakistan’s balance of payments. If in the short run there is a significant increase in imports from India without a perceptible increase in Pakistan’s exports we can consider invoking Safta provisions that allow a country to provisionally suspend the concessions.

Today there is a huge window of opportunity to speed up the project of integration. The timing is also better because traditional markets for South Asia in the West are slowing down.

To change the existing narrative the dissemination of gains from trade and the costs of non-cooperation must be carried out imaginatively, since most benefits will come in the future and initially Pakistan’s trade deficit with India will widen, making it more difficult to persuade influential detractors that obstacles are more imagined than real. So as not to jeopardise this shift India will have to be more generous in its approach to Pakistan, creating opportunities for it, especially in agriculture and textiles.

The writer is a former governor of the State Bank of Pakistan