MFN revocation on firm legal ground

Last Updated 19 February 2019, 07:51 IST

The Cabinet Committee on Security (CCS) on Friday decided to rescind the Most Favoured Nation (MFN) status extended to Pakistan in the wake of Thursday’s deadly terrorist attack in Jammu and Kashmir’s Pulwama, carried out by the Pakistan-based Jaish-e-Mohammad.

In doing so, India has ended its long-standing policy of treating Pakistan non-discriminatorily in terms of tariffs and other trade regulations. Pakistan, by contrast, had not accorded India MFN status and Prime Minister Imran Khan’s commerce adviser said as recently as November that the country had no plans of doing so “at present.”

Under Article I of the General Agreement on Tariffs and Trade (GATT), 1994, every member country of the World Trade Organisation (WTO) is to accord MFN status to all other member countries. Article I provides that any advantage, favour, privilege or immunity granted by one WTO member-country to any product originating in or destined for any other country shall be accorded, similarly, to a like product originating in or destined for the territories of all WTO members.

That is to say, contrary to what a colloquial understanding of the expression ‘most-favoured’ might suggest, it is an obligation of non-discrimination, and not special treatment.

Pakistan has, in recent years, cited “non-tariff barriers” and a trade imbalance as excuses to deny India MFN status. This was not always the case, and both countries did originally grant each other’s products preferential treatment under the GATT of 1947. But Pakistan withdrew the trade privileges following the 1965 and 1971 wars.

After the WTO came into existence in 1995 per the Marrakesh Agreement, India extended MFN status to Pakistan, but the latter refused to reciprocate. Bilateral trade stood at a paltry Rs 17,200 crore in 2016, and experts believe that the MFN status is vital to promoting cross-border commerce.

While it may make sound economic sense to remove barriers to free trade between the two countries, trade policy is not made in a vacuum, and the political and security realities of the relationship must be factored in. India is within its right to revoke its trade concessions to Pakistan on national security grounds.

Article XXI(b) of GATT makes an exception to the general obligations on every member country and states that a country may take any action that “it considers necessary for the protection of its essential security interests,” which would almost certainly include measures such as the revocation of MFN status. Article XXI(b)(iii) provides for action “taken in time of war or other emergency in international relations” to be covered under its ambit. India may contend that the situation created by Pakistan’s support to terrorist groups operating on Indian soil is sufficient to constitute an emergency.

The operative legal expression in Article XXI(b) is “considers necessary.” In other words, a country has substantial leeway in identifying the contours of its “essential security interests.” If Pakistan is to challenge India’s decision at the WTO, it will face an uphill task because the GATT leaves little room for an adjudicatory body to evaluate and overrule any given country’s assessment of its essential security interests.

In 1985, when Nicaragua approached the GATT against a US ban on its products, the Americans argued that the validity of their invocation of Article XXI to ban Nicaraguan products is beyond the purview of the GATT panel. The US succeeded in ensuring that the terms of reference for the panel precluded it from examining or judging the validity of the invocation of Article XXI(b)(iii).

It is also conceivable that Pakistan may rely on the Agreement on South Asian Free Trade Area (SAFTA). Article 3.2(b) says that the countries party to the agreement “affirm their existing rights and obligations with respect to each other under Marrakesh Agreement Establishing the World Trade Organization and other Treaties/Agreements to which such Contracting States are signatories.” Article 3.2(d) provides for the “free movement of goods, between countries through…the elimination of tariffs…and non-tariff restrictions on the movement of goods.”

India’s argument in response to an invocation of Article 3.2(b) will be that its decision to revoke Pakistan’s MFN status is not in violation of either the Marrakesh Agreement or GATT as it amounts to a security-based exception. The SAFTA also provides for exceptions, including national security.

Article 14(a) of the SAFTA states that the agreement cannot be construed to prevent a country from “taking action and adopting measures which it considers necessary for the protection of its national security.” The existence of provisions in both GATT and SAFTA that permit national security-related exceptions to be made bodes well for India.

Pakistan has the choice to lodge a complaint against India at the WTO. It is, however, apparent that India stands on firm legal ground and has the upper hand in any legal challenge that Pakistan may wish to mount against the MFN withdrawal.

(The writer is pursuing LLM in International Law from South Asian University, New Delhi)

(Published 18 February 2019, 18:31 IST)

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