What is MFN status under the WTO? Should

The Most Favoured Nation (MFN) treatment under the WTO means every member should all others normally for trade relations. Preferential terms are allowed but not negative discrimination. Exceptions to the general MFN rule on grounds of National Security, via Article XXI are permitted.  There are other exceptions as well, in Article XX of the GATT.  India in 1996 gave MFN status to Pakistan.
 
Pakistan, which is bound by WTO rules to extend the MFN status to India has not done so, using the provisions of Article XXI. India has not taken the issue to the WTO dispute settlement mechanism, partly because it is difficult to challenge Pakistan’s subjective assessment on security issues. Nor has New Delhi reconsidered withdrawing the 1996 decision. Article XXI ‘Security Exceptions’ of GATT states that:
 
“Nothing in this Agreement shall be construed…(a) to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests…(b) taken in time of war or other emergency in international relations; or (c) to prevent any contracting party from taking any action in pursuance of its obligations under the United Nations Charter for the maintenance of international peace and security.”
 
The critical phrase – “which it considers necessary” – gives a member state nearly unfettered rights to invoke this provision at its own discretion, which is what Pakistan has used, to deny the MFN status to India.
 
When Pakistan has invoked a security exception to deny India an MFN status, New Delhi would be justified in reciprocating for the same reason and under the same provision; and Pakistan will have no case to take to the WTO. Furthermore, recent developments near the India-Pakistan border would constitute an emergency in New Delhi’s relations with Islamabad, which would justify the decision to withdraw the MFN status.
 
If India withdraws the MFN status to Pakistan, it hurts both (particularly India) though will be a strong political message to Pakistan, but more importantly, to domestic public opinion that the government means business in facing up to the security challenges from the western frontier.
 
Pakistan’s exports to India in 2015-16 was $441 million – 1.56 per cent of its total exports – and much of it was primary products. On the other hand, India’s exports through regular channels to Pakistan in 2015-16, despite the denial of MFN status, was $2.17 billion. Pakistan could retaliate by restricting imports of several items from India. Informal trade via third countries (due to high tariffs, Pakistan’s negative list, lack of infrastructure and political tensions) is more than double of it, much of its Indian exports.