International Trade: Impact on India through Most Favoured Nation (MFN) Status

Harsh Niwas[1]

Introduction

International trade means trade between the two or more countries. International trade involves different currencies of different countries and is regulated by laws, rules, and regulations of the concerned countries. Thus, International trade is more complex than domestic trade.[2]

International trade is the exchange of goods and services between countries. This type of trade gives rise to a world economy, in which prices, or supply and demand, affect and are affected by global events. Political change in Asia, for example, could result in an increase in the cost of labour, thereby increasing the manufacturing costs for an American sneaker company based in Malaysia, which would then result in an increase in the price that you have to pay to buy the tennis shoes at your local mall. A decrease in the cost of labour, on the other hand, would result in you having to pay less for your new shoes.[3]

Trading globally gives consumers and countries the opportunity to be exposed to goods and services not available in their own countries. Almost every kind of product can be found in the international market: food, clothes, spare parts, oil, jewellery, wine, stocks, currencies, and water. Services are also traded: tourism, banking, consulting and transportation. A product that is sold to the global market is an export, and a product that is bought from the global market is an import. Imports and exports are accounted for in a country’s current account in the balance of payments.[4]

International Trade is regulated by an Agreement called as General Agreement on Tariffs and Trade (GATT). As per the purpose of this agreement, there will be considerable depletion of tariffs and other trade barriers and eliminations of priorities on a joint and mutually advantageous basis. This agreement was signed by the 23 nations on 30th October 1947 at Geneva. One of the Countries that signed GATT was India.

But this agreement continued to be in existence till 1994 where 123 nations in Marrakesh signed the Uruguay Round Agreements, which established the World Trade Organization (WTO) on January 1, 1995.The GATT Agreement is still in effect under the framework of WTO.

Thus, India has also become a member state for the World Trade Organization.

World Trade Organization (WTO)

The World Trade Organization (WTO) is the main worldwide association managing the global rules of trade between countries. Its primary capacity is to guarantee that trade streams as easily, typically and unreservedly as could reasonably be expected.

It facilitates trade negotiations among its members, which have increased from 123 in 1994 to 164 in 2018. The organization also monitors the implementation of those trade agreements, produces research on global trade and economic policy, and serves as a forum for settling trade disputes between nations. Established in 1995 and based in Geneva, Switzerland, the WTO is the successor to the General Agreement on Tariffs and Trade (GATT), an organization founded in 1948 whose rules created the modern multilateral trading system.

The WTO is a permanent body but not a specialized agency of the United Nations; it has far greater power to mediate trade disputes between member countries and assess penalties. WTO’s main task is to make the multilateral trading system credible and transparent. The WTO in its principal role as a trade police man will ensure the countries obey multilaterally accepted trade roles, carry out recommendations and rulings and compensate complaints[5].

Principals of International Trading as per WTO

Following are the principles for the establishment of the multilateral trading system:

Most Favored Nation Treatment Principal- Article I of GATT agreement contain the Most Favoured Nation Clause which states that “no country is to give special trading advantages to another or to discriminate against it. All are one and on an equal basis, and all share the benefits of any moves towards lower trade barriers.”

  1. National Treatment Principle-This is Article III of the GATT and requires that once goods have entered a market, they must be treated no less favourably than the equivalent domestically produced goods. In a simple sense, it means that the imported goods and domestically produced goods are equal.
  2. Anti-Non-Tariff Barriers Principle-This principle states that, where protection is given to domestic industry, it should be extended exclusively (subject to very limited exceptions) through customs tariffs and not through other commercial measures. Among other things, the aim of this rule is to make the extent of protection clear and quantifiable. Fees and charges other than tariffs must be limited to the approximate cost of the services. The “Escape Clause” exception permits the imposition of tariffs and non-tariff barriers in cases where, as a result of unforeseen developments, a product is imported into the territory of a contracting party of like or directly competing with a domestic product in such increased quantities and under conditions which causes harm or threatens serious injury to domestic producers.[6]
  3. Tariff Concession Principle-Under standard GATT operating practice, a country wishing to become a contracting party to the Agreement must submit negotiated tariff concession schedules (including lists of non-GATT complying non-tariff trade restrictions). These are sometimes referred to as “bindings.” They may include schedules of tariff reductions or the elimination of specified non-tariff trade restrictions. These tariff concession schedules are negotiated with other members collectively. Thereafter, tariffs and other trade restrictions may only (with certain exceptions that invite retaliatory action by other members) be reduced or eliminated through scheduled, unilateral, or mutually negotiated further trade liberalization. They may not be increased.[7]
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Most Favoured Nation Status

Directly speaking, the most -favoured –nation clause means “favour one, favour all”. A country should not discriminate between its trading partners. If a WTO member grants someone a special favour (such as lower customs duty) it should be done the same for all other WTO members. This rule is established in Article II of the GATS “with respect to any measure covered by this Agreement, each Member shall agree immediately and unconditionally to services and service suppliers the same as the treatment of other members and no less favourable than that it accords to like services and service suppliers of any other country.

In other words, if a country provides favourable treatment to one country, it must provide the same favourable treatment to all Member countries. Therefore, the essence of MFN treatment is non-discriminatory treatment by providing the same conditions given to one Member to other Members. In the context of trade, it is a principle that prohibits different treatment given to the same products depending on the country of origin.

Article 1 of the GATT agreement requires WTO Members to extend MFN treatment to like products of other WTO Members with respect to tariffs, regulations on exports and imports, internal taxes and charges on imported products, and internal regulations. In other words, “like” products from all WTO Members must be accorded the same treatment as the most advantageous treatment accorded by a Member to the products of any one state or territory under the jurisdiction of that Member.[8]

But there are certain exceptions provided in the GATT Agreement for the Most Favored Nation Treatment clause as follows:

  1. Customs Unions/Free-Trade Areas (GATT Article XXIV)- So as to reinforce the economic connection between two nations, the regional trade agreement is allowed for traditions associations/organized commerce regions under specific conditions. These understandings liberalize trade among nations within the locales, while keeping up exchange hindrances with nations outside the locale or districts. They may likewise prompt outcomes that are in opposition to the MFN rule in light of the fact that nations inside and outside the district are dealt with in an unexpected way. Hence, nations outside the locale are burdened. Nonetheless, totally restricting such understandings is considered excessively serious; what’s more, GATT permits them under strict conditions.
  2. Enabling Clause-The Generalized System of Preferences (GSP) program is a system that grants certain products originating in eligible developing countries preferential tariff treatment over those normally granted under MFN status. GSP is a special measure designed to help developing countries increase their export earnings and promote development.
  3. Non-Application of Multilateral Trade Agreements Between Particular Member States (WTO Agreement Article XIII)- Although there is also a provision about non-application in GATT Article XXXV, it is recognized that WTO Article XIII prevails against GATT Article XXXV. This situation occurs because WTO Article XVI stipulates that “In the event of a conflict between a provision of this Agreement and a provision of any of the Multilateral Trade Agreements, the provision of this Agreement shall prevail to the extent of the conflict”. In the case of non-application, benefits enjoyed by other Members are not provided to the country of non-application, which leads to results that are contrary to the MFN principle.[9]
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Impact on India

The impact of the World Trade Organization is favourable and unfavourable on India which as follows:

Favorable Impact[10]

  1. Increase in Export Earnings: Increase in Export Earnings can be experienced through the growth in Merchandise exports and growth in Service exports.
  2. Growth in Merchandise Exports: The activation of The WTO has enhanced the exports of the Developing Countries due to its impact on the tariff and non-tariff trade barriers, reducing them as a result of its intervention. India’s merchandise exports have increased from 32 Billion USD (1995) to 185 Billion USD (2008- 09).
  3. Growth in Service Exports: For countries like India the WTO established the General Agreement on Trade in Services (GATS). India’s Service Exports increased from 5 Billion USD (1995) to 102 Billion USD (2008-09). 
    1. Agricultural Exports: Curbing of trade barriers and domestic subsidies elevated the costof agricultural products in the international market. 
    1. Textile and Clothing: The dissolution of MFA (Multi-Fiber Arrangements) has largely benefited the textiles sector as the quotas limiting its trade are now eradicated. As a result, developing countries like India can have unhindered export of textile and clothing.
    1. Foreign Direct Investment: In accordance with the agreement on TRIMs (Trade Related Investment Measures) which lay down the rules that restrict the preference of domestic firms and thus allow foreign firms to operate more easily in international markets, have compelled the member nations to withdraw the restrictions on foreign investment. Thereby harmonizing the dominance of local and foreign firms and companies. In 2008- 09, the net foreign direct investment in India was 35 Billion US Dollars

Unfavorable Impact[11]

  1. TRIPS: Protection of intellectual property rights has been one of the major concerns of the WTO. As a member of the WTO, India has to comply with the TRIPs standards. However, the agreement on TRIPs goes against the Indian patent act, 1970, in the following ways:
  2. Pharmaceutical Sector: Under the Indian Patent Act 1970, only process patents are granted to chemical, drugs, and medicines. Thus, a company can legally manufacture once it has the respective product patent. The companies could sell good quality products at low prices. But, according to the TRIPs agreement, product patents will also be granted which will raise the prices of the products, as a result, the product in now, not within the reach of the poor people, fortunately, most drugs manufactured in India are off-patents so people will be less affected.
  3. Agriculture: The TRIPs agreement covers agriculture as well so the Indian agriculture will also be affected considerably. Since a large majority of the Indian Population depends on agriculture for their livelihood, these developments will have serious consequences.
  4. Micro-Organisms: Under the TRIPs patenting has been extended to microorganisms as well. This will largely benefit MNCs but not developing nations like India.
  5. TRIMs: Under the agreement on TRIMs the developed nations are favored as there are no rules in the agreement to formulate international trade practices by foreign investors. Also, by complying with the agreement TRIMs we will contradict our objective of self-reliant growth based on locally available technology and resources.
  6. GATS: The General Agreement on Trade in Services (GATS) favors the developed nations more than the developing nations. The service sector in India will now have to compete with gigantic foreign firms. Moreover, since foreign firms are allowed to transfer their profits, dividends, and royalties to their present companies they will offer a foreign exchange burden to the Indian Economy.
  7. LDC Exports: Many member nations have agreed to allow duty-free and quota-free market access to all products originating from the Least Developed Countries (LDC). India will now have to face the problem of competition arising due to other cheap LDC exports internationally. Even more troublesome is the fact that the LDC exports will also come to Indian markets and therefore provide competition to the locally produced goods.
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Conclusion

In any trade rehearses, presently a day, the free flow of merchandise and services is considered as the most essential and urgent viewpoint, the equivalent is valid for international trade too. The standards of GATS and WTO controls are assuming a huge job to guarantee the organized commerce rehearses in universal routine. Without a doubt, facilitated commerce rehearses are considerable for the headway of international exchange, now and then when it goes unrestrictive winds up risky to the country’s financial and social structure. Where a nation is bound to its commitments in the international regime, its commitments also lies toward the positive and healthy advancement of its own domestic regime, which is its first priority. To take steps for the welfare and advancement of one’s own territory is the most important aspect of a nation’s sovereignty which cannot be taken away from him.

In this way the restrictions demanded away by a country for the welfare and assurance of its own economy particularly when comes to issues of environment, wellbeing and fundamental prudent and social needs of its subjects might be viewed as authentic, yet they will end up unsafe when reason surpasses the limits of good and moral prerequisites, is ill-conceived and dangerous for the advancement of global exchange rehearses.

The disallowances on prohibitive measures for control of global trade rehearses, by WTO are basically lies on just the quantitative measure and furthermore gives a few exemptions on the ground economic, environment, wellbeing and other essential grounds are legitimized, until they executed with extraordinary alert and without the impedance of universal political aspect.

Hence India should be ready to face the emerging challenges and grasp the opportunities.


[1] Associate, Adani Railways Project

[2] Gargankush, National Control over International Trade Scope in Present Era, Legal Services Publication (2018), http://www.legalserviceindia.com/legal/article-144-national-control-over-international-trade-scope-in-present-era.html.

[3] Reem Heakal, What Is International Trade? Investopedia Publication (Jan 12 2018), https://www.investopedia.com/insights/what-is-international-trade/.,

[4] Ibid.

[5] Chatterjee, Aneek. International Relations Today: Concepts and Applications. Pearson Education. Noida India. 194-196 (2010).

[6] Supra note 5.

[7] Ibid.

[8] Ibid.

[9] Ibid.

[10] Harish K. Raman, the World Trade Organization and Its Impact on Indian Businesses, 2014, https://www.academia.edu/6323752/The_World_Trade_Organization_and_Its_Impact_on_Indian_Businesses.

[11] Ibid.