Permanent Normal Trade Relations

Context:

US and other members of the Group of Seven (G7) will revoke Russia’s “Permanent Normal Trade Relations (PNTR)” status to punish Russia for war over Ukraine.

About Permanent Normal Trade Relations

• The status of permanent normal trade relations (PNTR) is a legal designation in the United States for free trade with a foreign nation.
• The designation was changed from most favored nation (MFN) to normal trade relations by Section 5003 of the Internal Revenue Service Restructuring and Reform Act of 1998. Permanent was added to normal trade relations some time later.
• In international trade, MFN status (or treatment) is awarded by one nation to another. It means that the receiving nation will be granted all trade advantages, such as low tariffs, that any other nation also receives. Thus, a nation with MFN status will not be discriminated against and will not be treated worse than any other nation with MFN status.
• Countries that wish to have PNTR must fulfill two basic requirements:
  • Comply with the Jackson-Vanik provisions of the Trade Act of 1974 that states that the President of the United States determines that a country neither denies or impedes the right or opportunity of its citizens to emigrate; and
  • Reach a bilateral commercial agreement with the United States. Jackson-Vanik allows for the President to issue a yearly waiver to allow the granting of PNTR.

What is MFN Status?

• World Trade Organization (WTO) members commit to treating other members equally so they can all benefit from each other’s lowest tariffs, highest import quotas and fewest trade barriers for goods and services.
  • This principle of non-discrimination is known as Most Favoured Nation (MFN) treatment.
  • This is one of the measures which ensures trade without discrimination. Another one is ‘National Treatment ‘.
• Article 1 of the General Agreement on Tariffs and Trade (GATT), 1994, requires every WTO member country to accord MFN status to all other member countries.
• There are some exceptions, such as when members strike bilateral trade agreements or when members offer developing countries special access to their markets.
• For countries outside the WTO, such as Iran, North Korea, Syria or Belarus, WTO members can impose whatever trade measures they wish without flouting global trading rules.
• In international trade, MFN status (or treatment) is awarded by one nation to another.
  • For example, India accorded MFN status to all WTO member countries, including Pakistan, from the date of entry into force of the so called Marrakesh Agreement, establishing the WTO.
  • A nation with MFN status will not be discriminated against and will not be treated worse than any other nation with MFN status.
    • Grant someone a special favour (such as a lower customs duty rate for one of their products) and you have to do the same for all other WTO members.
• There is no formal procedure for suspending MFN treatment and it is not clear whether members are obliged to inform the WTO if they do so.
  • India suspended Pakistan’s MFN status in 2019 after a suicide attack by a Pakistan-based Islamist group killed 40 police. Pakistan never applied MFN status to India.

Cases of exceptions in MFN:

The WTO provides the following exemptions from MFN provisions for the following:

• trade blocs like the USMCA and the European Union, which are allowed to discriminate against imports from outside the bloc
• trade barriers in response to unfair competition
• for trade preferences extended to developing countries
• for trade in services, on a limited basis
• when members strike bilateral trade agreements or when members offer developing countries special access to their markets.

For countries outside the WTO, such as Iran, North Korea, Syria or Russian ally Belarus, WTO members can impose whatever trade measures they wish without flouting global trading rules.

Benefits of the Most-Favored-Nation Clause:

The most-favored-nation clause offers the following benefits:

1. Increases free trade

The most-favored-nation clause increases trade creation and decreases trade diversion, essentially encouraging more free trade between countries. It allows more efficient outcomes since the lowest cost producers can export goods to areas with the highest demand without government intervention.

2. Equal treatment of disadvantaged countries

The most-favored-nation clause allows smaller countries to participate in advantages that they may not normally receive since they are overlooked among the large global trade players. The clause helps the small countries to negotiate favorable trade terms that they normally would not receive.

3. Simplifies trade laws

The implementation of the most-favored-nation clause simplifies the complex trade agreements established bilaterally between countries. If all countries are under the same trade terms, it makes trade laws much simpler.

4. More competitive trade

MFN status is extremely gainful to developing countries. The clear upsides are access to a wider market for trade goods, reduced cost of export items owing to highly reduced tariffs and trade barriers. These essentially lead to more competitive trade.

5. Cuts down bureaucratic hurdles

MFN also cuts down bureaucratic hurdles and various kinds of tariffs are set at par for all imports. It then increases demands for the goods and giving a boost to the economy and export sector. It also heals the negative impact caused to the economy due to trade protectionism.

What does losing MFN status mean?

• Revoking Russia’s MFN status sends a strong signal that the United States and its Western allies do not consider Russia a economic partner in any way, but it does not in itself change conditions for trade.
• It does formally allow the Western allies to increase import tariffs or impose quotas on Russian goods, or even ban them, and to restrict services out of the country.
  • They could also overlook Russian intellectual property rights.
• Ahead of MFN status removal, the United States had already announced a ban on imports of Russian oil and gas.
• Further, the European Union has already banned about 70% of all imports, such as tobacco, potash and products made of wood or steel, from non-WTO member Belarus (Russia’s ally in war with Ukraine).

What is National treatment?

• It means treating foreigners and locals equally.
• Imported and locally-produced goods should be treated equally — at least after the foreign goods have entered the market.
• The same should apply to foreign and domestic services, and to foreign and local trademarks, copyrights and patents.
• This principle of “national treatment” is also found in all the three main WTO agreements (Article 3 of GATT, Article 17 of GATS and Article 3 of TRIPS).
• National treatment only applies once a product, service or item of intellectual property has entered the market.
  • Therefore, charging customs duty on an import is not a violation of national treatment even if locally-produced products are not charged an equivalent tax.

Source: The Hindu

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