MFN: TIME TO DEFLATE POLITICAL EGOS

SHAMSUL GHANI
(feedback@pgeconomist.com)
Nov 7 - 20, 20
11

The news that the federal committee has cleared a move to bestow on India the much awaited MFN status, is likely to fuel searing debates on Pakistan's political and business fronts.

While the proposal is to be finally approved by the parliament, the ammunition the parties on the two sides of the aisle have been provided with is sufficient to trigger heavy fireworks to galvanize the already charged political atmosphere of the country. The two parties are obviously the liberals and the proverbial hardliners.

On political front, the opposition may find a good reason to bash the ruling party and call them traitors as they have chosen to act "against the wishes of the nation" by granting trade facilities to an arch-enemy.

The army may also be dragged into the imbroglio by drawing its attention to the perceived Kashmir Cause sell-out. The hardliners may also turn impish by focusing on the terminology - Most Favored Nation. The devil, you know, is in the expression: most favored. Perhaps TFN - Trade Friendly Nation - could have been less exploitable.

Pakistan is not the only nation to act under the influence of decades-old political or economic biases. The United States had to face this dilemma when its people objected to the grant of MFN status to China - a totalitarian and centrally planned economy. The people of US were at no fault as they and their forefathers were trained to despise any economic or political system that clashed with the US ideologies of democracy and free market capitalism. Since the grant of MFN status was in the interest of US trade and industry, the terminological discrepancy was removed through simple renaming - NTR: Normal Trade Relations. The MFN/NTR status for China was suspended in 1951 and then restored in 1980. Thereafter, the status survived with the help of annual Presidential extensions until the infamous killings of pro-democracy demonstrators at Tiananmen Square in 1989. Serious debates ensued in the Congress and legislation had to be proposed either to suspend the MFN/NTR status or impose further conditions on China. As it often happens, the political and economic interests' standoff came to the rescue of China. The agricultural bodies fearing loss of billions of dollar exports to China, started lobbying for restoration of the status.

The US Congress had to back pedal by agreeing on a PNTR status for China - Permanent Normal Trade Relations. President Clinton signed the bill into a law in October 2000. Soon after, in December 2000, China joined WTO allowing great leverage to the US agriculture producers with the Chinese markets.

Leaving aside the Indo-Pak political and economic rivalry, the intricate international trade systems can not be trusted to promote genuine trade multilateralism. GATT, PTA, FTA, MFN, give whatever name you like, all are manifestation of the universal law: when it comes to dealings, there is no such thing as a fair deal. Efforts have been made by the developed part of the world and its spokesmen to emphasize the importance of multifaceted trade agreements in simplifying the international trade to the benefit of all and sundry, yet the fact remains that the inherent tilt of all such international trade instruments towards the powerful and the resourceful is an undeniable fact. A report titled Preferential Trade Agreements: An Insurance Against Protectionism? Reads: "Preferential trade agreements, long criticized as being obstacles to multilateral trade liberalization, may yet prove their value in the current economic downturn: as a brake on protectionist tendencies of policymakers. If a significant portion of world trade remains subject to PTAs, policymakers have little scope to increase tariffs in these areas, which could slow down the overall trend towards protectionism and avoid an all-out tariff war."

Another paper titled Preferential Trade Agreements and the Most Favored Nation Principle by Jean-Daniel Gerber concludes: "The MFN principle remains the fundamental principle guiding multilateral trade relations. However, the exceptions to this principle, allowing for preferential treatment, have in practice eroded this basic rule to a large extent. Sure, the PTAs can bring additional liberalization and also stimulate the WTO process if they comply with the spirit of the conditions imposed in Article XXIV GATT and Art. V GATS. PTAs can also contribute to spread and anchor WTO-rules. However, as I have shown in the beginning of my presentation, there can be no doubt that a MFN approach to all trade related matters is more beneficial to world trade than PTAs...Moreover, it would be a forceful demonstration that the PTAs agreed under Art. XXIV GATT and Art. V GATS are indeed building blocks and not stumbling blocks for the multilateral trading system." [PTA: Preferential Trade Agreement; FTA: Free Trade Agreement; WTO: World Trade Organization; GATT: General Agreement on Tariffs and Trade; GATS: General Agreement on Trade in Services]

The writer of the aforesaid paper is a Swiss national. According to him, Switzerland is a highly specialized, land-locked economy with no natural resources and a small home-market and it, therefore has to rely heavily on access to international markets for economic exchanges. Both India and Pakistan are neither land-locked and nor lacking in natural resources. They are not small home-markets - in fact India is the second largest of the world markets. These countries do not need to be highly specialized markets and therefore, over-dependent on access to foreign markets. Benefitting from their reasonably strong natural resource base, large domestic markets, and active labor force, they can chose from the available lot of trading options without being influenced by the high-profile international trade systems and mechanics. Gravity model of trade is very much relevant to this duo of contiguous countries. They should go for it sans fear of criticism for promoting regionalism. India has already given MFN status to Pakistan in 1995 and now it is Pakistan's turn to reciprocate - although late by more than 15 years, yet better late than never. We will have to deflate our political egos and sharpen our entrepreneurial skills to exist as equal trading partners.

The concerns about a hugely negative trade balance with India and use of Non-Tariff Barriers (NTBs) by the Indian government and business community should not deter us from taking the bold step of tying up two-way MFN relationship. The size of our trade deficit or surplus with any country is more a function of our overall external sector economy than that of our trading partner. So, it's the improvement in economy that we should focus on instead of worrying over the size of negative trade balance with any of our trading partners. The issue of NTBs can be resolved through positive reciprocation. We should know how to use our own switches to neutralize the overflow of current on either side. Our industrialists, instead of fearing a destabilizing competition from the Indian industry, should brace up to raise their own standards to suitably respond to the competitive pressure. The recent PM directive to go ahead for a 500 MW power deal with India appears to be yet another half-measure to resolve power crisis as India itself is feeling the heat of a severe electricity shortage. Nevertheless, it shows some sort of government resolve to extend business ties with India.