What is Most Favoured Nation (MFN) treatment? Why Pakistan is not extending MFN status to India?

The WTO as the trade promoting body has certain key principles or philosophical themes for its working. One such principle is non-discrimination which is well scripted in Most Favored Nation (MFN) treatment. The MFN is a status or treatment given by one country to another in trade matters. It means that the recipient country of MFN will nominally get equal trade advantage as the ‘most favoured nation’ by the country granting the treatment.

The real meaning of MFN: trade without discrimination

Though the MFN status says the receiving country is the most favoured by the issuing country; the meaning is slightly different. The real meaning is that the receiving country will not be treated disadvantageously by the issuing country in trade matters vis a vis other countries. Under WTO, countries cannot normally discriminate between their trading partners. If a special favour is granted to a particular country, it should be extended to all other WTO members. In this respect, the MFN is so important that it is the first article of the GATT, which governs trade in goods.

Exceptions for MFN

MFN at the same time allows some exemptions as well. One such exemption is the right to engage in Free Trade Agreements. This means members can participate in regional trade agreements or free trade agreements where there is discrimination between member countries and non member countries.

Another exemption is that members can give developing countries special and differential treatment like greater market access. This special concession are in different forms like reduced tariff rates from developing country imports, concessions that allows developing countries to give subsidies to their production sectors etc.

All these exceptions are subjected to strict conditions. “In general, MFN means that every time a country lowers a trade barrier or opens up a market, it has to do so for the same goods or services from all its trading partners — whether rich or poor, weak or strong. Each member treats all the other members equally as “most-favoured” trading partners.

Why Pakistan is not extending MFN status to India?

India and Pakistan have great trade potentials. But trade among the two is not much because of political mistrust. India has given MFN status to Pakistan in 1996, one year after the establishment of WTO. But Pakistan is slow to take a positive decision on conferring the status to India.

An important factor that makes its difficult for Pakistan to confer MFN status to India is the political impact of the tone of MFN status. It may feel that India is the most favored nation for Pakistan in literary sense though MFN means non-discrimination. To overcome that, Pakistan has devised a new term called Non Discriminatory Market Access (NDMA) which is equivalent to MFN. Such alteration of the MFN is happening elsewhere as well. For example in the US, the MFN is named as Permanent Normal Trade Relations (PNTR) clause. Pakistan has recently promised that it will confer India the NDMA status soon.

When Pakistan is reciprocating India’s MFN with NDMA, both countries have to reduce their tariffs on several commodities. Pakistan has to open trade in 2150 commodities to India, whereas India has to open up trade in 630 commodities.