Introduction

• 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).

About MFN

• 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 U.S.) to all other WTO members (including Pakistan).
• 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.

Economic and legal feasibility

• Assuming India was 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.
• On the contrary, restricting India’s exports, which have contracted considerably in the last 18 months, might hurt India more than Pakistan.
• 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.

WTO & GATT

• In the post-WTO era, in 1996, when the European Communities (EC) challenged the Helms-Burton Act of the U.S., enacted to strengthen the American embargo on Cuba, the U.S. again justified it as a national security exception. Even here, before the adjudicatory process could start, the U.S. and the EC reached a settlement.

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.

1. “It considers necessary” give full authority to India to enact any measure it likes without any scrutiny by WTO’s DSB?
   1. 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.
   2. 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.
2. Article XXI (b) a general national security exception?
   1. 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).
   2. 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.
3. Does the current situation fall under an EIR?
   1. 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.

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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.

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.

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