India’s Withdrawal of MFN Status to Pakistan: Ceding More Space to China

In the wake of the Pulwama attack in Jammu & Kashmir against Indian paramilitary forces, the Indian government has withdrawn the Most Favoured Nation (MFN) status for Pakistan. This status had been accorded to Pakistan on the basis of India’s obligations under the World Trade Organisation. The former had, however, never reciprocated and it is only now that New Delhi has sought to respond in kind. [1]

While this is seen as a strong signal of sorts to the Pakistanis, it is unlikely to be so given the abysmally low level of Indo-Pak bilateral trade.

According to the UN Comtrade Database, Indo-Pak trade stood at US$1.992 billion in 2015, just about crossed the US$2 billion threshold in 2016 and in 2017 had not increased by more than a few tens of millions of dollars over the previous year. Pakistani exports to India in this period stayed between US$310 million and US$350 million. By contrast, Sino-Pak trade in 2015 stood at nearly US$13 billion with Pakistan suffering a deficit of some US$11 billion. In 2016, trade went up to US$15.3 billion with not just Pakistani imports rising but its exports to China also falling worsening its deficit. This trend continued even as Sino-Pak trade rose to nearly US$17 billion with Pakistani exports to China constituting just a shade over US$1.5 billion.[2]

Clearly, the figures are nothing to write home about in the case of India-Pakistan trade and this is not for want of trying on the Indian side. Pakistan maintains a large negative list of over 1,200 products not allowed in from India and allows less than 150 items to be exported to India. It has also consistently failed to implement measures to facilitate trade despite agreeing to these at bilateral talks.[3]

While the Sino-Pak trade, too, is but a drop in the bucket for China, the large trade deficit adds to concerns in Pakistan over a potential debt burden that the China-Pakistan Economic Corridor (CPEC) too might entail. Against this backdrop, if New Delhi further attenuates India’s economic ties with Pakistan, this then only creates ever more space for China to fill in Pakistan. This is exactly what happened with another such move made by New Delhi in 2015, namely the fuel blockade of Nepal. The resultant ill-feeling in the Himalayan state has been such that the Chinese are now well and truly ensconced there as a counterweight to Indian influence.

Pulling the MFN status for Pakistan only risks reducing whatever little connections Pakistan’s business community has with India pushing them to either look for substitutes from other countries, resort to illegal smuggling or to use the more expensive option of routing their trade with India through third countries like the United Arab Emirates, for example. In the process, the Indian government also risks losing whatever links it has to the Pakistani establishment.

Contrast this with what the Chinese are doing. Not only does the CPEC ambit cover cultural and people-to-people exchanges in Pakistan, it also involves discussions between China and various provincial governments in the country.[4] And despite complaints on the Pakistani side about CPEC,[5] and China’s own annoyance at its slow pace of progress,[6] Beijing is nevertheless also willing to work to improve the implementation of CPEC projects.

Note also how Beijing quickly moved past Pakistani Prime Minister Imran Khan’s statements against the CPEC both before and during the election campaign in Pakistan last year and sought to build bridges with him. China has, in fact, showed a remarkable ability to work with new governments in India’s neighbours despite previously being identified closely with the previous regime. This has been true of Sri Lanka post-Mahinda Rajapaksa and it will no doubt be true soon of the Maldives as well post-Abdullah Yameen.

The problem of Pakistan, therefore, requires a political economy approach from India that in the first instance identifies potential constituencies in that country that will voice support or seek engagement with India, builds them up and sustains them, and then gradually expands attention to and works with all actors. This is a long-term process and might seem counter-intuitive especially at this particular juncture. But it is necessary and inevitable if Indian policymakers and strategic commentators are serious when they claim that China is the bigger challenge than Pakistan and if they are ‘realists’ as they so often claim to be.

This article was originally published as Jabin T. Jacob, ‘Pulwama Attack: Let’s Not Give China More Space in Pakistan’, Moneycontrol.com, 18 February 2019.

REFERENCES

[1] https://indianexpress.com/article/explained/explained-what-is-mfn-status-how-can-india-hurt-pakistan-by-withdrawing-it-following-pulwama-attack-5585409/

[2] https://comtrade.un.org/data/

[3] https://indianexpress.com/article/explained/explained-what-is-mfn-status-how-can-india-hurt-pakistan-by-withdrawing-it-following-pulwama-attack-5585409/

[4] https://pk.chineseembassy.org/eng/zbgx/t1626097.htm; https://www.samaa.tv/economy/2016/10/chinese-embassy-releases-province-wise-share-under-cpec-project/

[5] https://www.dawn.com/news/1450773

[6] https://www.dawn.com/news/1457315

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