India as MFN: Possible gains for Pakistan in Information Technology Sector

Pakistan India MFN Information Technology

The Globalization of world economy has opened up immense possibilities for the development and progress of international community. The national and geographical boundaries are no more a barrier to free flow of money, technology and commodities. E-Commerce and IT Revolution has acted as a catalyst to the on going process.

In international economic relations and international politics, most favoured nation (MFN) is a status or level of treatment accorded by one state to another in international trade. The term means the country which is the recipient of this treatment must, nominally, receive equal trade advantages as the “most favoured nation” by the country granting such treatment. (Trade advantages include low tariffs or high import quotas.)

In effect, a country that has been accorded MFN status may not be treated less advantageously than any other country with MFN status by the promising country (McCloure, Mike (2011-07-25) “Most Favoured Nation Clauses – No favoured view on how they should be interpreted”. Kluwer Arbitration Blog. Retrieved 2011-07-26.).

Recently there is resurgence upon improving the economic and commercial relations between Pakistan and India. In particular, the liberalization of trade between the two countries has become a hotly debated issue. Pakistan and India are the two most populous and largest economies of the South Asian Region. However, official bilateral trade remains negligible and neither country falls in the category of top ten trading partners of each other.

Pakistan has adopted a conscious strategy to gradually open trade with India, particularly in sectors in which it is not so competitive. While Pakistan allows all kinds of exports to India, it had maintained a positive list of 687 items which were officially importable from India. In pursuance of the South Asian Preferential Trade Agreement (SAPTA) negotiations, the positive list of importable items was expanded by 81 items to a total of 768 items and further to 773 items in February 2006.

MFN is one of the instruments in use by the WTO to make member countries’ trade regimes competitive and non-discriminatory. India granted MFN status to Pakistan in 1996 but Pakistan has not yet reciprocated in the same manner. As a signatory to the WTO Agreement, Pakistan is bound to grant MFN status to all member countries including India without any discrimination. Instead of granting MFN status, Pakistan has gradually increased the number of items permissible for trade with India.

The KCCI (Karachi Chamber of Commerce and Industry) has already recommended to the Government to grant MFN status to India (Karachi Chamber of Commerce and Industry Report, March 2004) because, in their view, it is unlikely that it will cause any damage to the Pakistani industry. Pakistani manufacturers, however, feel that liberalizing trade between the two countries, after granting MFN status to India, will mostly benefit India given that it possesses a substantial industrial and engineering base. Moreover, dumping of cheap Indian products is also likely which will pose problems for the regulators in Pakistan (Implications of Liberalizing Trade and Investment with India, Report of State Bank of Pakistan, June 10, 2011

Remedies are also available for the manufacturers who can use Trade Defence Laws available in Pakistan to effectively counter the Indian threat following the MFN status to India. “To effectively resist the Indian cheaper goods threat, Pakistan’s industry needs to use Trade Defence Laws in Pakistan such as Anti Dumping Duties Ordinance, Countervailing Duties Ordinance and Safeguards Ordinance. They also stated that the laws could even be pressed into service if there was a threat of injury to the industry,” observed the experts at a seminar held here at Lahore Chamber of Commerce and Industry on January 16, 2012.

The current volume of trade between India and Pakistan is not commensurate with the existing potential. Although the recorded trade between India and Pakistan is merely $415 million (5-years average), but through third country and illegal channels, it is estimated between $250 million to $2 billion annually (Taneja, 2004; Sangani and Schaffer, 2003; Dhakal, 2004; Kanth, 2002; Mr Riaz Ahmed Tata’s Interview with Amitabha, May, 2004, Khan et al in Naqvi and Schuler, 2006).

On the basis of FY04 trade, though the overall market size available for Pakistan’s exports may reach $ 5.1 billion, given the fact that additional exportable surplus might not be available in the short run, the potential exports to India is estimated around $2.5 billion . On the other hand, the size of potential imports from India is about US $2.7 billion. The total trade potential (exports plus imports), between Pakistan and India, therefore, could be around $5.2 billion. This can be compared with other estimates of $1.85 billion (IMF Country Report, Pakistan: December, 2004) in a World Bank study, using fixed effects gravity model of bilateral trade based on 2001 data.

Pakistan can gain on multiple fronts going well beyond access to a larger market and possible efficiency boosts, creation of trade flows, the advantages of dismantling tariff- and non-tariff barriers include the potential for boosting productivity and economic growth, and can also extend to promoting regional cooperation in all areas. Pakistani consumers would also benefit, when product prices will fall and consumer choice will increase with reduced trade barriers. Importing from India rather than from more distant locations would imply lower transportation costs.

Even though both Pakistan and India compete in the global market, there are countless areas in which both the countries can reciprocate each other’s needs thus producing cost-effective goods. Cooperation in the information technology (IT) and creation of joint ventures can be equally beneficial to both the countries.

There is little doubt that the scientific and technological manpower and research and development institutions in India are far superior and can match those of the western institutions. The real breakthrough comes in the Indian export of software. This sector has increased its contribution to India’s GDP from 1.2% in FY1998 to 7.1% in FY2011. Aggregate revenue for FY2012 is expected to cross USD 100 billion. Aggregate IT software and services revenue (excluding hardware) is estimated at USD 88 billion (Indian IT-BPO Industry,

Our IT companies and software developers can learn a lot from the Indian success by incorporating their expertise along with education from their renowned institutions. Both the countries can work together as there in no lack of talent in Pakistan.

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