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India raises customs duty on all goods imported from Pakistan

India has increased customs duty on all goods originating from or imported from Pakistan to 200 per cent with immediate effect. The move comes after India withdrew the Most-Favoured Nation status accorded to Pakistan

Feb 18, 2019 14:30 IST
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India on February 16, 2019 increased customs duty on all goods originating from or imported from Pakistan to 200 per cent with immediate effect. It is not very clear whether this will affect the third-country trade which is going on between the two countries through places such as Dubai in the UAE and Singapore.

The move comes after India withdrew the ‘Most-Favoured Nation’ status accorded to Pakistan on February 15 following the Pulwama terror attack in Jammu and Kashmir that led to the killing of at least 40 CRPF personnel and injuring of many others.

The decision was taken during a meeting of the Cabinet Committee on Security, which was presided over by Prime Minister Narendra Modi to discuss the security scenario in Jammu and Kashmir in the wake of the terror attack. During a press meet after the meeting, Finance Minister Arun Jaitley said all the required efforts will be made to ensure that perpetrators of the heinous attack are brought to book and made to pay a heavy price.

The Minister said that the Union External Affairs Ministry would be launching an all-out effort to isolate Pakistan for having a direct hand in this gruesome terrorist attack. He said that the CRPF will make all the arrangements to bring back the mortal remains of all those who lost their lives in this attack.

What is MFN status?

The most favoured nation (MFN) status was accorded in 1996 under WTO's General Agreement on Tariffs and Trade (GATT).

The special status is accorded by one state to another in international trade. The term means that the country which is the recipient of this treatment must nominally receive equal trade advantages as the "most favoured nation" by the country granting such treatment.

As per the obligation under the WTO, the member countries of WTO were required to extend MFN status to each other automatically, unless otherwise specified in the agreement or schedule notified to the WTO by the member country.

Both India and Pakistan are signatories to this which means they have to treat each other and rest of WTO member countries as favoured trading partners.

India extended MFN status to all SAARC nations including Pakistan and except for Pakistan, all the SAARC countries extended the special status to India as well.

MFN status leads to equal treatment amongst countries and ensures a more stable, predictable, reliable and competitive international trade.

The trade advantages mainly include low tariffs and high import quotas. A country that has been accorded MFN status may not be treated less advantageously than any other country with MFN status by the promising country.

Following are some of the key benefits of MFN status:

Free trade: The status increases trade creation and decreases trade diversion. A country that grants MFN on imports will have its imports provided by the most efficient supplier if the most efficient supplier is within the group of MFN.

Equal Opportunities: The status allows smaller countries, in particular, to participate in the advantages that larger countries often grant to each other. The smaller countries would often not be powerful enough to negotiate such advantages by themselves.

More Transparency: Having one set of tariffs for all countries simplifies the rules and makes them more transparent.

No Discrimination: Each WTO member is required to treat all the other members equally as "most-favoured" trading partners. If a country improves the benefits that it gives to one trading partner, it has to give the same "best" treatment to all the other WTO members so that they all remain "most-favoured". The nation also has to ensure that there is no discrimination between its own and foreign products, services or nationals.

Fair competition: It also discourages unfair practices such as export subsidies and dumping products at below cost to gain market share.

India-Pakistan

India granted the MFN status to Pakistan in the year 1996. Though the two nations have no formal bilateral trade agreement, a composite dialogue began between them in 1998.

As per the WTO rules, India could roll back the MFN status from Pakistan at any point. The decision to review the MFN status accorded to Pakistan was first thought off in the wake of Uri attack.

India's main exports to Pakistan include sugar, cotton, man-made filaments, chemicals, carpets, furniture fresh fruits and vegetables while its imports comprise mineral fuels, precious stones and wooden handicrafts among others.

Impact of withdrawal

Pakistan exported just $500 million of goods in 2017-18 to India, representing 1.5 per cent of its exports. However, it is believed to have exported goods worth about 3-4 times as much through third countries.

While the official trade between the two neighbours in 2017-18 stood at $2.4 billion, the third-country trade between the two is estimated to have been $5-10 billion.

The main items imported by India from Pakistan include fresh fruits, cement, petroleum products, bulk minerals and ores and finished leather.

The major items that India exports to Pakistan include raw cotton, cotton yarn, chemicals, plastics, manmade yarn and dyes.

According to analysts, the 200 per cent hike in the excise duty could hit cement and bituminous oil export by Pakistan as these are bulk commodities which are difficult to ship through third countries without impacting the costing hugely.

Pulwama terror attack

On February 14, 2019, at least 37 CRPF personnel were killed and dozens injured after a Jaish suicide bomber rammed a vehicle carrying over 100 kilograms (kg) of explosives into their bus at Awantipora in Pulwama district of Jammu and Kashmir.

More than 2,500 Central Reserve Police Force personnel were travelling in a convoy of 78 vehicles when they were ambushed on the Srinagar-Jammu highway at Latoomode in Awantipora in South Kashmir.

Many of the CRPF personnel were returning from leave to rejoin duty in the valley.

The attack is one of the deadliest terror attacks on India’s armed forces since the Uri airbase attack in 2016.

The Pakistan-based Jaish-e-Mohammed terror group has claimed responsibility for the attack and the suicide bomber was identified as Adil Ahmed, who according to officials joined the terror group in 2018.

Ahmed was driving a vehicle packed with over 300 kg of explosives on the wrong side of the road and hit the bus, which was carrying around 39-44 CRPF personnel.

The powerful explosion reduced the bus to a mangled heap of iron with no survivors. The explosion was heard many kilometres away, including in some parts of Srinagar adjoining Pulwama district.

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