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Table of contents
Abstract4 Trade between India and Pakistan4 Prospects and Challenges for Increasing India-Pakistan Trade5 Potential sector for trade8 Potential items for export to India.8 Potential items for import from India..10 Analyzing potential items further in detail..11 Textiles and Clothing.11 Iron and Steel.11 Chemicals and Pharmaceuticals..12 Automobiles...13 Information Technology...13 Trade Liberalization under SAFTA...14 Advantages of Trade Liberalization for Pakistan.14 Prospects for Economic Integration16 The Ease of Doing Business.17

Should Pakistan give MFN status to India18 Discussing some misconceptions19 Preventing impact of incidents like Bombay attacks...19 Trading relations with china..20 Intervening in internal issues.20 Water issues with India..20 Kashmir issue..21 Economic independency.21 Recommendations for Bilateral and Regional Economic Cooperation.21 Conclusion...23 Appendix.24 References...27

Pakistans economy is on the edge of collapse. Recent steps in order to elevate Pakistans economy by giving MFN status to India are indeed milestone reached by cabinet of Pakistani government. This paper examines the short-run and long-run dynamic interactions between exports, imports and income for Pakistan within a multivariate framework by giving MFN status to India. Further, it also examines the MFN status to India from different perspectives. This paper highlights some important facts and figure which are needed to boost Pakistan economy. Moreover this paper provides a systematic solution and recommendations to improve trade with India. This study develops some reasonable facts and figures to support the status of most favorite nation to India. This study suggests that trading with India is important in fueling the economic growth of Pakistan in the short-run and the long run.

1. Trade between India and Pakistan

Trade between India and Pakistan is as old as the two countries are, but the volume of trade between them is minuscule relative to the size of their economies. However, this has not always been the case. After 1947, Pakistans exports and imports with India remained quite significant for several years, as high as 30 percent of exports and 10 percent of imports. Later on both of them declined to less than 5 percent (on average). In 1990s, the volume of trade began to improve again when the average exports ($ 85 million) doubled the average of the past two decades. During the same period the increase in imports was also manifolds. With WTO becoming effective in 1995, it was expected that trade between the two countries

would increase significantly as the two countries would be required to open their borders for trade, but this did not happen. Despite the fact that India gave the MFN status to Pakistan, exports to India could not witness a significant increase. In contrast, Pakistan has still not reciprocated the same status to India and allows only a select of items for import, but interestingly the volume of imports rose to more than double in the post 1995 period. Nevertheless, the share of imports from India is still low, as opposed to the recorded trade between India and Pakistan, trade through third country and illegal channels is quite significant and is estimated to be more than $ 2 billion. Given the market size available in the two countries, the current volume of trade between India and Pakistan is not commensurate with the existing potential. The two broad reasons, generally quoted, for low volume of trade between the two countries are (i) the presence of non-tariff barriers in India; and (ii) the absence of MFN status to India. While the first reason is quoted exclusively by the Pakistani exporters the second reason is shared by traders on both sides of the border. As regards the trade barriers, both India and Pakistan have had a very restrictive trade regime. But, during the last two decades both the countries have liberalized their trade regimes significantly by reducing tariffs, multiplicity of tariff types and slabs, regulatory duties, and exemptions. Also, other barriers on trade such as import licensing, improper valuation methodology, tariff rate quotas have also been removed or reduced. Nevertheless, the Indian trade regime is still more restrictive than its counterpart in Pakistan. According to an IMF study, Indias trade restrictiveness measures 8 (on a scale from 1 to 10), while Pakistans index stands at 6 [IMF (2004)]. Pandey (2004) estimates that the average coverage ratio (which measures the percentage of imports subject to non-tariff barriers) for 1996-97 is 47

percent for the whole economy and 55 percent for the manufacturing industry. While the protection in case of consumer goods (65 percent) is quite high relative to the average rate for the whole economy, the protection for intermediate goods (43 percent) and the capital goods (34 percent) are also quite substantial. Anecdotal evidence suggests that the volume of informal trade between the two countries is around $ 2 billion. This suggests that if trade diverts from informal to formal channels it might increase the formal trade to that extent. The Karachi Chamber of Commerce and Industries estimates the potential of trade between the two countries in the range of $ 10 to $ 15 billion. Nabi and Nasim (2001) estimate the total volume of trade in the range of $ 700 $ 1000 million. Their estimate is also based on various anecdotal evidences.

2. Prospects and Challenges for Increasing India-Pakistan Trade:

In the face of massive economic challenges, a shooting population, energy and water shortages, and huge and growing numbers of unemployed workers, especially youth, Pakistan needs to look for ways to move itself out of the economic hole into which it has fallen. Greater trade with India offers an immediate and rich possibility of economic growth for both Pakistan and India. Recent meetings between the commerce ministers of both countries in New Delhi appear to have yielded some good intentions to increase trade from its current level of $2 billion a year to $6 billion, still well below what many scholars estimate to be the potential. Yet, the obstacles remain, in the form of rules and regulations that inhibit trade, and in the lack of private-sector initiatives that would surmount governmental foot dragging. In the end, it is the private sectornot of official tradethat will boost incomes on both sides of the border. And the question remains: Will India and Pakistan see the

advantage of opening borders as being mutually beneficial? Economic theory and empirical evidence have clearly established the links between trade, productivity, and economic growth. Countries that have large internal markets have also benefited by integrating themselves into the world economy, and thus opening up their economies. World trade in 2009 amounted to $12 trillion. The size of Pakistans domestic market is only $180 billion (GDP). Currently, its share of global trade is only 0.14 percent. Even a 0.5 percent share in the global export market implies that its exports could rise from the current $25 billion to $60 billion, creating millions of jobs.A. On the other side, imports bring the transfer of technology into the country via imported goods and services, and, as a result, raise the potential of increased domestic production. For India, the potential market for its exports to a neighboring country would reduce the costs of trade and remove many of the underlying issues that have bedeviled its relationship with Pakistan since independence in 1947. Moreover, wider trade with Pakistan creates the possibility of transit trade beyond Pakistan, to Afghanistan and Central Asia. It is also becoming quite obvious that the balance of global economic power is moving away from developed countries to developing countries. China has overtaken Germany to become the largest exporting country, and has surpassed Japan to become the second-largest economy in the world. China and India are projected to be the two fastestgrowing economies of the world over the next several decades. Pakistan is a neighbor to both of these large and expanding economies. Its national economic interests dictate that it should expand its trade with both of these countries and penetrate their markets on the basis of its comparative advantage in a number of sectors. India, sharing a larger and more-accessible common border with Pakistan, offers the biggest immediate gains from trade.

The question often raised inside Pakistan is: Will expansion of trade with India bring benefits to Pakistan, or would it be swamped by its large neighbor? A lot of myths and misperceptions on this point have taken root in public discourse. Empirical evidence, based on an examination of specific sectors, indicates that India-Pakistan trade is a winwin situation. When combining the top two deciles of income distribution, India has a middle class of approximately 300 million people, with rising purchasing power that matches that of southeastern Europe, while Pakistans middle class is approximately 30 million. Even a 10 percent share of the Indian middle-class market would double the market size of Pakistani companies and businesses. Numerous studies on India-Pakistan trade have so far demonstrated that the relaxation of constraints in the way of bilateral trade would benefit both countries. The theoretical argument is that countries in relative geographical proximity tend to trade more with each other than with more-distant countries because of lower transport and communication costs. Gravity models have been used to test this hypothesis empirically. (Under these models, the economic size and proximity of potential trading partners affects their trade flows.) Researcher Amita Batra, using an augmented gravity model, showed that all three gravity effects of distance, size, and income were statistically significant for India-Pakistan trade[1]. An Indian Council for Research on International Economic Relations (ICRIER) study showed a much higher volumeabout $10 to $11 billion (Pakistan, 55 percent textiles; India, 90 percent non-textiles) from the current official trade of about $2 billion a year[2].IjazNabi and AnjumNasim estimated that trade between India and Pakistan could increase

Source: Department of Commerce, Government of India

Source: Director General, Foreign Trade Institute of Pakistan threefold if Pakistan followed Indias example and accorded India Most Favored Nation (MFN) status, and both countries imposed a maximum tariff rate of 50 percent[3]. A State Bank of Pakistan study came to the conclusion that bilateral trade could increase fivefold if MFN status were granted and non-tariff barriers were removed by both India and Pakistan[4].

ZareenNaqvi and Philip Schuler estimated that the trade between the two countries could jump from $2.5 billion in 200708 to $5 to 10 billion, or two to four times its current basis[5].Mohsin Khan, a senior fellow at the Peterson Institute for International Economics, has suggested in a recent study that trade between the two countries could be five to ten times larger than the present value, thereby raising GDP and household incomes in both countries[6]. Net welfare gains are positive in every single scenario, ranging from the most conservative to the most optimistic. Trade will lead to some limited specialization and trade in intermediate inputs for use in exports to high-income countries.B. Granting MFN treatment to India would benefit Pakistan, and a free trade agreement (FTA) would further increase those benefits. This paper draws extensively and freely from the findings of a major and comprehensive research study carried out by the State Bank of Pakistan (2006). Other more-recent studies (for example, Mohsin Khans work) have supported the findings of this one, but are not as broad-based. The State Bank of Pakistan (SBP) study showed that the potential of trade (exports plus imports) between the two countries amounted to $5.2 billion in fiscal year 2004 (FY04), when the actual trade was about $1 billion. In FY04, Pakistan imported 2,646 common items worth over $7 billion from the rest of the world (which accounted for 53 percent of the total imported items, and 47 percent of the aggregate value). India also had exports of the same items worth over $15 billion (covering 24 percent of the total value of its imports). Analysis revealed that for 48.7 percent of the items in FY04, the unit values for Pakistans imports were more than the unit values of Indias exports. Even after excluding the items which are currently permissible for imports from India, about 45 percent of the items still remain on the common list, which could be imported from India at a lesser cost than the current cost of imports from the rest of the

world. Allowing imports of such items from India (i.e., expanding the current list of positive items that can be imported from India) will give Pakistan an estimated average savings of $400 to $900 million.C. A disaggregated analysis at the sectoral level carried out by the SBP study illustrates the picture more clearly. The broad conclusions drawn from the sectoral analysis contained in the SBP study are reproduced below and on the following page.

3.1. Potential Items for Export to India:

A comparison of Pakistans exports with Indian imports indicates various potential sectors that can be explored in case trade between the two countries is liberalized. Of the total value of Pakistans exports in FY04, 32 percent represents those items

3. Potential Sectors for Trade:

By comparing Pakistans exports with Indias imports, potential sectors can be identified. Similarly, potential items which could be imported from India can be judged by comparing Indias exports and Pakistans imports. This section contains the analysis of exports and imports of Pakistan and India at the 8-digit level HS code for the two fiscal years FY03 and FY04 by comparing the unit values (presuming it reflects the price content only) to identify the potential sectors/items. Data has been obtained from the Federal Bureau of Statistics, Pakistan and the Directorate General of Foreign Trade, Ministry of Commerce India [7]. Since the data covers the full year trade, the difference in time periods of the fiscal years of Pakistan and India has been ignored. Further, the fact that the existing trade between the two countries is nominal given their overall trade with The rest of the world has also been ignored in the analysis of the data.

which are also imported by India from the rest of the world, constituting one third of the total Indian imports. There are about 1,181 8-digit-level items worth $ 3.9 billion which are common between Pakistans exports and Indias imports during FY04, covering 45 percent of the total number of items exported by Pakistan (Table 1). Majority of the items (about 60 percent) have exports worth less than or equal to $ 0.1 million. These items pertain to major sectors like textiles and textile articles, prepared foodstuffs, spirits and vinegar, raw hide and skins, leather, fur skins, mineral products, plastics, rubber, vegetable products, machinery, mechanical appliances, and electrical equipment. The textiles and textile articles remain the dominant sector with 20 percent share in the total number of common items and around 68 percent of the export value of common items. Nevertheless, sectors other than the textiles cover items for which there is a wide scope for exports. The Indian imports under these non-textile items

constitute over 98 percent of the total value of imports in common items with 45 percent of these items having individual imports worth more than or equal to $ 5 million. The bulk of these common items imported by India pertain to mineral oil and products (mineral fuel/oil/wax, and bituminous) but since Pakistan itself is a major importer of petroleum products, this sector does not offer much scope for exports. The remaining sectors, however, still account for a significant proportion as Indian imports in these categories amounts to about $ 5 billion. The major sectors other

with the same HS-code may still not be comparable as their unit values may be different due to the differences in quality. An analysis of the unit values of Pakistan exports and Indian imports reveals that 70.3 percent of the common items exported from Pakistan have unit values less or equal to the Indian imports unit values (Table 2). The share remains 68 percent even if items with export value more than one million dollars are considered; though the number of items decline drastically to just 104. Although the differential between the unit values might be due to the quality factor, still this shows that there is a large scope for the export of these items simply by producing the quality required in India. As mentioned earlier, the overall market size for items with unit values less than that of India is around $ 5.1 billion. The actual export, however, would depend upon the availability of exportable surplus. In the short run, it is expected that trade might divert from other destinations to India for two reasons. First, due to lower transportation costs, the profit margins may give an incentive to exporters to change the destination; second, traders may start exporting to make inroads in the Indian markets to diversify their markets and to take advantage of a socially identical consumer base. Based on FY 04 exports of 692 common items having unit values less than that of Indian imports, the maximum likely diversion of exports to India is estimated at $ 2.5 billion.

than mineral oil and products include: machinery, mechanical appliances and electrical equipment; vehicles, aircrafts and parts; vegetable products; products of chemical or allied industries (including items like fertilizer); plastics and rubber; and textiles and textile articles. In order to analyze the potential sectors on the basis of pricing, the average unit price of the Pakistani exports and Indian imports as an approximation of the actual prices are used. Since the unit values also reflect the quality of the products, as such two items

Of the common items with unit values of Pakistans exports less than twice the unit value of Indian imports, the major categories include: nuclear reactor, boiler, machinery and parts; aircrafts, spacecrafts and parts; vehicles other than rail or tramway parts; plastics and articles thereof; optical, photographic, cinematographic items; fertilizers; wool, fine or coarse animal hair; miscellaneous chemical products; rubber and articles thereof; man-made filaments; ships, boats

and floating structures; edible fruits and nuts, fresh/dry and edible vegetables roots tubers. Within these categories, however, the trend of import of some of the items (such as fertilizers, man-made filaments and edible vegetables roots tubers) in India is quite volatile and probably depends on the domestic supply situation. Currently, Pakistans exports in these categories are also quite low.

imports above $ 5 million contribute 83 percent of import value of these common items (Table 3). Excluding mineral products, bulk of Pakistans imports pertains to products such as chemical or allied industries; machinery and mechanical appliances; electrical equipment; vehicles, aircrafts; vegetable products; base metals and its articles; plastics; rubber; natural pearls, precious or semi precious; textiles and textiles articles; animal or vegetable fats and oils; wood pulp, waste and scrap, optical, photographic, and surgical instruments. Within these categories, Indias exports are to the tune of $ 12.8 billion but excluding textiles and textiles articles (for which Pakistan is a major exporter) this comes to $ 8.5 billion. While comparing the unit values of Pakistans imports and Indian exports, it is observed that for 48.7 percent of the items, the unit values for Pakistans imports are more than the unit values of Indias exports and import value of these items amounted to $ 2.7 billion in FY04 (Table 4).

3.2. Potential Items for Imports from India:

While making assessment of the needs for Pakistans imports by comparing items imported by Pakistan with those which are exported by India, it is observed that Indian exports cover almost 53 percent of Pakistans total import items.

In FY04, there were 2,646 common items of Pakistans imports worth over $ 7 billion (47 percent of the aggregate value of imports). Under these items India also had exports worth over $ 15 billion (covering 24 percent of the total value of imports). Analysis reveals that 41 percent of the total common items have individual imports of less than or equal to $ 0.1 million only. Moreover, imports are concentrated to few items, that is 6.4 percent of the total common items with individual

These items pertain largely to sectors like nuclear reactor, boiler, machinery and parts; organic chemicals; electrical machinery and parts; optical,

photographic, cinematograph, and surgical instruments; inorganic chemical compounds; plastics and articles thereof; articles of paper pulp/paper-board; articles of iron or steel; miscellaneous chemical products; rubber and articles thereof; copper and articles thereof. Similarly, 51.3 percent of items with individual imports of over $ 1 million have unit values greater than that of Indian exports unit values. Note that after excluding the items that are currently permissible for imports from India, about 45 percent of the items remain in the list of common items. These items could be imported from India at a cost lesser than the current cost of import from the rest of the world. Based on the average unit values of Indian exports in the FY03 and FY04, it is estimated that allowing import of such items from India (that is, expanding the current list of positive items) the average saving for Pakistan could range between $ 400 million to $ 900 million.


4.1. Textiles and Clothing:
The textile and apparel sector continues to be the driving force for economic growth in both India and Pakistan. This sector contributed 18.8 percent in India and 65.6 percent in Pakistan, of the total value of exports in FY04. In both countries, the textile and apparel sectors exhibit different degrees of specialization. India is regarded as a major alternative source to China for apparel and highvalue-added textile products. Pakistan, although a supplier of a limited range of products, is considered a competitive supplier of cotton goods, particularly mens apparel, home textiles, and fabrics. Currently, trade in textiles and clothing between India and Pakistan is almost nonexistent. The comparison of exports of both countries identifies

176 common items which have comparable unit values. Out of these 176 items, India has a price advantage (i.e., lower realized export unit value) in 48 textile products, while Pakistan has a price advantage in 128 textile products.D. Since other factorssuch as quality, production, and design of products, etc.are also important, it is hard to conclude on the basis of just export unit value that the granting of MFN status would result in a unidirectional flow of textile products, meaning Indian textile products would flood the Pakistani market. Although Pakistan ranks above India in both the textiles and clothing sectors in terms of the revealed comparative advantage (RCA), this should be interpreted cautiously.E. The higher magnitude of RCA index in the case of Pakistan shows the vulnerability of the export earnings of Pakistan to sector-specific events. Pakistans economy is far less diversified as compared to the Indian economy, and depends heavily on the textile industry. Garry Pursells study shows that there would be some gains for both countries, but that the scope for penetrating each others domestic-use markets (in contrast to supplying inputs to the export industry) would be limited [8]. High-quality products such as bed linens and cotton-lawn fabric from Pakistan are in demand in India.

4.2. Iron and Steel:

In FY04, India was the major supplier of raw material (iron ore) to this vital industry, and accounted for 69.2 percent of the total imports of iron ore in the world, followed by Australia (19.9 percent) and Iran (10.9 percent)[9]. Unlike Pakistan India has a well-established steel industry, and is a net exporter of steel and steel products. The Indian steel industry produces a wide range of steel products. On the back of abundant raw materials, highly skilled technical manpower, and competitive labor, India is the eighth-largest crude-steel

producer, and the largest producer of sponge iron in the world. Pakistans iron- and steel-product imports from India account for just a small fraction of its total imports. In FY04, Pakistan imported $662 million worth of iron and steel products (326 items), of which India supplied only 25 items, worth $7.1 million. About 46 items are identified as potential imports that are cheaper to import from India on the basis of lower unit value of Indian exports, compared to the import unit value of Pakistans imports from the rest of the world.

4.3. Chemicals and Pharmaceuticals:

Pakistans chemical industry has by and large developed on a fragmented and ad hoc basis, motivated by a combination of the existence of a small local market and traditionally high tariffs. As a result, it suffers from the lack of economies of scale, national integration, and subsequent lack of competitiveness. As a result, the country is highly dependent on imported chemicals to cater to the needs of its agriculture and industrial sectors. During FY04, imports of chemicals stood at $2.8 billion, an increase of 29.5 percent over the previous year [10]. Compared to Pakistan, the Indian chemical industry is well established and has shown impressive growth over the years, contributing about 6.7 percent to the Indian GDP. In terms of volume, it is the twelfth largest in the world, and third largest in Asia. With a current turnover of about $30.8 billion, it accounts for 14 percent of the total manufacturing output in India [11]. The pharmaceutical industry in Pakistan plays an important role in the economic development of the country. Total local production/consumption of pharmaceuticals is currently estimated at $2 billion. There are about 316 pharmaceutical manufacturing companies, including 30 multinationals (47 percent share), which are meeting around 80 percent of the

countrys requirement. Almost 95 percent of the basic raw materials used for the manufacturing of medicines are imported from China, India, Japan, the United Kingdom, Germany, the Netherlands, and others. Other production inputs, such as technology, labor, packaging materials, power, and raw materials, are easily available, and the government provides good incentives for importing raw materials and technology. Compared to the pharmaceutical industry of India, the size of Pakistani companies is relatively small, and hence uncompetitive. The Indian pharmaceutical industry has become a net exporter and is now putting up US Food and Drug Administrationapproved plants, and is exporting to advanced economies. Indian companies are the only suppliers worldwide for some pharmaceutical raw materials. The country ranks fourth worldwide, accounting for 8 percent of the worlds production by volume and 1.5 percent by value. India is also among the top twenty pharmaceutical exporters, and among the top five manufacturers of bulk drugs in the world. During FY03 and FY04, Pakistan imported 4.3 percent and 6.8 percent of its total imports of chemicals and pharmaceutical products, respectively, from India. Out of its total imports of $2.9 billion (1,105 items) in FY04, India supplied 353 items worth only $196.8 million. Out of the total imported chemicals and pharmaceutical products from India, 166 items had a lower unit value compared to the unit value of the same items imported from elsewhere. These items have the potential for enhancing imports from India. Pakistan already imports raw materials for its pharmaceutical products from India, and the scope for finishedproduct imports from India is substantiated by these unit-value comparisons.

4.4. Automobiles:
The automobile industry in Pakistan operates under franchise and technical-cooperation agreements with leading world manufacturers, and can be broadly categorized into various segments, i.e., cars and light commercial vehicles (LCVs), two- and three-wheelers, tractors, trucks, buses, and vendor industry vehicles. The automotive industry contributed over 30 billion rupees (US $659.96 million) to the government exchequer in the form of duties and taxes in FY03, with a contribution of 17 billion rupees (US $373.98 million) from the top four manufacturers alone. From the late 1980s to the early 90s, the demand for automobiles in Pakistan was on the rise, setting the stage for a decade of robust growth. The industry had achieved a phenomenal growth of 50.2 percent in FY04, and increased competition led to the introduction of innovative automobile products, such as larger-capacity sedan cars and pickup trucks, as well as a decline in financing costs [12]. Compared with Pakistan, India has a strong engineering base, and has successfully created a sizable capacity for production of vehicles. It enjoys a clear edge over Pakistan in the automobile sector. Indian auto companies are highly cost-competitive due to appropriate levels of mechanization and lowcost automation, and have achieved a high level of productivity by embracing Japanese concepts and best practices. India is already the second-largest two-wheeler manufacturer, second-largest tractor manufacturer, and fifth-largest commercial vehicle manufacturer in the world, and has the fourthlargest car market in Asia. The automobile industry in India is now gradually evolving to replicate those of developed countries. Pakistan can import automotive components and spare parts from India at a lower price than Thailand. On the other hand, India is expected to benefit from free trade due to its relatively low rawmaterial, electricity, and labor costs. This would make imports of automobiles from India much

cheaper for Pakistan than those from other countries, such as Japan or Korea. Joint ventures between the firms from two countries located near the industrial clusters would lower the unit costs of production and distribution.

4.5. Information Technology:

In India, the IT industry has made tremendous progress and has emerged as one of the fastestgrowing sectors. In 1998, the IT sector accounted for only 1.2 percent of GDP. By 2009, its contribution had jumped to 5.8 percent of a much larger GDP. The annual growth rate of the industry has been simply phenomenal. The revenues earned in 2000 were only $4 billion. Ten years later they had surged to $62 billion. Infosys, for example, employed 10,000 people in 2001, which multiplied twelvefold, to 125,000 by 2010. A majority of the multinational IT companies operating have either software development centers or research development centers in India. Indias expertise in emerging technologies has actually helped the country to attract new customers, and IT and services companies in Europe and Japan are outsourcing to India. Although the IT industry in Pakistan is in its infancy, it is growing at a fast pace, even as it struggles to catch up with the regional and global industry. Officially recorded IT exports increased from US $46 million in 200405 to US $250 million in 200910, showing a 40 percent annual growth rate. As per the World Trade Organization (WTO)prescribed formula, the size of the IT industry in Pakistan is currently in the range of $2.8 to $3 billion, and IT-related exports are around $1.6 billion [13]. However, most of the companies are small- to medium-sized, with few entities concentrating on the export of software- and ITenabled services. Pakistan has lagged behind other regional countries in using IT as a catalyst for economic revival. This is one of the potential areas which could be exploited. India, with its wider

software industry, can extend help to Pakistan to promote IT through the establishment of joint ventures. The wages of IT professionals in India are rising fast, and it is losing the labor-cost advantage. Hence, a joint venture between a Pakistani IT company, supplying skilled professionals of comparable quality at lower wages, and an Indian company, procuring international contracts in its name, would be a win-win situation for both the countries and the industry. The above SBP study is corroborated by another study on Pakistan-India trade, carried out by the World Bank, which concluded that Pakistan stood to gain from liberalization of trade [14].

$511 million for Pakistan. In other words, the opportunity cost or foregone benefit of free trade within SAFTA is high.

5. Trade Liberalization under SAFTA:

The South Asian Association for Regional Cooperation (SAARC) member countries, including Pakistan and India, reached the landmark Agreement on South Asian Free Trade Area (SAFTA) on January 6, 2004, with a pledge to allow free trade among member countries by eliminating trade barriers and scaling down their tariffs in two phases, to 0 to 5 percent from January 1, 2006, onward. The treaty allows free cross-border movement of goods within the region, with the provision for a list of sensitive items for member countries to safeguard national interests. SAFTA is likely to contribute significantly to intraregional trade, along with a scope for enhanced trade between India and Pakistanparticularly in transportation equipment and engineering goods, including IT products. Complete elimination of tariffs under SAFTA may increase intraregional trade by 1.6 times over the existing level.F. The intra-SAARC trade in South Asia is about $25 billion, or 4.8 percent of South Asias trade with the world. The above projections need to be viewed against the cost of noncooperation, which was estimated by an earlier RIS.G. study to be about


Advantages of Trade Liberalization for Pakistan:

The liberalization of bilateral trade between Pakistan and India would not only lend impetus to the integration of both economies, but it would also be seen as a good model by other nations in the region. The potential advantages of trade liberalization for Pakistan appear to be great. Going well beyond the immediate creation of trade flows, dismantling tariff and non-tariff barriers would also boost productivity and economic growth, and promote broader regional cooperation in South Asia in all areas. Trade liberalization will unambiguously benefit Pakistani consumers, since product prices fall and consumer choice increases when trade barriers are reduced or removed. Increased trade flow that stems from the lifting of import prohibitions for items coming from India would lead to additional customs revenue for Pakistan (if corruption can be avoided in the collection of customs duties). Within the protective walls of regional economies, both countries can achieve specialization in various subsectors of the economy. Moreover, the strengthening of bilateral/regional trade would also cushion the economies of both countries from global financial or stock-market shocks.

Bilateral trade balance with any particular country does not have to be positive. There would be no trade in that case. Pakistan would run a trade deficit with India just as it does with China, and surpluses with other countries. India is a larger, morediversified economy, and also produces goods that Pakistan exports. The determining factor is whether the cost of imports from India is less than comparable-quality imports from other sources. In that case, Pakistans local industry and its consumers would both stand to benefit. If the empirical evidence is so strong, why is trade between the two countries so lowless than 1 percent of Indian exports, and less than 5 percent of Pakistani imports? The volume of bilateral trade has not exceeded $2 billion, out of a total volume of Indian and Pakistani exports of about $200 billion. Three main reasons lie behind the slow growth of trading relations between India and Pakistan: 1) Political relations between the two countries have remained discordant and contentious over a long period of time. A trust deficit does not allow for stability, which is a prerequisite in order for any exchange of goods and services to take place. 2) Both countries have, until recently, pursued import-substitution policies that sheltered local industry behind protective barriers. 3) The commitment to regional economic integration in South Asia has remained quite weak [15]. Even in the face of bilateral political disputes, it is possible to promote trade within a regional preferential trading area framework. This has not happened in South Asia. These constraints can be relaxed. Countries with adverse political relationships, without giving up their principled stand on disputes and differences, have engaged in cross-border investment, trade, and movement of people.

Over time these activities have helped to foster a better understanding of each others viewpoints. Although Singapore and Malaysia broke up as

partners in a political union, both countries have improved political relations because of close economic ties. Confidence-building measures and the creation of stakeholders in the countries can eventually defuse the tension and soften the ground for peaceful resolution of disputes and disagreements. It is therefore not right to wait to resume economic relations until the bilateral political disputes are resolved. If economic engagement is fierce and picks up steam, the hawks in each country may be confronted by the new stakeholders, who are benefiting from such engagement. Investors, traders, transporters, bankers, and business groups who will be working for Indian firms in Pakistan, and vice versa, will act as strong lobby groups to nurture, preserve, and promote peaceful bilateral political relations between the two countries. Any souring of the relations will hurt their vested economic interests. Resumption of economic relations should be allowed without any preconditions, and without the countries giving up their respective negotiating positions on political disputes. Composite dialogue between India and Pakistan should carry on at the same time to resolve those disputes and disagreements.

6. Prospects for Economic Integration:

On the second constraint, it is heartening that both India and Pakistan have opened up their economies, abandoning the old import-substitution policies that favored autarky instead of importing lower-cost products from overseas, and embarked upon a process of integration with the world economy. The reforms they have carried outsuch as cutting tariff rates, elimination of Quantitative Restrictions, regulating duties, and Para-tariffsleave them in a much better position to pursue preferential liberalization. Pakistan and India signed SAFTA in January 2004, which came into force in January 2006. SAFTA is aimed at reducing and eventually eliminating tariff barriers, facilitating cross-border movement of goods, promoting fair competition in the region, and

creating an effective framework for regional cooperation. But the agreement is still hindered by fairly restrictive sensitive lists, strict rules of origin, and a slower time frame and scope. A recent study by Nisha Taneja and colleagues has attempted to prune Indias sensitive list under SAFTA [16].Of the five member countries of SAFTA studied, Sri Lanka, Nepal, and Bhutan already have bilateral free trade agreements with India. Bangladesh enjoys the LDC status, and the operational sensitive list applicable to it contains only 331 items. This leaves Pakistan the only country having a non-LDC status. The sensitive list applicable to Pakistan has the largest number of items, 868 (910 under the six-digit level restructured list). Regional trade agreements like SAFTA, if fully implemented, can have a positive effect on growth, trade, technological diffusion, and foreign investment. Trade within the region will unleash new technology, lower domestic prices, provide new technology, and usher in economies of scale in production and distribution as the effective market size expands. Joint ventures in pharmaceuticals, chemicals, petrochemicals, automobiles, agro processing, technology-transfer arrangements among IT firms, and joint gas-pipeline projects are some of the possibilities that can take place within SAFTA if harmonization takes place. Empirical studies on South Asian regional trade have shown mixed results primarily because of the smaller countries of the regionAfghanistan, Bhutan, Nepal, Maldiveswhich are landlocked, or small islands in the presence of a giant continental economy, such as India. Other research has concluded on the basis of computable general equilibrium model simulations that the policy of unilateral liberalization would benefit South Asian countries much more than SAFTA, as small countries would gain little, or even lose[17]. A European Trade Study Group (ETSG) report on regional trade in South Asia comes to an opposite

conclusion using the gravity model. Its analysis shows that there is a significant trade-creation effect with the rest of the world under the South Asian Preferential Trade Agreement (SAPTA). This report finds no evidence of the trade diversion effect with the rest of the world, and argues that further regional integration may bring about substantial benefits to the SAARC region, while SAFTA is most likely to promote interregional trade through further dismantling of tariff and other non-tariff barriers among members.

Pakistani exporters of textiles and garments say that these are important barriers in their ability to access the vast Indian markets. According to Tanejas survey of Indian exporters doing business with Pakistan, very few NTBs in Pakistan restrict trade [21]. The World Banks frequency-coverage ratio of non-tariff barriers measures Indias at 51 percent, one of the highest in the world. In comparison, Pakistans ratio was much lower, at 29 percent. It also uses stringent domestic standards, whereas Pakistan applies normal international standards. Indiaa much bigger economy, accounting for more than 80 percent of Gross Regional Product, and imbued with self-confidence and aspirations to become an economic powercould demonstrate a greater degree of generosity by removing these tariff and non-tariff barriers unilaterally without risking much in return. A wider offer to its neighboring countries in terms of opening up the markets and trade and removing barriers to mobility would ultimately benefit India, reducing hostility and favoring its exporting and importing industries, as well as benefiting Indian consumers with lower prices for goods imported from Pakistan. It would be advisable for India to establish asymmetric relationships with its neighbors and provide more concessions to them, initially expecting less from them in return in order to generate wider economic benefits for itself and its trading partners in South Asia in the long run. Given the large and growing size of its effective market, the economic losses to India would be minuscule, while political goodwill and returns would be substantial over time. Pakistan, Bangladesh, and Sri Lanka would be much better off economically if they were able to penetrate the buoyant Indian market. Friendly, peaceful, and irritant-free neighbors would aid rather than hinder India in moving toward its long-term goals, enunciated periodically by its leaders. South Asia, a region with the highest number of people living below the poverty line, would surge ahead.

7. The Ease of Doing Business:

Both India and Pakistan continue to use tariff and non-tariff barriers (NTBs) to protect their domestic producers, even after reforms have led to overall economic liberalization[18].India is ranked 115th out of 125 countries on the World Banks latest (200608) Trade (MFN) Tariff Restrictiveness Index (TTRI), and Pakistan stands at 102nd place. Indias trade regime is much more restrictive than other large emerging economies like Brazil, China, Mexico, and Russia, or in comparison with neighboring countries in South Asia. Indias ranking on the ease of doing business indicators are also quite low, with the latest ranking at 122nd out of 178 countries, compared to Pakistans rank at 77th place for 200608 [19]. Research by Zareen Naqvi shows that Indias MFN applied average tariff rate, at 14.5 percent (in 2007), is much lower than tariff rates a decade ago; however, the applied tariff rates for agriculture exports, at 39 percent in 2007, is one of the highest in the world. This is a major barrier that Pakistani exporters of agricultural products face in terms of expanding trade with India [20]. In a number of sectors, specific tariffs and regulatory duties outside statutory MFN tariff rates are levied. Potential textile exports from Pakistan are subject to specific duties, which can go as high as 50 to 100 percent in equivalent terms. The

8. Should Pakistan give MFN Status to India?

MFN is one of the fundamental principles of the multilateral trading system and is at the heart of many of its agreements. Since the WTOs inception, it was believed that the foremost requirement from its member countries would be the implementation of this principle and this would be the major booster to the whole process of free trade. As such no comprehensive evidence can be found as to how many countries have completely complied with this article, but there are countries, such as USA, China, India, and Pakistan, which have not completely implemented this clause.H. As mentioned earlier, soon after the enactment of the WTO agreement, India gave MFN status to Pakistan, but the same status was not reciprocated by Pakistan. Over the last several years there is now growing pressure for such reciprocity both from internal and external stakeholders. The business community and, in particular, the traders in Pakistan have been advocating for a complete opening up of the borders for trade for quite some time and with the current wave of dialogue and official visits between the two countries, their insistence has gained further momentum. Pakistan, however, has so far been very cautious about this issue. Exporters on the Indian side have been persuading their government to put pressure on Pakistan for reciprocating the MFN status but India has so far kept a soft tone in its demand for MFN status. The opposition to MFN status for India is perhaps quite often based on the misconception of its definition. It is believed that giving MFN status is tantamount to giving some special status to India that would result in imports with duties either zero or less than what is levied at imports from other countries. This is, nonetheless, not the case and MFN status only suggests that for trade purposes a

WTO member country would not be discriminated with other member countries [22]. Generally, the argument against MFN status is given by the stakeholders related to industrial sector and is of infant industry. It is asserted that the opening up of Pakistani market for all Indian products would hurt the domestic manufacturing sector. The arguments reflect that our industry is uncompetitive and inefficient relative to the Indian industry. It is expected that the Pakistani markets will glut with cheap Indian products and the domestic producers will not be able to compete due to lower prices. Specifically, the domestic auto and the electronics industry may face tough competition as the Indian industry is relatively well established and efficient. For the textiles sector, it is argued that since the Indian textiles industry is more into the domestic supply as compared to an export oriented Pakistani textile sector, the low cost textiles of India would wipe out the Pakistani textile production meant for the domestic consumer. Garment exporters in Pakistan have strongly supported the move saying it would help them get a foothold in the fast-growing Indian market. An agency report said that Pakistan may also import electricity from India to help ease severe shortages that disrupt power supply for 10 hours a day, causing widespread resentment. Granting MFN to India is also opposed on the grounds that Pakistan will be a net looser in terms of the overall trade balance with India, since despite the MFN status given by India, Pakistan has not been able to make inroads in the Indian market and this is due to the presence of high non-tariff barriers. Strategic considerations are also used to advocate denial of MFN to India. It is argued that since political relations between the two countries are not stable and in the wake of existing conflicts these are unlikely to become stable, dependence on an enemy state should not be increased. Trade means

more flow of human traffic between the two countries making it difficult to check infiltration of persona non grata. Also, in the absence of a long lasting solution of the political disputes the trade ties would remain vulnerable and are likely to be broken with a slightest degree of strain in relations. In such situations, it is difficult to establish business relations involving long term or continued commitments. In India, such apprehensions regarding the gas pipeline crossing Pakistan have also been shown. Protecting the domestic economy from Indian products infiltration appears to be based on assumption that all Indian goods are more competitive than the domestically produced goods. This is, nevertheless, unlikely and only those items, as also suggested from the analysis in the preceding section, are likely to make inroads that: (i) will substitute the items being already imported from other countries; (ii) are currently being smuggled or coming through third country; (iii) remain cheaper than the domestic goods after the application of tariffs. While the first two kinds of imports are unlikely to affect the domestic market since these are already available, importing other items would depend upon the cost competitiveness and the tariff barriers. Opening the borders does not suggest an unrestricted flow of Indian products. All the Indian imports will remain subject to the tariffs already in place. For the third kind of imports, it can be argued that if the Indian goods remain cheaper than their domestic counterparts even after paying the import duties, then why not allow them? Though the ultimate conclusion could only be based on gains in general welfare, there is no doubt that the consumers will be the net gainer in this situation. Other major beneficiary is the government for the revenues raised through such trade.

The substitution of our imports with cheaper Indian products should be more than welcome since this may benefit in two ways: first, the low cost of imports and secondly, lesser time involved.J. Trade with India is likely to bring another advantage in terms of enlarged road transportation services. Today, our domestic shipping services are either not available or are not competitive. Given the already available structure of road transportation, trade through road vehicles is likely to promote such services and foreign exchange receipts to the country. Many products of multinationals are cheaper in India than Pakistan; they may adjust their productions resulting in lower prices. The analysis of the comparison of Indian and Pakistani trade composition in this note provides us a clue about the potential of trade and identifies the potential items. It does suggest that Pakistan can benefit not only by accessing a big market for its exports it can save significantly by substituting its expensive imports from the rest of the world with those from India. Indeed, in this likely scenario, granting MFN status to India should not be a worry for Pakistani producers.

9. Discussing some misconceptions:

In this section we will discuss some misconceptions in granting MFN status to India from different perspectives.


Preventing impact of incidents like Bombay attack:

Someone may argue that if incidents like Bombay attack took place again than will it put us right back from where we started. Yes it will have some consequences on our relations but the need of the hour is that we should not let such incidents over come our healthy trading relations. We should resolve our issues through dialogue. A joint task force should be formed to prevent incidents like Bombay attacks because such attacks always occur

from the inside help form both side. There are some culprits in both Pakistani and Indian government who do not want India and Pakistan get going peacefully. Punish all such culprits by forming a joint task team so that such incidents never happen again. We need to move on!!!


Trading relations with China:

Some one may argue that if we have a country like china as our neighbor which is even bigger economic might than India then why we need to prefer India over China. Yes, it is right that china is also a mighty economic power and that is why china is also currently enjoying MFN status by Pakistan, but we need to understand that this world has become global village so we must have healthy trading relations with every country. By preferring India over china would be very beneficial for our foreign exchange reserves because our exports to china is almost nonexistent where as we have a great potential in our exports to India which will have strong positive impact on our foreign exchange reserves(as analyzed in previous sections). Moreover the value of our currency will also increase internationally by preferring India over china.

by area is the largest province of Pakistan) is equal to the budget of Islamabad city, which is a clear indication of being prejudice towards Baluchistan. If we make Baluchistan economically and politically strong and give them there due basic rights, we can turn there anger in love and peace towards Pakistan and consequently Baluchistan would no longer be Indias cup of tea. On the other hand Pakistan also needs to stop interfering in internal matters of India, as Pakistan had been doing it in Aasam and Aruna Chal and Pakistan has to make sure that culprits like Ajmal Qasab must not do any attack on India. So by taking such measures we can resolve our Baluchistan and Indian interference issue easily. A joint task force would help us to control these extremist elements.


Water issues with India:


Intervening in internal affairs:

One may also argue that giving MFN to India shall also pave the way of Indias interference in Baluchistan which already had created a lot of mess for Pakistan. Yes, it is right that India is interfering in Baluchistan and exploiting them against Pakistan. But the matter of the fact is that if today the Baluchistan has become Indias cup of tea, is just because of Pakistans brutal policies for Baluchistan. We have to admit that we have been very terrible towards Baluchistan. We never gave them provincial supremacy and deprived them of basic rights. They are deprived of very basic facilities like hospitals and educational institutes. They are even struggling very hard to find clean water to drink. The budget of Baluchistan (which is

One may also argue that India is depriving us from our right of water by building dams on our rivers and breaking Indus water treaty. Yes, it is right that India is building dams on our rivers but claiming that Indias construction of dam on our rivers is illegal, is a highly false claim by Pakistan as under clause no#3 of Indus water treaty 1960, India securely enjoys right to built dams for its electrical consumption unless Pakistan is not getting its due share of water.I. This issue is also being misunderstood by Pakistani people because majority of us dont know the difference between dam and barrage and we interpret dam as place to stop the flow of water. First of all, dam is a place where you store huge amount of water to produce electricity and then you let go the flow of water as it is, as it was coming from the source and secondly, water is stopped by constructing barrages. Actually if we are running short of water, it is only because we do not have a proper system or dam(being more specific) in a way to store the huge amount of water coming from India and from our glaciers, so consequently we witness disastrous floods every year in our country. Pakistan can easily overcome water shortages by constructing dams like KALA

BAGH dam. So blaming India for our water shortages is nothing but a false claim and excuse of our incapability to build new dams.


Economic independency:


Kashmir Issue:

One may also argue that how can we manage MFN status with India without resolving the issue of Kashmir and how come we would keep our trading relations intact when even slightest of strain on our relations put us right back from where we started. Yes its reality that Kashmir factor is a big hurdle between our relations but only dialogue is solution for this problem. To have constructive dialogue peace full atmosphere has to be created, which can only be done by getting close to each other in which MFN status to India can play big part. Countries like China-Taiwan and Singapore-Malaysia with adverse political relationships, without giving up their principled stand on disputes and differences, have engaged in cross-border investment, trade, and movement of people. Countries have improved political relations because of close economic ties, Confidence-building measures and the creation of stakeholders in the countries can eventually defuse the tension and soften the ground for peaceful resolution of disputes and disagreements. Investors, traders, transporters, bankers, and business groups who will be working for Indian firms in Pakistan, and vice versa, will act as strong lobby groups to nurture, preserve, and promote peaceful bilateral political relations between the two countries. Yes it is also right that slightest of strain may put our trading relations right back in the hut, but we need to realize that we need to move on. Recently India voted for Pakistan in United Nations for seat in UN Security Council where Muslim country like Bangladesh did not vote for us, which is a clear indication that ground for peaceful and constructive dialogue has got soften after since Pakistan declared MFN status to India. So we must not let any strain effecting our trading relations, if we want to become economically sound.

One may argue that we can make our economy stand on its own feet by our self, so we dont want trading relations with India to elevate our economy. The question then arises is that if we really have that much potential to raise our economy on our own, then we should stop trading with countries like China, America, turkey or any other country whom we are trading with. Since we our self sufficient to boost our economy on our own, so we must abandon trading relations will all the countries (which will definitely sound stupid). We have to realize that even economic might like China and America are having very trading relations with the rest of the world. So it does not mean to become self sufficient in economy we should stop trading with any country with whom we are having some political differences.

10. Recommendations :

(For Bilateral and Regional Economic Cooperation)

While India and Pakistan continue their dialogue in an effort to resolve core political issues, they should start by focusing on the removal of nonpolitical constraints that will promote bilateral trade. Businessmen in both countries will then be able to take advantage of the opportunities that will present themselves.

10.1. Short-Term Goals:

Pakistan should grant MFN status to India, while India should reduce its tariffs on agriculture commodities, textiles, and other goods that are of potential value to Pakistan. Both countries should reactivate SAFTA and agree on a phasing out of the sensitive

list (of items that each country deems important for its economy) over the next few years. A restrictive list would nullify all the potential gains of preferential trade access. Rationalize and simplify the technical barriers to trade and sanitary and phytosanitary measures29which are, in fact, acting as powerful deterrents to the exchange of goods.

These are, in effect, NTBs that hinder the flow of goods. In 2005, Governor Y. Venugopal Reddy and the author had signed an agreement to open branches of two Indian banks in Pakistan, and two Pakistani banks in India. This agreement has not yet been implemented, as procedural difficulties have been allowed to overwhelm the substance of the agreement. Without banking services, the opening of letters of credit, and cross-border fund transactions, trade cannot take place.

10.2. Medium- to Long-Term Goals:

The following tasks should be carried out immediately: Trade facilitation through expeditious border crossings; streamlining of documentation requirements; coordination of border agencies; opening of new border crossings; quick customs clearance; improvement of electronic data interchange, telecommunication, and transport links; creation of new shipping protocols; and the easing of visa restrictions for businessmen. In addition, increase railway, air, and road connections between the two countries. Replace domestic tax, tariff, and subsidy policies that distort incentives for production and trade in both countries with moreneutral policies.

Strengthen the policies used to manage and facilitate trade integrationsuch as the setting of standards, quality control, technical regulations, and material testing and make them more user-friendly. Harmonization of legal regulations for investor protection, contract and intellectual property rights enforcement, and labor relations would promote the relocation of industries within the region, as the expanded market size and mobility of goods and services would result in economies of scale. Choosing locations for inputs, components, and raw materials that have low transaction costs would confer comparative advantage to final finished goods. The 2006 composite dialogue between India and Pakistan had on its agenda the resumption of rail service between Khokhrapar and Monabao; bus service between Srinagar and Muzaffarabad; religious visits to Lahore and Nankana Sahib; a new shipping protocol; the deregulation of air services; and joint registration of basmati rice. This agenda should be revived and agreements reached to implement these measures. A joint task team comprising of honest and competent people from both countries must be formed to ensure that culprits who do not want Indo-Pak relations going peacefully, must be caught and punish above board.

If implemented sincerely, these measures will open up a new vista for the two countries in the twenty-first century. It is high time the political leadership of India and Pakistan demonstrate the courage and conviction necessary to facilitate trade between their countries, for the benefit of their populations and the region overall.


The analysis of the comparison of Indian and Pakistani trade composition in this note provides us a clue about the potential of trade and identifies the potential items. It does suggest that Pakistan can benefit not only by accessing a big market for its exports it can save significantly by substituting its expensive imports from the rest of the world with those from India. Indeed, in this likely scenario, granting MFN status to India should not be a worry for Pakistani producers. The need of hour is that on such issues of national interests, there should be establishment of working groups of technical experts and academicians and national think tanks, whose recommendations should be debated in the Parliament for a consensus decision. Since a formal decision has yet to be made, therefore, let us do it even now, before, personal relations prevail over national interests


A. According to a survey by the Textile Commissioners Organization of Pakistan, 600,000 additional jobs were created between 1999 and 2007, when exports of textiles increased by $6 billion.

B. Using an intra-industry flow matrix, it can be surmised that agricultural raw materials, iron and metals, automotive parts, chemical, elements and compounds, and cotton fabrics can benefit both countries. Both can specialize in products at different stages of production, or in differentiated products.

C.The negative list, for example, includes pharmaceuticals, cosmetics, and jewelry, while the positive list includes, among other items, chemical elements and compounds, concentrates of iron and steel, tires and tubes of rubber, machinery and its parts, etc.

D. Single yarn, cotton fabrics, denim, woven fabrics, ensembles, jackets and blazers, trousers, blouses, T-shirts, jerseys, mens swimwear, skirts, garments.

E. Revealed comparative advantage (RCA) is a measure of competitiveness, and is estimated as a ratio of the share of a given product in a countrys exports to it share in world exports. If it takes a value greater than 1, the country has an RCA in that product. If it is less than 1, the country has a comparative disadvantage.



G. Research and Information System for the nonaligned and other developing countries.

H. USA has been using the granting of MFN as a tool to achieve various objectives with respect to various countries, such as China, Cuba, Iran, and Libya, for years [see, Cato Handbook for Congress Unilateral Sanctions at:]. Cebi and Ludema (2001) show that over time the cost (relative to the benefits) of granting an unconditional MFN for developed countries to all countries increases with respect to less developed (or smaller ) countries. The unconditional MFN increases the trade gains and reduces opposition to liberalize trade in smaller countries. This explains why large countries who were the strong supporter of unconditional MFN clause in GATT retreated and began circumventing the MFN clause exploiting other clauses of the agreement. Nevertheless, the utilitarian approach helps to reach the conclusion that trade sanctions, embargoes, or the denying of MFN status is ineffective in changing the behavior of countries considered inappropriate for international community. McGee (1998) concludes that using the utilitarian approach to assess the negative effects of trade sanctions is insufficient and a better approach would be to find out if there has been any violation of property, contract, or association rights.





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