What is Most Favoured Nation status?

There is no proposal under consideration to give India the Most Favoured Nation (MFN) status, Pakistan Commerce Minister Khurram Dastgir Khan has said. The Minister said this in the National Assembly on Friday while responding to a question. India has granted MFN status to Bangladesh, Vietnam and Pakistan. Only Pakistan is yet to reciprocate.

This makes us wonder about what this MFN status is all about. MFN is a status or level of treatment accorded by one state to another in international trade. The term means the country which is the recipient of this treatment must, nominally, receive equal trade advantages as the "most favoured nation" by the country granting such treatment. (Trade advantages include low tariffs or high import quotas.)

In effect, a country that has been accorded MFN status may not be treated less advantageously than any other country with MFN status by the promising country. "Most favoured nation" relationships extend reciprocal bilateral relationships following both GATT and WTO norms of reciprocity and non-discrimination. In bilateral reciprocal relationships a particular privilege granted by one party only extends to other parties who reciprocate that privilege, while in a multilateral reciprocal relationship the same privilege would be extended to the group that negotiated a particular privilege.

India and Pakistan, the two largest economies in South Asia, share a common border, culture and history. Despite the benefits of proximity, the two neighbors have barely traded with each other. In 2011, trade with Pakistan accounted for less than half a percent of India's total trade, whereas Pakistan's trade with India was 5.4 percent of its total trade.

The results of the general equilibrium simulation indicate Pakistan's most favored nation status to India would generate larger benefits if it were supported by improved connectivity and trade facilitation measures. In other words, gains from trade would be small in the absence of improved connectivity and trade facilitation. The idea of trade facilitation is simple: implement measures to reduce the cost of trading across borders by improving infrastructure, institutions, services, policies, procedures, and market-oriented regulatory systems.

The returns can be huge, even with modest resources and limited capacity. The dividends of trade facilitation can be shared by all, write Prabir De, Selim Raihan and Ejaz Ghani in a paper ‘What Does MFN Trade Mean for India and Pakistan? Can MFN be a Panacea?’ for the World Bank.