What is Most Favoured Nation status?
According to the MFN principle of the WTO’s General Agreement on Tariffs and Trade (GATT) — to which India is a signatory/contracting party — each of the WTO member countries should “treat all the other members equally as ‘most-favoured’ trading partners.”
The WTO says, "Grant someone a special favour (such as a lower customs duty rate) and you have to do the same for all other WTO members." Hence, though MFN sounds like special treatment, in effect it means non-discrimination.
Have Pakistan and India accorded MFN status to each other?
The MFN status was accorded to Pakistan in 1996 as per India’s commitments as a WTO member. But Pakistan has not reciprocated, reportedly citing “non-tariff barriers” erected by India as well as huge trade imbalance. According to the WTO’s report on the Trade Policy Review of Pakistan (in 2015), “Pakistan is in the process of offering India Non-Discriminatory Market Access" (similar to MFN).
What will happen if India revokes Pakistan's MFN status?
While the Prime Minister has called for a meeting to review the MFN status to Pakistan, there have been suggestions that India will not withdraw the MFN status to Pakistan. Even if India chooses to do so there won’t be any significant trade fallout as the level of bilateral trade is “very low” — representing a minuscule 0.4 per cent of India’s overall goods trade worth $643.3 billion in 2015-16.
What will be the political fallout of such an action by India?
Though it will have only a “symbolic” impact in trade terms, politically it could result in India losing goodwill in the South Asian region, where it enjoys a trade surplus and is a party to a free trade pact called SAFTA, which also includes Pakistan. The move may also not go down well at the WTO-level.
What are India’s options?
India could consider making use of a ‘security exception’ clause -- Article 21(b)(iii) -- in the GATT to deny the MFN status to Pakistan or bring in certain trade restrictions.
What should Indian officials keep in mind while considering using the Article 21 provision?
According to a paper by Shailja Singh of the Centre for WTO Studies at the Indian Institute of Foreign Trade, “GATT and WTO practice shows that the countries have by and large observed self restraint in using the national security exception. .. This is hardly surprising as national security is too sensitive a subject that countries will be comfortable submitting to an international review.”
Also, there have been Article 21 disputes in the past between Czechoslovak (Socialist Republic) and the U.S. (1949); the U.S. and Nicaragua (1983 and 1985) and between the European Communities and former Yugoslavia (1992).
