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Prabhash Ranjan: Keep up the fair exchange
October 11, 2016
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Amid tensions between the two countries, it has been suggested that India should impose a trade embargo on Pakistan by suspending its most-favoured nation (MFN) commitment towards Pakistan in the World Trade Organisation (WTO). The MFN provision, given in Article I of the General Agreement on Tariffs and Trade (GATT), 1994, puts every WTO member (including India) under an obligation to extend any benefit (say, lowering tariff rates) accorded to one member (say, the US) to all other WTO members (including Pakistan). This core non-discrimination principle is the cornerstone of the world trading system. Arguing for India suspending its MFN commitment towards Pakistan would mean India restricting imports from Pakistan without restricting imports of like goods from other countries, or/and India restricting exports to Pakistan without restricting the export of like goods to other countries. This can be achieved by imposing trade quotas, higher tariffs, taxes, or even totally banning some or all traded products. But is this economically and legally feasible?

Economic and legal feasibility

Although bilateral trade between India and Pakistan has increased from $345 million in 2003-04 to $2.61 billion in 2015-16, it is abysmal compared to India’s total merchandise trade of $641 billion in 2015-16 and Pakistan’s total trade of around $75 billion, which includes exports worth $28.3 billion. India’s exports to Pakistan amount to $2.1 billion whereas imports from Pakistan are just $441 million, resulting in a trade surplus of $1.7 billion in favour of India. Given these numbers, assuming India were to suspend MFN status by stopping all imports from Pakistan, it would only result in a very marginal decline of Pakistan’s total exports and that too assuming that Pakistan is unable to find alternative markets. Even prohibiting all Indian exports to Pakistan, such as textiles, chemicals and agricultural products, will also not have any noticeable impact on Pakistan because Pakistan can always source these goods from other countries. On the contrary, restricting India’s exports, which have contracted considerably in the last 18 months, might hurt India more than Pakistan.

Would India be able to justify its MFN violation if Pakistan were to challenge this in the WTO’s dispute settlement body (DSB)? First, India cannot justify this on the pretext that Pakistan does not honour MFN obligations towards India. The correct recourse to Pakistan’s action is to mount a legal challenge in the WTO and not indulge in tit-for-tat.

However, India can justify its MFN violation if it is able to make a case under any of the GATT exceptions such as the national security exception, most important in the current scenario. In the pre-WTO era, the US in 1985 relied on this exception to defend its MFN violation when it imposed a trade embargo on Nicaragua to oppose the Sandinista government. However, given the weak and diplomacy-based method of resolving trade disputes then, the US defence was never judicially tested. In the post-WTO era, in 1996, when the European Communities (EC) challenged the Helms-Burton Act of the US, enacted to strengthen the American embargo on Cuba, the US again justified it as a national security exception. Even here, before the adjudicatory process could start, the US and the EC reached a settlement.

‘Judicial review’

Article XXI (b) of GATT provides the most important national security exception. It states that nothing in GATT shall be construed to prevent any country from taking any action that “it considers necessary” for the protection of its essential security interests. Three questions are pertinent. First, do the words “it considers necessary” give full authority to India to enact any measure it likes without any scrutiny by WTO’s DSB? Although Article XXI (b) gives a country very wide discretion to unilaterally decide its national security measures, a certain degree of “judicial review” is still possible. Thus, at a minimum, India will have to provide a reasonable explanation to the DSB as to why restricting export of cotton and tomatoes to Pakistan or/and restricting imports of dates, light oil and portland cement (these commodities constitute almost 50 per cent of India’s imports from Pakistan) is necessary to protect India’s essential security interests.

Second, is Article XXI (b) a general national security exception? No. This exception can be invoked only if the measure adopted relates to fissionable material, to traffic in arms or other related material, or is taken in time of war or other emergency in international relations (EIR). India will most likely try to make a case in the EIR category. Even here, though India will enjoy a wide discretion to define EIR, this cannot be unilaterally determined to ensure that Article XXI is not used for political or punitive purpose.

Third, does the current situation fall under an EIR? This is difficult to answer. Notwithstanding recent escalations, both countries continue to have diplomatic relations, cultural and social ties have not been snapped, transport links continue to exist. Also, both countries have seen far worse days in the past and yet trade and economic ties deepened.

Free trade and peace

Therefore, given the negligible economic impact and potential legal problems, suspending MFN to impose trade sanctions on Pakistan will only escalate tensions without much benefit. Instead of weakening trade ties, India and Pakistan should pay heed to this famous claim that ‘when goods don’t cross borders, soldiers will’. Free trade connects countries, and thus incentivises peace. Empirically, it has been shown that higher levels of free trade reduce military conflicts. India and Pakistan should boost free trade amongst themselves, Pakistan should honour its MFN commitment to India in the WTO, and India should use the SAARC platform to push for deeper trade ties.

The Hindu

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