The official displeasure of India in the aftermath of the dastardly Pulwama attack resulted in withdrawal of Most Favoured Nation or MFN status to Pakistan paving the way for enhancement of customs duties to any level (here 200 per cent on goods coming from Pakistan). In fact, the principle of MFN is quite consistent with the principle of equity embodied under the spirit of GATT. According to the MFN principle, each WTO member country should “treat all the other members equally as ‘most-favoured’ trading partners. Accordingly, India accorded MFN status to Pakistan in 1996 as per its commitment as WTO member though Pakistan has not reciprocated citing “non-tariff barriers” created by India and “huge trade imbalance with India”.

Pakistan enjoyed the MFN status for about 23 years from Indian and it survived possibilities of withdrawal by India even during the Kargil War (1999), or terror attacks on Parliament (2003) or Mumbai terror attack (2008) or in the aftermath of the Uri attack (2016).

Advertisement

India being one of the founding members of WTO and by virtue of its membership automatically receives most-favored-nation (MFN) and national treatment from all WTO members for its exports and vice versa. Similarly, another important principle of “National treatment” does apply to the member countries once a product, service or item of intellectual property enters the domestic market of a member country. Therefore, charging customs duty on an import is not a violation of national treatment even if locally-produced items are not charged an equivalent tax. The MFN provision as articulated under Article I of the General Agreement on Tariffs and Trade (GATT) underlines the principle of nondiscrimination, which prohibits WTO member countries from discriminating among their trading partners subject to some exceptions.

Transparency, due process; access to markets; fair competition within markets; and the dispute settlement mechanism are the building blocks of the WTO. It presupposes a rule-based participation and aims at ensuring stability and predictability in international trade. In this background, the Indian move may not be well appreciated at the WTO level. Any harsh measure like this needs to be initiated under the rubric of WTO laws and it does provide for exceptions like “security exception clause” for invoking such measure. In the instant case, it is imperative for India to consider making use of a ‘security exception’ clause provided under Article 21(b)(iii) in the GATT to deny MFN status to Pakistan.

But the recent decision of India’s hike in customs duty to 200 per cent on Pakistani goods does not use the sequiturs of either national security or essential security interests or nor does it properly explain under what circumstances it was imminent to withdraw the MFN status. If the matter is taken to the seat of Dispute Settlement Mechanism of WTO, India has to be ready with its defense of essential security interests with sufficient explanation as to why and how increasing customs duty to 200 per cent on Pakistani products was the imminent action to protect India’s ‘essential security interests’. India and Pakistan are the two largest economies in the South Asian region, both countries promise huge potentialities for intra-regional trade.

Though revocation of MFN status is frowned upon by WTO, in the instant case the saving grace is the non-reciprocal posture by Pakistan in terms of granting MFN status to India. Reportedly, India’s decision will be like a death knell to Pakistan’s exports to India, currently standing at around $490 million, which seems to be exaggerated. In fact, the trade volume between the two countries is worth about $2.30 billion, which is less than 0.40 per cent of India’s total volume of trade. Further, in case of any retaliatory tariffs on Indian goods or expansion of its negative list prohibiting imports from India, it will certainly have a negative impact on Indian exports which is close to worth $2 billion. Realistically speaking, this will cause far more harm to India than to Pakistan. Further, the recent decision by India could affect the goodwill and business reputation of India in world trade. This measure will also impact our relationship with SAFTA countries where Pakistan is also a crucial member.

Foreign trade experts opine that India had gained far more from trade ties with Pakistan than the other way around. Pakistan’s exports to India have barely crossed the half-a-billion-dollar mark since the grant of MFN status by India. In this background, Pakistan may not face an exacerbating situation with the increased import duty. The backlash may be on the proliferation of informal trade (routed through third countries like UAE and Singapore), which is approximately double that of formal trade. Under South Asia Free Trade Area Agreement (SAFTA) 2004, Pakistan’s share in external trade is less than 10 per cent, while India’s share is more than 70 per cent. India’s steps may propel Pakistan to search for new markets beyond SAFTA and growing prospects of trade through a third country, mainly via Dubai and Singapore.

In the short history of GATT/WTO there are several member countries like especially the US which have invoked the national security exception on many occasions. In the pre-WTO era, the US used to rely on the national security exception to defend its MFN violations. For example, in 1996 when European Communities (EC) challenged the Helms-Burton Act of the US that strengthened the American embargo on Cuba, US justified it as a national security exception. Nevertheless, the dispute ended in a settlement before the commencement of the adjudicatory process.

Even last year, the US announced a hike in steel and aluminum tariff rates citing national security reasons though such hikes were aimed at protecting the US industry. In this context, India should explore such an explanation, in case this issue is raised at Geneva. In this context, it is high time that the two powerful members of the WTO took steps to give a fair chance to accelerated bilateral trade by deescalating the war hysteria and ensure that there is peace and stability in the region.

(The writers are Advocates, Supreme Court of India.)