India-Pakistan: The Curious Case of the MFN Status

For many years, Pakistan has been struggling with the idea of granting most favored nation (MFN) status to India. In 2011, at least, it seemed that dialogue between the two countries was delivering some progress. MFN status appeared to be a matter of when, not if, and indeed this was candidly communicated to the business community and the media.

The collegial agreement on the Composite Dialogue sought to discuss several issues affecting Pakistan-India relations, including peace and security, Kashmir, water and territorial issues, terrorism, and economic cooperation. Trade appeared to be the low-hanging fruit for stakeholders on both sides of the border who hoped that better economic relations would pave the way for political stability and normalized relations between the two countries.

Several meetings into the dialogue Pakistan agreed to grant MFN status to India, renaming it non-discriminatory market access, in the first quarter of 2014 provided India reciprocated with market access to Pakistan for some 300 items. The meeting also came with promises to ease visa processes across the border and open banks on each side to accelerate transaction processes. The final decision was postponed until after the Indian elections so that the MFN status could be offered to the new Indian government in office.

However, speaking at a recent conference organized by the Indian Council for Research on International Economic Relations, Pakistan’s High Commissioner to India, Abdul Basit, said that extending MFN status to India would severely harm Pakistan’s local economy. Basit argued that growing bilateral trade has hardened India’s stance on the issue of Kashmir.

His comments effectively neutralized any perceived progress the two countries had made in the past decade to normalize relations. It is not difficult to deduce what happened. If there ever was hope that Pakistan would smoothly transition into a truly democratic state given the resounding majority vote for the Nawaz administration in the most recent election, it was squashed by the Peshawar attack. With the slaughter of more than 140 schoolchildren at an army-run school, there was little question that the Army would once again be occupying the driver’s seat when it comes to Pakistan’s foreign policy, the Nawaz government notwithstanding.

Basit’s statement not only offers an insight into who is actually running the country, it shows an inability to prioritize. Pakistan is more worried about the blossoming ties between India and the U.S. than it is about dealing with the escalating problem of terrorism on its own soil. Only a few days after the Peshawar attack, a court in Islamabad granted bail to Zaki-ur-Rahman Lakhvi on the basis that there was insufficient evidence to hold him. Rahman is the leader of Lashkar-e-Taiba, and the alleged mastermind behind the 2008 Mumbai attack. The Pakistan Supreme Court rejected the bail decision and Rahman remains detained as the courts and the government argue over his potential release.

The violence notwithstanding, it was U.S. President Barack Obama’s visit to India that really shook Islamabad. Talks between Obama and Indian Prime Minister Narendra Modi emphasized U.S. support for the growing Asian giant, strengthening bilateral relations. This momentum has Pakistan concerned once again about Kashmir.

Meanwhile, trade between Pakistan and India has grown to 2.3 billion dollars in 2013. Indian exports to Pakistan comprise 80 percent of this bilateral trade. Many experts contend that trade between the two countries is actually almost double the official figure, with imports from India coming to Pakistan via third countries such as Dubai. MFN status would enable direct imports into Pakistan from India instead of indirect routes that translate into higher transport costs.

Pakistan’s agriculture and automotive sectors have often forcefully lobbied against MFN status, arguing that they are still too young to compete with the onslaught of cheaper Indian products. The ugly truth is that Pakistan’s industries will never be able to compete if the government continues to protect them with high tariffs and other non-tariff measures. Pakistan imports 57 percent of its auto-related raw materials from Japan, contributing to large import bills. A continually rising cost of production ensures Pakistan will never attain economies of scale, and eternally nascent industries continue to enjoy protection at the expense of consumer welfare.

However, Pakistan’s current stance has significance beyond the MFN status, domestic interests, or bilateral trade. For years the two countries have insisted on negotiating trade with non-trade issues. As a consequence, talks have remained intermittent, largely governed by the unresolved political animosity between the two countries. Where trade might once have paved the way to better ties with India, it has now become a negotiating chip for other, larger issues between the two countries. Pakistan’s move to bring back the Kashmir issue only ensures that India will be unyielding to any firm commitment and economic cooperation will only sputter forward. Though economic and political issues cannot be mutually exclusive, holding one issue hostage for another is puerile at best and a counterproductive long-term policy at worst.