Best Of Luck, ‘MFN’

MFN (Most Favoured Nation) status only suggests that member states of the World Trade Organization (WTO) are obliged to extend MFN status to each other for trade purposes and that member country won’t be discriminated with other member countries. The euphoric opposition to the proposed extension of MFN status to India by Pakistan is perhaps based on the misconception that it is tantamount to giving some special status to India that in effect would result in imports with duties either zero or less than what is levied at imports from other countries. It is asserted that the opening up of Pakistani market for all Indian products would hurt its domestic manufacturing sector, besides sidelining country’s political stand on Kashmir issue. India is reported to have erected non tariff barriers that discriminate against Pakistan's exports to India. After according MFN status, a section of people apprehend that there would be dumping of so-called cheap Indian goods in Pakistani markets which means dropping goods below cost so that the Pakistan industry can be destroyed.
Economically speaking Pakistan's decision to extend MFN status to India (after 16 years India granted it to Pakistan) has the potential of a positive and far reaching impact on India-Pakistan bilateral ties especially in the area of commercial relations. Switch trade carried out through Dubai involves trade of Indian goods from tires to fabrics and pharmaceuticals, from machinery to beedis into Pakistan routed via Singapore or the UAE. Alternately smuggling takes place across border. In effect Pakistan continues to lose millions in customs revenues and by way of additional transportation costs. Increased trade flow that stems from lifting of import prohibitions from India would lead to additional customs revenue for Pakistan. Replacing cross-border smuggling with direct trade ties with India will boost Pakistan’s revenues. As more products become available, consumers will have more choice of goods, prices will go down. Certainly there will be more competition for Pakistan’s industrialists. Opening borders, remember, does not suggest an unrestricted flow of Indian products.
South Asia is, by most measures, the least economically integrated region in the world, largely due to the animosity between India and Pakistan. At independence, as M. Desai says, Pakistan’s trade with India accounted for 60% of Pakistan’s total foreign trade. That number is now barely above 3%, an economic travesty considering the scale of unmet demand for Indian goods in Pakistan and vice versa (measured through the roaring smuggling trade between the two countries). Official trade between the two countries is modest but has great potential for growth ($11bn from the current $1.8bn) if India and Pakistan get serious about improving trade relations. Currently India maintains a negative list of 850 items of import from Pakistan as against 1946 from India. Pakistan allows import of just 1,934 items from India based on a 'positive list', against more than 6,000 items from other countries, such as Brazil, Mexico, Australia and Germany. The non-tariff barriers (that Pakistan says) restrict exports to India are essentially the measures that India employs across the board. Most of the problems are infrastructural issues at ports of entry, bureaucratic and administrative mishandling, and psychological barriers emanating from bilateral political issues, visa restrictions and surveillance of visitors to India. When Pakistan moves to negative list it would allow for trade in a greater number of goods. India is also expected to trim the negative import list of items from Pakistan under SAFTA.
People in India mostly think–indeed some openly say--that Pakistan’s economy is a failure and the country is a basket case. Granted that today India’s success as economic powerhouse is undeniable yet only a decade ago the Pakistanis were equally snooty about India’s economy. As it happens there is and has never been much difference between the two countries if one studies their respective economic records. The countries of south Asia are laggards rather than leaders. The relative performance of these countries for the past 50-60 years has largely been similar. Ratio of their per capita income has not been much different from unity. Now, one goes ahead but they are similar in being behind the rest than being much ahead of each other. South Asia (apart from Sri Lanka) lags behind sub-Saharan Africa in its primary and secondary enrollment. Adult literacy is almost similar. Both countries neglect their human resources by failing to provide education or sanitation or health. Life expectancy, child malnutrition is shocking. Both have nuclear bombs over human welfare. India’s growth is taking place not because of the government but despite it. It’s not top-down but bottom-up---messy, chaotic and largely unplanned. The country’s key advantages are genuine private sector established rights of property and contract, independent courts and the rule of law (even if it is often abused). India’s private sector is the backbone of its growth. The government in India sleeps at night and the economy grows.
Both India and Pakistan have had a very restrictive trade regime. But then during the last two decades both the countries have liberalised their trade regimes significantly by reducing tariffs, multiplicity of tariff types and slabs, regulatory duties, and exemptions. Also, other barriers on trade such as import licensing, improper valuation methodology, tariff rate quotas have also been removed or reduced. Nevertheless, the Indian trade regime is still more restrictive than its counterpart in Pakistan. According to an IMF study, India’s trade restrictiveness measures 8 (on a scale from 1 to 10), while Pakistan’s index stands at 6 [IMF (2004)]. The non-tariff barriers, include requirement of political/security clearance, sampling/customs inspection, requirement of technical/standard certification, labeling and marking rules, packaging rules specification, and etceteras by India. In addition, India maintains tariff rate quotas in the agricultural sector and the efficiency of customs operations also act as a de facto barrier to trade.
Fine, India’s economic transformation and rising economic clout may mesmerize the world and even make many to dismiss Pakistan as failure, but India, for all its assets, can’t prosper and grow in a sustained manner, if it is surrounded by poor, unstable and unhappy nations. Pakistan would be well-advised to try and capture some of India’s economic magic—or at least try and benefit from the wealth, expertise and know-how of India’s top, globalised companies. Compared to India, Pakistani economy has weak foundation. Its industry is sick, fallen prey to domestic instability, law and order situation and is insecure from the investment point of view.  Besides, owing to the power shortages and lack of secure environment, the local business class is taking out its assets for investment elsewhere especially in secure countries. For Pakistan it would be ideal time to exploit the competitive edge enjoyed by Indian goods (cheaper and better quality) after the grant of MFN.
Whether South Asians like it or not, regional integration — or at least regional cooperation — is the only way that countries can flourish and grow in today’s globalised world. Small, fragmented markets do not attract investors; large, regional ones do. The European Union may be struggling to save the euro but one of Europe’s most significant successes is the creation of the frontier-free single market where goods, services and people can circulate untrammeled by border restrictions. The Association of Southeast Asian Nations (ASEAN) is following the EU lead by working hard to build a common market. ASEAN is in fact at the core of a ‘noodle soup’ of regional initiatives including region-wide free-trade agreements which bring together an array of countries, including China and Japan. South Asia can learn from these examples. It’s not just bilateral India-Pakistan relations that will improve with the grant of MFN. With India and Pakistan at peace — at least on the economic front — all of South Asia could become a better place.
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