India’s revocation of MFN status for Pakistan: A progressive exhibition of economic diplomacy.
Authors: Aditya Shekhar
Abhishek Choudhary,
2nd Year – B.A. LL. B (Hons)
National Law University, Jodhpur
Introduction
The barbaric suicide bombing by the Pakistan-based terror group Jaish-e-Mohammad, in Pulwama martyred 40 CRPF soldiers. The Pulwama attack led to the revocation of MFN status by India to Pakistan and it did jostle the flow of bilateral trade. Pakistan did not reciprocate to this revocation. The value of bilateral trade in February was $164 million, which stooped down to $105 million in June.[1] Thus Pakistan’s trade is already struck in a violent tempest and its suspension of trade with India on the backdrop of India scrapping off of Art 370 from Jammu & Kashmir, might worsen the situation. All of this boils down to the inevitable devastation of trade and economics in Pakistan which must be a major concern for them.
Most Favoured Nation Clause: India and Pakistan
If one country gives preferential and favoured treatment to another country related to specific issue then, it has to equally to other countries also. In other words, to provide a level playing field for the benefit of all nations. By this status partner countries have less trade barrier between the countries, they can trade easily on negotiable terms and conditions. This status provides countries concessions and trade privileges. This is defined in the Article 1 of the GATT. It reduces the trade restrictions between the counties. An MFN clause entitles a beneficiary to ‘no less favorable treatment than that which is accorded by the host state to nationals of a third State’.[2] The purpose of an MFN clause is to ‘maintain fundamental equality and non-discrimination amongst States and investors at all times.[3] To boost Foreign-Direct-Investment India and Pakistan took the path of Bilateral-Investment-Treaty (BIT).
The objective of MFN clauses within BITs is to ensure that the relevant parties treat each other in a manner at least as favourable as they treat third parties.[4] Conventionally, MFN clauses have safeguarded the party from discriminatory treatment by upholding a host state’s obligation to award permits subsequent to approvals of investments[5] and to deeming a foreign investor’s expulsion from a contract, and the subsequent awarding of the same contract to local investors, a breach of fair and equitable provisions in third party BITs. This might pose a vivid threat to trade in Pakistan relative to India as Pakistan loses the benefit of ‘more favourable dispute resolution provisions’ contained in ‘third party treaties’ which is an extension of MFN clause. This extension of MFN clause to ‘more favourable’ dispute resolution provisions are subject to interpretation by arbitral tribunals. The interpretation majorly depends on the wordings of the MFN clause. This discussion is beyond the scope of this article and thus the authors have refrained from exploring this any further. However, we can hereby radically come to a conclusion that the removal of MFN status drastically scrapes away Pakistan’s access to ‘most favourable dispute resolution provisions contained in third party treaties.
Impacts on Trade
Due to the withdrawal of MFN there will be increase in the illegal trade and the sale will be increased by the third country and third country involvement might increase.[6] Bilateral trade between both the countries has successfully militated political strains since 1947 however this time the figures have changed dramatically. The massive informal trade between both the countries vividly indicates the untapped trade potential between the countries. Estimates of informal trade between the two countries as per study by ICRIER was valued at $ 4.7 Billion in FY13 which is almost double the value of formal trade.[7] It is important to note that most of the informal trade is routed through third countries such as Dubai, Afghanistan and other CIS countries. Unofficial exports through both routes include machinery, cement, tyres, tea, medicines, alcohol beverages, chemical products, steel utensils etc.[8]
There is a myriad of items which are not on the permissible list. The MFN status had somewhere diluted the economic burden on trade between the countries. However, its revocation might leave Pakistan’s trade bemused and paralyzed to some extent. India has a great demand for energy. Pakistan can act as a potential transit route for energy from Iran and Central Asia.[9] The transit fees can be an excellent source of financial influx for Pakistan. Pakistan has never accorded MFN status to India and this has hindered the growth of such economically beneficial trade projects. However, the removal of MFN status by India as well has concretized the trade between the countries and such projects now seem a distant dream impossible to achieve.
Legality of India’s action against Pakistan
According to Article XXI, which clearly states that “to prevent any contracting party from taking any action in pursuance of its obligations under the United Nations Charter for the maintenance of international peace and security” thus, India’s action against Pakistan would be justified because the attack itself destroys the peace and security. The Interpretation of the phrase “which it considers necessary” of the Article XXI of GATT 1994, itself says that it is upon the member state to remove or invoke this status on the basis of the essential security interest. Taking the case of India and Pakistan, India has taken harsh step due to the reason of the attack not, this reason stands in favour of India due to the peace and security not on vague basis.[10] The phrase “measures which it considers necessary” of the Article 14(a) of SAFTA reiterates, the member state can take actions in order to protection of its national security. The measures are left to the discretion of the member and India would be justified in withdrawing the MFN status in the circumstances of attacking by Pakistan.[11]
When a state refuse to obey international rules and threatens global peace and security, trade sanctions provide an opportunity for nations to influence the acts of others by non-violent means. By using economic diplomacy to negatively affect other economies, states can seek to deter aggression and motivate change.[12]
Economic diplomacy blanketed under Trade Sanctions alters state’s activities through non-violent means. The basic idea is to expose the other state to economic hardship to compel them to change their course of action. The Council on Foreign Relations defines it as “the withdrawal of customary trade and financial relations” in either comprehensive form, such as “prohibiting commercial activity with regard to an entire country”, or a more targeted form, such as “blocking transactions of and with particular businesses, groups, or individuals”. India has acted according to the former definition of Trade Sanctions. Countries launch trade sanctions against other countries whose conduct are against their interests; these interests can be strategic, such as targeting a country’s aggression towards another country, or moral, such as targeting a country’s actions that are contrary to international norms.[13] Trade sanction as a potential measure to channelize trade has been effective in the way US and United Nations(UN) had applied it on Libya’s economy in 1990’s. Libya was acting as a womb for terrorism and it was necessary to apply such trade sanctions.[14] In similar vein Pakistan has had its share of funding terrorism. The diplomatic step of revoking MFN status for Pakistan is a necessary step guised as trade sanction to compel Pakistan to mend its ways.
Conclusion
Closing down the gates of Most-Favored-Nation for Pakistan is unequivocally a strong diplomatic move made by India. It is a bold and revamped strategy to internationally exclude Pakistan from further benefits which it used to reap from the MFN clause under GATT. Passively downplaying such major controversies with Pakistan has always hindered the idea of free trade and non-discrimination, as envisaged by the framers of GATT and WTO, since Pakistan has never provided MFN status to India citing diplomatic and military tensions between the countries. The removal of MFN status will drastically shape the trade transactions between both the countries.
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[1] Indo Asian News Service, Pakistan formally suspends trade with India, The Economic Times, Aug 10 2019, https://economictimes.indiatimes.com/news/economy/foreign-trade/pakistan-formally-suspends-trade-with-india/articleshow/70615331.cms last visited (Nov 30, 2019 23:43 IST).
[2] Emmanuel Gaillard, Establishing Jurisdiction thorough a Most-Favored-Nation Clause, 233 New York Law Journal 3 (2005).
[3] Anglo-Iranian Oil Company (United Kingdom v. Iran), Preliminary Objection, I.C.J. 93 (1952).
[4] United Nations Conference on Trade and Development, Recent Developments in International Investment Agreements (2006 June 2007).
[5] MTD Chile SA v. Chile, ICSID ARB/01/0, 104 (2004).
[6] Satya Sontanam Slate, All you wanted to know about MFN status, March 11 2019, https://www.thehindubusinessline.com/opinion/columns/slate/all-you-wanted-to-know-aboutep/article26501686.ece, last visited 21: 29 PM.
[7] Mudit Kapoor, Why LoC trade ban with Pakistan doesn’t mean much?, Business Today, April 19 2019, https://www.businesstoday.in/top-story/loc-trade-ban-pakistan-india-trade-suspended/story/338685.html, last visited (Nov 30, 2019 15:53 IST).
[8] Nisha Taneja, India-Pakistan Trade Relations: Opportunities for Growth, Economic and Political Weekly, Vol 39 Issue 4, Jan 24 2004.
[9] Taneja, N and S Bimal (2012), ‘FDI – A major milestone in Indo-Pak ties’, Hindu Business Line, 22 August, 2012.
[10] GATT 1994. art. XXI.
[11] SAFTA. art. 14(a).
[12] Henry Federer, GATT Article XXI: Trade Sanctions and the Need to Clarify the Security Exceptions, 3 Cambridge L. Rev. 212 (2018).
[13] Ibid.
[14] Sean D Murphy, ‘US/UK Negotiations with Libya Regarding Non-Proliferation’ 98 American Journal of International Law 195, (2004).
