The Renewed Hope of Multilateralism in South Asia: Applying the MFN Principle to Pakistan–India Trade
| Author | Sasidaran Gopalan,Kenneth A. Reinert,Ammar A. Malik |
| DOI | http://doi.org/10.1111/1758-5899.12080 |
| Published date | 01 November 2013 |
| Date | 01 November 2013 |
The Renewed Hope of Multilateralism in
South Asia: Applying the MFN Principle to
Pakistan–India Trade
Sasidaran Gopalan, Ammar A. Malik and Kenneth A. Reinert
George Mason University
Abstract
The multilateral trading principle of nondiscrimination and the World Trade Organization commitment of most-
favoured nation (MFN) treatment have been missing in the Pakistan–India trading relationship. This practitioner com-
mentary addresses recent moves toward multilateral principles between these two countries, namely Pakistan’s deci-
sion to grant MFN status to India. It considers the political economy of Pakistan’s‘negative list’in addressing ‘sensitive
sectors’in Pakistan and provides partial equilibrium estimates of the domestic output, consumer welfare and net wel-
fare impacts in Pakistan of liberalizing trade in this negative list.
Given that the Doha Round of multilateral trade negotia-
tions (MTNs) has been stalled for several years, doubt
has been cast on the functioning of multilateralism in
trade relations. There is much evidence to support a pes-
simistic view in the form of the onward march of prefer-
ential trading arrangements.
1
Nevertheless, the principle
of nondiscrimination among World Trade Organization
(WTO) members, and the WTO commitment of most-
favoured nation (MFN) treatment in particular, remains
fundamental in holding the world’s trading system
together (e.g. Horn and Mavroidis, 2009).
Trade relations between two important WTO members,
Pakistan and India, have been operating outside MFN
commitments. India first granted Pakistan MFN status in
1996 and Pakistan only decided to reciprocate in 2011,
although it has yet to fully implement its commitment.
This is notable in itself, but even more so given the fact
that these two countries have cooperated within the
GATT and WTO on matters of mutual concern (e.g. textile
and clothing trade in the mid 1990s and the Group of 21
at the 2003 Cancun Ministerial).
What prevented the application of MFN commitments
between Pakistan and India? Since the mid 1960s, bilat-
eral trade relations between these two countries have
been marred by periods of hostility. Trade never
exceeded the US$100 million mark until 1994–95. During
the last decade, however, annual trade has increased
from US$200 million in 2003 to over US$2 billion in 2010
(see Figure 1). Despite this trade growth, relations remain
vulnerable to exogenous shocks, as shown by the 2008
Mumbai terrorist attacks. Furthermore, the low current
bilateral trade value of approximately US$2.5 billion (as
of 2010) represents an insignificant fraction of the total
potential under full MFN commitments, and the normali-
zation of trading relationships between Pakistan and
India is a crucial component of reducing political ten-
sions in the region.
The breakthrough and the negative list
In late 2011, Pakistan made a significant breakthrough by
announcing its intention to grant India MFN status. As
part of this decision, Pakistan created a temporary 1,209-
item negative list of ‘sensitive’goods banned from being
imported from India. This switch to a negative list from
the earlier positive list of 1,938 items freed up over 7,000
tariff lines. The next move, away from the negative list
regime towards full MFN status, has been received in
Pakistan with a sense of optimism combined with trepi-
dation.
2
In response to a request from the International
Growth Centre (IGC) in Lahore, we assessed the political
economy of this negative list and the economic impacts
of liberalizing trade within the list.
To assess the receptivity of stakeholders in Pakistan and
India to the application of MFN commitments, we con-
ducted interviews with individuals in Islamabad, Lahore
and Delhi, including those in business, government and
academia. The MFN prospect has created expectations of
substantial economic opportunities for Pakistan and of
increased trust between the two countries. But it has
ignited apprehensions in Pakistan’s business and policy
circles as to whether it would adversely affect domestic
Global Policy (2013) 4:4 doi: 10.1111/1758-5899.12080 ©2013 University of Durham and John Wiley & Sons, Ltd.
Global Policy Volume 4 . Issue 4 . November 2013 445
Practitioner Commentary
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