Mr Patel was sitting at the Dwarka Port in Western Gujarat with a copy of The Economic Times in his hand and was pondering over the headline “Pakistan Okays MFN status for India”. He was thinking what implications this would have on an exporter like him. Just then his good friend and economist with the local university Mr Shah came and started discussing with him the implications of this.
Pakistan just granted India the long due Most Favoured nation (MFN) status which India had already given to Pakistan way back in 1996. The MFN status, which means that Pakistan will give trade treatment to India at par with its other partners, is likely to boost the bilateral economic ties. India had granted the MFN status to Pakistan way back in 1996. According to WTO the definition goes “Most-favoured-nation (MFN): treating other people equally Under the WTO agreements, countries cannot normally discriminate between their trading partners. Grant someone a special favour (such as a lower customs duty rate for one of their products) and you have to do the same for all other WTO members.” This has a lot of implications on the trade between the two countries which are listed below:
- Trade re-routing: Even without the MFN status there is a large amount of trade happening between India and Pakistan. This trade is routed through entrepot centres like Dubai. This MFN declaration would facilitate the direct trade between India and Pakistan thereby eliminating the need for trading via Dubai. Future trade data will show a reduction in India’s exports to the UAE and an increase in exports to Pakistan.
- Shipping boom: There will be a boom in the shipping, communication and trade serving directly to Pakistan. The Gujarati ports which don’t have much business will see a boom.
- Middlemen: These above facts would appear to just be superficial and not affect the business in the economics sense but there will be removal of a lot of costs. For example, the shipping costs would reduce by at least 2x (even though this cost is small, it will have a huge impact). Another dimension is the cost of middlemen in Dubai. The reduction in the number of intermediaries would directly affect the business thus increasing margins.
- Competition: Indian goods will compete with Pakistani goods which will lead to overall cost reductions.
- Relationships: More Indian companies will look for opportunities to grow in Pakistan and the same will happen for Pakistani companies. This will lead to companies spread across the border. A large fraction of the global trade is intra firm trade so when big companies from either side establish centres on the other side of the border, this will lead to a growth in the bilateral trade.
- Benefits for the states: States on the border which have been susceptible during times of conflicts will be the ones which are benefitted the most from this; especially Gujarat with its long coastline nearest to the Pakistani ports.
- Benefits for companies: Companies which have set up production centres in states which are bordering Pakistan would be affected in a positive manner as new markets will be approachable cheaply. For example, companies like Tata can look forward to ship their low cost car Nano to Pakistan via the ports in Gujarat.
- People: Looking at trade in isolation would be improper as this movement of goods and services will lead to movement of people. Thus, this will hopefully ease the visa restrictions imposed by the two countries on each other.
- Finance: It is said in history that finance follows trade. So where trade in goods and services leads, finance follows. MFN would lead to trade financing, cross border banking, payments, purchases of information, FDI, FII flow, INR /PKR currency risk management and investment flows, etc.
Originally published on : Finertia - GIM's Finance portal
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