After Prime Minister Narendra Modi called a meeting on Thursday to review Most Favoured Nation (MFN) status to Pakistan, it is time to understand all the macro and micro points regarding the matter.

The MFN status is governed by the World Trade Organization's (WTO) General Agreement on Tariffs and Trade (GATT).

MFN is apparently a misnomer. It sounds like a contradiction. Though it suggests special treatment, it actually means non-discrimination - treating virtually everyone equally.

Also read: Pakistan's 'Most Favoured Nation' status may be withdrawn by Modi government

According to WTO, each member treats all the other members equally as "most-favoured" trading partners. If a country improves the benefits that it gives to one trading partner, it has to give the same "best" treatment to all the other WTO members so that they all remain "most-favoured".

The principles of the trading system should be:

Without discrimination: A country should not discriminate between its trading partners (giving them equally MFN status); and it should not discriminate between its own and foreign products, services or nationals (giving them "national treatment").



Freer: Barriers coming down through negotiation.

Predictable: Foreign companies, investors and governments should be confident that trade barriers (including tariffs and non-tariff barriers) should not be raised arbitrarily; tariff rates and market-opening commitments are "bound" in the WTO.

More competitive: Discouraging "unfair" practices such as export subsidies and dumping products at below cost to gain market share.

More beneficial for less developed countries: Giving them more time to adjust, greater flexibility, and special privileges.

Also read: How to punish Pakistan

What MFN really means, under the WTO agreements:

1. Treating other people equally

Countries cannot normally discriminate between their trading partners. Grant someone a special favour (such as a lower customs duty rate for one of their products) and you have to do the same for all other WTO members.

It is so important that it is the first article of GATT, which governs trade in goods. MFN is also a priority in the General Agreement on Trade in Services (GATS) (Article 2) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) (Article 4), although in each agreement the principle is handled slightly differently. Together, those three agreements cover all three main areas of trade handled by the WTO.

Some exceptions are allowed. For example, countries can set up a free trade agreement that applies only to goods traded within the group - discriminating against goods from outside. Or they can give developing countries special access to their markets. Or a country can raise barriers against products that are considered to be traded unfairly from specific countries.

And in services, countries are allowed, in limited circumstances, to discriminate. But the agreements only permit these exceptions under strict conditions.

In general, MFN means that every time a country lowers a trade barrier or opens up a market, it has to do so for the same goods or services from all its trading partners - whether rich or poor, weak or strong.

Also read: India's options in dealing with Pakistan and cross-border terror



2. National treatment: Treating foreigners and locals equally

Imported and locally-produced goods should be treated equally - at least after the foreign goods have entered the market. The same should apply to foreign and domestic services, and to foreign and local trademarks, copyrights and patents. This principle of "national treatment" (giving others the same treatment as one's own nationals) is also found in all the three main WTO agreements (Article 3 of GATT, Article 17 of GATS and Article 3 of TRIPS), although once again the principle is handled slightly differently in each of these.

National treatment only applies once a product, service or item of intellectual property has entered the market. Therefore, charging customs duty on an import is not a violation of national treatment even if locally-produced products are not charged an equivalent tax.

Freer trade: gradually, through negotiation back to top

Lowering trade barriers is one of the most obvious means of encouraging trade. The barriers concerned include customs duties (or tariffs) and measures such as import bans or quotas that restrict quantities selectively. From time to time other issues such as red tape and exchange rate policies have also been discussed.

Opening markets can be beneficial, but it also requires adjustment. The WTO agreements allow countries to introduce changes gradually, through "progressive liberalisation". Developing countries are usually given longer to fulfil their obligations.

Predictability: through binding and transparency back to top

Sometimes, promising not to raise a trade barrier can be as important as lowering one, because the promise gives businesses a clearer view of their future opportunities. With stability and predictability, investment is encouraged, jobs are created and consumers can fully enjoy the benefits of competition - choice and lower prices. The multilateral trading system is an attempt by governments to make the business environment stable and predictable.

Also read: Uri attack is another watershed moment in cross-border terrorism



India-Pakistan MFN status

India and Pakistan have no formal bilateral trade agreement. India granted the MFN status to Pakistan in the year 1996. Pakistan is yet to reciprocate.

A composite dialogue between India and Pakistan started in 1998. Bilateral dialogue between the two countries resumed in April 2010 after the 26/11 Mumbai terror attack in 2008. Bilateral trade dialogue with Pakistan was re-initiated in April 2011. This was followed by further rounds of talks between 2011 and 2012.

The Commerce Ministers of India and Pakistan met on January 18, 2014 on the sidelines of the Fiftth SAARC Business Leaders Conclave held at New Delhi. Both ministers reaffirmed the commitment of their governments to expeditiously establish normal trading relations and in this context to provide Non-Discriminatory Market Access (NDMA), on a reciprocal basis. Both sides decided to intensify and accelerate the process of trade normalization, liberalization and facilitation and to implement the agreed measures.

Pakistan has moved from 'Positive List' regime to a 'Negative List' regime comprising of 1209 tariff lines of import of goods not allowed from India. Both countries have Preferential Trading arrangement under South Asia Free Trade Area (SAFTA) process. Benefits under the SAFTA process are partially blocked by Pakistan through 'Negative List'.

Also read: Pakistan says India can't suspend Indus Waters Treaty unilaterally





As per the obligation under the WTO, the member countries of WTO shall extend MFN status to each other automatically, unless otherwise specified in the agreement or schedule notified to the WTO by the member country. Pursuant to this provision, in case of goods, India has extended MFN status to member countries of WTO.

As regards SAARC countries, Bangladesh, Maldives, Nepal, Pakistan and Sri Lanka are members of WTO and except the Islamic Republic of Pakistan, these countries have extended MFN status to India.

India has extended MFN status to all these SAARC countries including Pakistan. So far as exception to MFN status, if any, in services is concerned, each member country has indicated the same in the schedule of commitments in services notified to WTO.

It leads to equal treatment amongst countries and ensures a more stable, predictable, reliable and competitive international trade.