What Is The 'Most Favored Nation' Clause In International Trade?

In response to the deadly attack on CRPF officers in Pulwama, Jammu and Kashmir by the Jaish-e-Mohammed terrorist group on Thursday, the Indian government announced the withdrawal of the 'most favored nation' status given to Pakistan under the World Trade Organisation (WTO) rules.

Finance minister Arun Jaitley has reiterated Prime Minister's statement on Friday regarding the same as he said that the Ministry of External Affairs would initiate diplomatic steps to completely isolate Pakistan in the international community.

What is 'Most Favored Nation' status?

The Most Favoured Nation (MFN) clause, despite what the title suggests, means that all the WTO member countries should be treated equally and granted the same concessions or privileges. This is the primary clause in the General Agreement on Tariffs and Trade (GATT), which means that if a special tariff cut is made in favour of one country, it needs to be extended to all the members of WTO. The idea is to promote free trade among all the members nations.

India-Pakistan Trade Relations

The MFN status was granted by India to Pakistan in 1996 but the latter did not reciprocate.

A statement from the Ministry of External affairs dated 17 July 2014 says, "As per the obligation under the World Trade Organization (WTO), the member countries of WTO shall extend Most Favored Nation (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."

However, under the 'security exception' clause under article 21(b)(iii) in the GATT can allow India to deny MFN status to Pakistan or put trade restrictions on it.

India exports vegetables, cotton, dyes, iron, chemicals, and steel while importing spices, fruits, chemicals, cement and leather. The level of bilateral trade between the countries accounted for 0.4 of India's overall trade goods in 2015-16.