India Rethinks Most Favoured Nation Status For Pakistan

Under World Trade Organisation rules, member countries - like India and Pakistan - can't discriminate against each other in matters relating to trade. In principle, all member countries are 'most favoured nations' for each other. This means if India were to reduce tariffs on import of a good, it will have to do so for all its trading partners.

However provision of MFN status is not automatic for WTO members. Countries need to sign exclusive trade agreements for this to operate. On the other hand, member countries can deny MFN benefits on several grounds - including threat to national security from another nation.

India granted Pakistan MFN status in 1996, which means it imports all items from Pakistan. Similarly India exports all items to Pakistan.

But despite lengthy negotiations over two decades, Pakistan is yet to grant MFN status to India. Pakistan argues it has a sizeable trade imbalance with India - which means there is a greater demand for Indian goods in Pakistan and their import could hurt Pakistan's domestic industry -- and consequently it needs protection in form of tariffs. But experts say Pakistan has denied India MFN status because of political compulsions and not economic challenges.

The cancellation of MFN status for Pakistan will largely have a symbolic effect. In principle, India will be free to raise tariffs on Pakistani exports, but given the relatively small size of bilateral trade - it was only 2.61 billion dollars last year - it may not have a significant impact. India could also drag Pakistan to WTO's Dispute Settlement Body and demand the grant of MFN status, something it has not done so far.