Most favoured nation

In international economic relations and international politics, most favoured nation (MFN) is a status or level of treatment accorded by one state to another in international trade. The term means the country which is the recipient of this treatment must nominally receive equal trade advantages as the "most favoured nation" by the country granting such treatment (trade advantages include low tariffs or high import quotas). In effect, a country that has been accorded MFN status may not be treated less advantageously than any other country with MFN status by the promising country.

There is a debate in legal circles whether MFN clauses in bilateral investment treaties include only substantive rules or also procedural protections.^[1] The members of the World Trade Organization (WTO) agree to accord MFN status to each other. Exceptions allow for preferential treatment of developing countries, regional free trade areas and customs unions.^[2] Together with the principle of national treatment, MFN is one of the cornerstones of WTO trade law.

"Most favoured nation" relationships extend reciprocal bilateral relationships following both the General Agreement on Tariffs and Trade (GATT) and WTO norms of reciprocity and non-discrimination. In bilateral reciprocal relationships a particular privilege granted by one party only extends to other parties who reciprocate that privilege, while in a multilateral reciprocal relationship the same privilege would be extended to the group that negotiated a particular privilege. The non-discriminatory component of GATT/WTO applies a reciprocally negotiated privilege to all members of GATT/WTO without respect to their status in negotiating the privilege.

Most favoured nation status is given to an international trade partner to ensure non-discriminatory trade between all partner countries of the WTO. A country which provides MFN status to another country has to provide concessions, privileges, and immunity in trade agreements. It is the first clause in the GATT.

Under rules of WTO, a member country is not allowed to discriminate between trade partners and if a special status is granted to one trade partner, the country is required to extend it to all members of WTO. In a nutshell, MFN is a non-discriminatory trade policy as it ensures equal trading among all WTO member nations rather than exclusive trading privileges.

History[edit]

The earliest form of the most favoured nation status can be found as early as the 11th century. Today's concept of the most favoured nation status starts to appear in the 18th century, when the division of conditional and unconditional most favoured nation status also began.^[3] In the early days of international trade, "most favoured nation" status was usually used on a dual-party, state-to-state basis. A nation could enter into a "most favoured nation" treaty with another nation. In the Treaty of Madrid (1667), Spain granted England "most favoured nation" trading status.^[4] With the Jay Treaty in 1794, the US also granted the same to Britain. In the Joseon–United States Treaty of 1882, the Korean kingdom Joseon was compelled by the United States to give it most favored nation status.^[5]

After World War II, tariff and trade agreements were negotiated simultaneously by all interested parties through the General Agreement on Tariffs and Trade (GATT), which ultimately resulted in the World Trade Organization in 1995. The WTO requires members to grant one another "most favoured nation" status. A "most favoured nation" clause is also included in most bilateral investment treaties concluded between capital exporting and capital importing countries after World War II.

Increases trade creation and decreases trade diversion. A country that grants MFN on imports will have its imports provided by the most efficient supplier if the most efficient supplier is within the group of MFN. Otherwise, that is, if the most efficient producer is outside the group of MFN and additionally, is charged higher rates of tariffs, then it is possible that trade would merely be diverted from this most efficient producer to a less efficient producer within the group of MFN (or with a tariff rate of 0). This leads to economic costs for the importing country, which can outweigh the gains from free trade.

MFN allows smaller countries, in particular, to participate in the advantages that larger countries often grant to each other, whereas on their own, smaller countries would often not be powerful enough to negotiate such advantages by themselves.

Granting MFN has domestic benefits: having one set of for all countries simplifies the rules and makes them more transparent. Theoretically, if all countries in the world confer MFN status to each other, there will be no need to establish complex and administratively costly rules of origin to determine which country a product (that may contain parts from all over the world) must be attributed to for customs purposes. However, if at least one nation lies outside the MFN alliance, then customs cannot be done away with.

tariffs

MFN restrains domestic special interests from obtaining measures. For example, butter producers in country A may not be able to lobby for high tariffs on butter to prevent cheap imports from developing country B, because, as the higher tariffs would apply to every country, the interests of A's principal ally C might get impaired.

protectionist

Trade experts consider MFN clauses to have the following benefits:

As MFN clauses promote non-discrimination among countries, they also tend to promote the objective of free trade in general.