day after the Pulwama attack, an angry India revoked the most favoured nation (MFN) status from Pakistan. It was the first in a series of diplomatic offensives targeted at the neighbouring country to isolate it economically and diplomatically. Granting of MFN to Pakistan or its withdrawal was not a big deal inasmuch as every member country of the World Trade Organisation is required to accord this status on another member courtesy Article 1 of the General Agreement on Tariffs and Trade. MFN is a misnomer as it actually means non-discrimination among member nations. Moreover, the volume of trade between the two countries added up to less than $2 billion dollars. While India had extended the friendly gesture to Pakistan in 1996, expecting the latter to reciprocate, Pakistan never did this over 23 years. To this extent, the withdrawal of MFN by India may not have made a big diplomatic splash. We could have withdrawn this long back instead of waiting for a Pulwama to happen.
The bilateral trade has always been tepid and the growth never touched a double-digit figure. Trade between the two South Asian neighbours rose by 6 per cent in 2017-18 to $2.4 billion, with $1.9 billion exports and $500 million imports from Pakistan. At present most trade between India and Pakistan is routed through either the United Arab Emirates or Singapore to the tune of $3 billion because of trade restrictions imposed by Islamabad. Trade diversion is likely to increase after withdrawal of the MFN status. India accounts for a paltry 1.55 per cent of Pakistan’s imports and 2.55 per cent of its exports. Since the volume of the bilateral trade between the two countries is small, withdrawal of MFN will make little difference to both countries. The move is only symbolic and it may increase the chances of illegal trade between the two countries. India imports cement, petroleum products, fresh fruits, finished leather, bulk minerals and ores from Pakistan while its export to Pakistan include cotton, chemicals, plastics, man-made yarn and dyes. The balance of trade between the two countries favoured India.
In the wake of the withdrawal of MFN status on Pakistan, India increased the custom duties on Pakistani goods by 200 per cent. The hike of customs duties has started affecting traders of both countries, more those of Pakistan where the cement industry has been hit the hardest. Traders in India have started cancelling orders. Also, traders dealing in fresh fruits and cotton have been affected as the high customs duty has almost put an end to the entire export activity with India. The ripple effect of the customs duty hike will affect small traders who are staring at huge financial losses. Many Pakistan industries like sugar, steel, textiles and chemicals will suffer on account of the increase in customs duties. Basic chemicals and cotton industries that depend on Indian imports will also be hit. Indian traders have stopped exporting products to Pakistan. Tomato exported from India fetch about thrice the profit in Pakistan. After Pulwama, tomato farmers in Jhabua district of MP have completely stopped exporting tomato to Pakistan. Reports said the kitchen staple currently sells at Rs 180 a kg. After the withdrawal of the MFN status, India should now use its diplomatic leverage with other countries that deal with Pakistan to follow suit. An economic squeeze on Pakistan will make it difficult to run terror infrastructure in the country. Withdrawal of the MFN status on Pakistan may seem a baby-step now, but going forward it will have a ripple effect on the country.