Most Favored Nation Status (MFN)

• 22 Feb 2019

Why is it in News?

India had withdrawn the MFN status from Pakistan due to the Pulwama terrorist attack in February 2019.

Background of MFN:

If we look at the WTO broadly we will find that WTO has implemented three major agreements namely:

1. General Agreement on Tariff & Trade (GATT) - deals with merchandise trade

2. General Agreement on Trade & Services (GATS) - deals with Services

3. Trade-related Aspects of Intellectual Property Rights (TRIPS) - deals with issue of Intellectual Property Rights.

Under these three agreements of WTO, the common thread which is running is the concept of MFN.

What is the MFN Status?

Under rules of the World Trade Organisation (WTO), a member country is not allowed to discriminate between trade partners and if a special status is granted to one trade partner, the country is required to extend it to all members of the WTO. This concept of treating all member countries alike is referred to as Most Favored Nation Status.

Example to illustrate this:

• Say India grants Tax Exemption to the imports coming from Bhutan, then as per the provisions of MFN, it shall extend the same tax exemption to all the members of WTO.
• Since, the formation of WTO, India has given MFN status to all the member countries of WTO but India has not been accorded the MFN status from Pakistan.

Is there any Exception to MFN?

Yes, say India enters into a Free Trade Agreement (FTA) or Preferential Trade Agreement (PTA) with BRICS/ BIMSTEC, then the imports originating from the group of these countries will have certain tariff exemptions which will go against the rules of MFN (which asks that imports of all WTO members shall be treated alike), but such exemptions are allowed under the WTO Guidelines.

Which Article of GATT discusses the Provision of MFN?

Article 1 of GATT has the provisions related to MFN status.

Will Withdrawal of MFN Status hurt Pakistan?

Trade of India with Pakistan is meager ($2billion) hence; the withdrawal of MFN Status is more symbolic rather than having economic impact on Pakistan’s economy. Other aspect of looking at the situation is that it will encourage illegal trade.