Why in news?

Following the Pulwama terror attack, India has withdrawn the Most Favoured Nation (MNF) status accorded to Pakistan.

What is the MFN status?

• The MFN status offers preferential trade terms with respect to tariffs and trade barriers.
• It is a provision under the World Trade Organisation (WTO) which requires every member country to accord MFN status to all other member countries.
• Though the term suggests special treatment, in the WTO it actually means non-discrimination/treating virtually everyone equally.
• As, under WTO rules, a member country cannot discriminate between its trade partners.

What is the case with India and Pakistan?

• India accorded MFN status to all WTO member countries including Pakistan in 1996, a year after the formation of WTO.
• However, Pakistan is yet to transition fully to MFN status for India.
• It maintains a Negative List of 1,209 products that are not allowed to be imported from India.
• In addition, Pakistan permits only 138 products to be imported from India through Wagah/Attari border land route.
• Instead of MFN, Pakistan came up with a dissimilar but globally popular Non-Discriminatory Market Access (NDMA) agreement.
• The reason Pakistan has chosen to adopt the NDMA with India is the political mistrust and a history of border conflicts.
• Despite domestic demands at various instances for withdrawal of MFN status to Pakistan, India has not done it before.

How is India-Pak trade at present?

• India’s trade volumes with Pakistan are notably low.
• It jumped nearly three-and-a-half times between 2000-01 and 2005-06 (from $251 million to $869 million per annum).
• But progress was slower in the decade that followed, with volumes rising a little over three times.
• In the 2012 Commerce Secretary level talks with Pakistan, a roadmap was agreed for facilitating trade.
• But the agreed roadmap could not be implemented since Pakistan did not notify the removal of trade restrictions through Wagah-Attari land route.
• Despite Pakistan's restrictions, India continues to maintain a substantial trade surplus with Pakistan.
• Pakistan’s exports to India have consistently been about only a fourth of what it imports from India.
• The bilateral trade potential is actually high if both countries take proactive measures to exploit untapped areas of economic cooperation.

What is the likely impact of India's decision?

• The withdrawal decision is intended to isolate Pakistan diplomatically and restrict the country’s industry.
• It is negative in terms of the bilateral relations between the two neighbours.
• But the impact on trade is less likely to be substantial as the volumes of merchandise trade are low.

• Nevertheless, the stoppage of input materials such as chemicals and cotton from India will push up costs of production for the relevant Pakistani industries.
• On the downside, it would give a push to the illegal trade between the two countries through border gaps and via third countries.
• It could also drive the extremist elements in Pakistan to promote the rhetoric against India.