On November 2nd, 2011, Pakistan granted its long-time rival India Most-Favored Nation status, reciprocating a gesture India had already made fifteen years ago, in 1996. The decision was made in a cabinet session, with Prime Minister Yousuf Raza Gilani chairing the meeting, and initial predictions have been overwhelmingly positive. Despite the potential benefits of this decision, there has also been a strong voice of opposition to the move. This paper will attempt to discuss varying opinions on the matter, while seeking to prove that the positives outweigh the negatives for Pakistan.
The term “most favored nation” refers to a status accorded to one state by another regarding international trade, whereby the recipient of the MFN status may not be treated less advantageously than the “most favored” country the promising country already conducts trade with. As it is a cornerstone of WTO trade law, all members of the World Trade Organization accord MFN status to each other. Exceptions are sometimes included to grant some leeway to developing nations. Pakistan has been a WTO member since 1995, but hesitated in granted MFN status to India earlier due to deplorable relations between the two countries.
By finally reciprocating, the Pakistani government has stirred a lively debate in both countries, which is primarily centered on two core issues: 1) why this decision was taken, & 2) what it means for Pakistan in terms of a) economics effects, and b) politics & defense. One thing is clear: though the cabinet has finalized their decision, Pakistan has not done away with its hesitation. Information Minister Firdos Ashiq Awan initially announced that the federal cabinet had unanimously decided to grant India MFN status, an announcement that was later altered to vaguely imply that the cabinet members had only agreed to approve the process of normalization with India, in regard to trade. This was further clarified by a later announcement that any decision regarding trade or MFN status would be finalized after a series of meetings with the Indian Ministry of Commerce and Industry.
Whereas as some herald the decision as yet another step in the thaw of relations between the two countries, and indeed, the most recent of a series of “confidence-building” measures for peace and stability throughout South Asia, others are more skeptical. According to The Times of India, “Pakistan is not being friendly towards India because of a change of heart. It’s under severe international criticism… an untrustworthy partner of the US. Its reputation is in tatters, as is its economy. It needs to show some positive moves towards India so as to deflect criticism from itself. Given a chance, Pakistan will still be happier attacking India’s interest.” (Panday, 2011)
In line with this view, retired Pakistani general Talat Masood is quoted as having said, “I think they have realized they can’t have bad relations with the United States and at the same time continue to have very poor relations with India because this synergy will be very dangerous.” (Haider, 2001)
To a large extent, Pakistan’s decision may be based on purely economic logic. Tariffs on Indian imports will now have to be the same as those on other imports, which, up till now, have always been lower. By lowering the tariff on Indian goods, trade between the long-time rivals will be given a significant boost, to the benefit of both economies.
Huma Yusuf presents an interesting point, stating that the energy sector might have played a prominent role in the cabinet’s decision-making process. Pakistan’s energy sector has always been barely able to meet demand. Load-shedding and a complete lack of electricity are common across the country. The total energy deficit is at 6000 mega-watts, and is devastatingly hampering GSP growth. The same day that the MFN status was officially announced, Prime Minister Gilani also initiated an energy deal with India – to import 500 mega-watts of electricity. This could be the beginning of extensive collaboration in the energy sector, benefits for the industrial sector, and a higher standard of living for Pakistan’s population.
Another boost will come from what is currently the “black” market. MFN status acts to legalize previously unregulated trade between the two countries, which, according to the Indian Council for Research on International Economic Relations, could have taken trade between the two countries to over $14 billion in 2009. Also, WTO member requirements will finally be fulfilled. (Yusuf, 2011) The Director General of CII, Chandrajit Bannerjee, presents a more humble figure – $8 billion in bilateral trade in five years. (Deccan Herald, 2011) The goods which now enter Pakistan via Dubai and Afghanistan (through informal channels) will become importable through legal channels. This means that not only will the cost of imported goods go down, but the government will also gain from enhanced revenues from these goods.
“Of the $1.4 billion in trade recorded in 2009/10, Indian exports to Pakistan stood at $1.2 billion while Pakistan exports to India totaled $268 million, according to official data.” (Haider, 2001)
Following the above logic, we see that a) the trade deficit between Pakistan and India will decrease and b) MFN status paves the way for domestic industries to acquire raw materials much more affordably, enabling them to cut costs and increase efficiency in the export of finished products, thus reducing its import burden by sourcing cheaper Indian products closer to home.
Other potential benefits include the removal of trade barriers such as drawn-out customs clearance procedures, and excessive use of “trade-defense” measures (additional taxes and duties, subsidies provided to domestic farmers, etc.), on Pakistani goods exported into India. This will serve to make Pakistani goods more accessible to the Indian public, and hopefully boost domestic export levels. However, obstacles such as stringent visa rules and restrictions on travelling and tourism, difficulty in communication and opening of more trade routes or ports to handle Pakistani goods have yet to be thoroughly addressed.
Criticism of the decision is based on fears that Indian goods will swamp the Pakistani market, damaging local industries and eventually making Pakistan dependent on Indian help. An angry journalist attending Firdos Ashiq Awan’s initial press conference called the decision a “crime”, and some exporters have expressed a fear of not being able to compete with the Indian market. Many say that Pakistani industries have long since lost their competitive edge as a result of security issues, power shortage and rising cost of production. Just one example of this is Pakistan’s $14 billion textile export bill, which seems meager when compared to Indian textile exports of $24 billion, in a global textile and clothing trade of $800 billion. (Zaheer, 2011)
Many financial experts claim the forced liberalization of imports associated with granting MFN status is another blow to Pakistan’s struggling economy. Repayments to the IMF need to be the government’s top priority, as foreign direct investment in the country has dropped from $7 billion to $359 million in just 6 months. Exports have dropped from 75% of imports to just 50%. If at this point, Pakistan were to expand its list of “allowed-to-import” Indian products, the domestic economy would find no end to its suffering.
As far as defense and politics are concerned, the opposition argues that by named India an MFN, not only do we get access to a thriving market of more than a billion people, but, also, “the free trade dynamics will unleash a future of mutual dependence, in turn, minimizing cross-border security concerns” (Monnoo, 2012). In parallel however, there is strong concern about what India’s regional designs may be, its poor relationship with Pakistan in the past, especially with respect to bilateral trade. Many feel that Pakistan is being pressurized by is weakening alliance with the United States to minimize regional tensions, and is thus forced into taking actions which are not necessarily to its benefit.
These concerns fall into the now run-down argument of India as Pakistan’s biggest security risk. As a nation, Pakistan will benefit from looking at a larger picture, and appreciating how well a stronger South Asia can battle an ever-changing global system. Though India may be considered a threat, it is also important to note that ties with both Afghanistan and the Unites States are growing increasingly fragile as terrorism mounts and counter-terrorism initiatives yield no real results. The MFN trade agreement will ensure that Pakistan is not isolated, and surrounded by hostile neighbors. Also, the US and India have been establishing ties of cooperation and it would hardly help Pakistan’s case with the US to shun India even further. In fact, the granting of MFN status might get Pakistan some “bonus points”. US officials have often encouraged Pak-India relations as “the key to regional stability”.
Relations with Afghanistan have never been as rosy as Islamabad would have liked, and with the upcoming withdrawal of US troops from Afghanistan, fears of India-Afghan ties will be further enhanced. To establish positive relations with India now is the smart step. It will pave the way for Pakistan to establish congenial relations with Kabul.
Establishing trade ties with India will result in a sort of inter-dependency, as two economies are inter-linked for mutual benefit. Majority of manufacturers and industrialists in both countries are set to benefit from increased bilateral trade, and thus will form pressure groups against any potential aggression between the two governments. The MFN status will do India a great deal of good, as India will have direct access to Iran and Central Asia. Goods moving along this route will be handled by Pakistani transport and logistics firms, creating multiples opportunities for profit, investment, employment, etc.
Pakistan is well known for the quality of its wheat, rice, and dry fruit. The textile and surgical instrument industries are also known for their quality. These strengths, and the breadbasket of the Punjab will work to Pakistan’s advantage as good can be more readily exported to India.
Most importantly, the development of a porous border will initiate long-needed people-to-people contact between the two populations. Prejudice, bias, and negative assumptions can only be overcome through integration, association and positive action. Pakistan and India share many cultural links, and yet are virtually cut off from each other. Collaboration would result in a more vibrant South Asia, and help dispel any potential aggression between the countries.
In the words of Fatima Bhutto, “We need more people-to-people contact to promote peace… Trade between India and Pakistan is a fraction of the trade that we do with strangers… Many other arch rivals have better trade ties.”
There is no doubt that Pakistan needs to be careful and do its homework properly before throwing itself into delusions of the MFN agreement magically making everything better. In doing so, it needs to grapple with the elements of reciprocity and fair play to provide a level playing field to its own people. All this being said, however, the MFN agreement holds enormous potential to benefit Pakistan, and is not something that should be quickly passed over.
Ahmed, S. (n.d.). MFN status to India to bring greater benefits to Pakistan. Retrieved from Pakistan Observer: http://pakobserver.net/detailnews.asp?id=126854
Deccan Herald. (2011, November 2). Pakistan gives India MFN status, India Inc rejoices. Deccan Herald. Deccan Herald. Retrieved from http://www.deccanherald.com/content/201994/pakistan-gives-india-mfn-status.html
Haider, Z. (2001, November 3). Pakistan gives Most Favored Nation status to India. Arab News. Arab News. Retrieved from ArabNews.com: http://arabnews.com/world/article528123.ece
Monnoo, K. (2012, January 4). MFN status to India – An analysis! The Nation. The Nation. Retrieved from http://www.nation.com.pk/pakistan-news-newspaper-daily-english-online/columns/04-Jan-2012/mfn-status-to-india-an-analysis
Panday, P. (2011, November 3). The Times of India Blogs. Retrieved April 18, 2012, from The Times of India: http://blogs.timesofindia.indiatimes.com/the-real-truth/entry/pakistan-giving-india-mfn-status-is-good-for-both-countries
Yusuf, H. (2011, November 10). Pakistan Grants India Most Favored Narion Trading Status? Asia Pacific Bulletin.
Zaheer, F. (2011, November 21). MFN status to India : Textile sector looking to cash in despite high production costs. The Express Tribune. International Herald Tribune. Retrieved from http://tribune.com.pk/story/294999/mfn-status-to-india-textile-sector-looking-to-cash-in-despite-high-production-costs/