Most Favored Nation

The Most Favored Nation (MFN) status refers to granting similar trade benefits comprising low tariffs, including favorable market access conferred upon its trading partner as per the principle of international trade. It aims to promote non-discriminatory trade practices and equitable treatment between nations.

It also ensures that all trading partners of a country get the same advantage and access to fair competition without any preferential treatment to any of them. Hence, it removes trade barriers and promotes openness plus transparency in global trade. World Trade Organization (WTO) has formulated MFN as its vital principle, which widely enhances international trade relations by creating a level playing field for all its members.

• The most favored nation clause means granting an equal trading opportunity to every member state of WTO.
• It encourages enormous market opportunities for developing and smaller nations at par with other nations. MFN can be of two types- conditional MFN and unconditional MFN.
• The basic principle behind MFN is to provide equal trading opportunities to all nations without discrimination.
• The United States has ratified MFN using the Trade Act of 1974, as MFN supersedes other bilateral trade agreements.

The most favored nation (MFN) clause refers to a special trading status given by one country to another that gets applied to all the other members of the World Trade Organization. It means if a lower trade tariff gets offered to one nation by another, the agreement will offer the same to all other member countries. As a result, almost all nations form a part of the WTO, which supersedes all previous bilateral trade agreements.

This most favored nation clause helps the nations to do the following things -

• First, it increases free trade without any government intervention.
• Second, more minor and developing countries get the opportunity to get favorable trade conditions from more prominent global trade players.
• Third, it makes trade simpler among nations.
• It resolves the complexities of trade laws.
• The economic growth experienced by every nation.
• Most importantly, it discourages the formation of discriminatory trade blocs amongst nations of similar economies, preventing World War 2-like situations.

However, specific legal hurdles still exist in the shape of Case No. ARB/97/7, namely Maffezini v. Spain (2000), despite MFN of WTO.

Thus, this clause has been into existence for many years within the different trade treaties. The clause and its various principles lay the foundation for equal treatment to all the nations or member countries of World Trade Organization. With the introduction of Noter American Free Trade Agreement (NAFTA), the term MFN has is used to describe the position of any import that are non-qualifying, along with tariff.

In the field of law, this term is being widely used to denote that all customers should be treated equally in the eyes of law. However, it is important to note that the only countries who are not included in this status are North Korea and Cuba.  

Thus, this clause has been into existence for many years within the different trade treaties. The clause and its various principles lay the foundation for equal treatment to all the nations or member countries of World Trade Organization. With the introduction of Noter American Free Trade Agreement (NAFTA), the term MFN has is used to describe the position of any import that are non-qualifying, along with tariff.

In the field of law, this most favored nation clause is being widely used to denote that all customers should be treated equally in the eyes of law. However, it is important to note that the only countries who are not included in this status are North Korea and Cuba.  

The most favored nation (MFN) status originates back to 18th-century treaties, which gained significant recognition by establishing the General Agreement on Tariffs and Trade (GATT) in 1947. Moreover, GATT was the predecessor to establishing the WTO.

 Besides, the most favored nation provision framework:

• Promotes non-discriminatory trade practices.
• Creates a level playing field in global trade, and
• Prevents preferential treatment

Thus, the most favored nation clause encourages equal and fair treatment in international trade and helps prevent trade wars or discriminatory trade practices.

WTO has enshrined MFN as its fundamental principle. Currently, it has 164 member nations in its most favored nation list adhering to its MFN framework. The WTO has set dispute settlement mechanisms for its members to ensure compliance with MFN principles amongst its members. It also promotes the liberalization of trade by way of trade negotiations.

Organizations like WTO have used the MFN clause to prepare trade treaties for hundreds of years. For example, a WTO panel determined in September 2020 that the Trump administration had broken WTO regulations by imposing unfair import taxes on $200 billion of Chinese goods.

The Jackson-Vanik amendment to the Trade Act of 1974 in the United States barred non-market economies from receiving the trade advantages of most-favored-nation status because it restricted emigration. The Jackson-Vanik amendment was initially applied to the Soviet Union, China, and Vietnam, among others. China and Vietnam both rescinded the amendment in 2002 and 2006, respectively. The Jackson-Vanik amendment was repealed as it related to Russia in 2012 by the Magnitsky Act, which restored trade links between the two countries.

This amendment is still in effect for Azerbaijan, Belarus, Kazakhstan, Uzbekistan, Tajikistan, and Turkmenistan, subject to an annual presidential waiver. Cuba and North Korea, still subject to a US embargo, are the only nations that are now not eligible for normal trade relations, or most favored nation, US import duty rates.

The principle of most favored nation status relies heavily on the notion that it should treat all country's trading partners equally. In other words, no particular nation gets undue favor. It also means that goods and services emanating from any specific country must not get treated, especially concerning other countries.

WTO, which made the main principle of MFN, does not allow any nation to give preferential treatment to their products and services compared to other countries. The following are the principles of MFN under WTO:

• Treating every country equally in trading without discrimination as per the most favored nation WTO. Free trade agreement between member countries of special groups overrules MFN.
• Preparing free trade agreements between member countries of special groups that overrule MFN.
• Giving special access to developing economies.
• Raising barriers against products traded unfairly by some countries.
• Treating local and globally produced goods at par are treated nationally.
• Applying national treatment only once the product has entered the market. However, import duty over such imported products does not violate national treatment.

However, there are  some cases of most favored nation status, in which the World Trade Organization does not implement the principles of MFN.

• This will happen in case of the trade blocks like United States Mexico Canada Agreement (USMCA) and also the European Union.
• Any trade barrier that is created due to unfair competition and with the aim of stopping it.
• If any trade preference is given to the different developing nations of the world.
• Implementation will not happen even in case of service-related trades.

Therefore, to summarise the above, the main purpose of the most favored nation principle is to ensure that there is a playing field available to all the trading countries which is equal in all respects. The competition levels created by foreign Institutional Investors from different nations who want to set us their business in those countries should go about without any discrimination. This is because any type of adverse and useful discrimination will create the chance of getting a competitive advantage. Thus, investors should also be aware of and avoid any special treatment to any country.

Two different types of MFN exist:

#1 - Conditional 

It offers specific extraordinary scope or limitations in trading between trading members kike regional trade agreements.

Moreover, member countries of WTO have to adhere to the MFN framework, but they can also undertake additional trade agreements to further their trade relations and interests.

It has the following provisions for this most favored nation principle:

• The contractual party receives the concessions freely provided previously to any third party.
• Any concessions obtained in the earlier deal get allowed on comparable terms or by exchanging similar profits.

#2 - Unconditional

It extends equal trading treatment to all trading partners without exceptions. Therefore, below are a few exceptions of the most favored nation principle:

• Free trade agreements and customs unions
• Developing country preferences
• Bilateral agreements
• Waivers and special arrangements
• Trade preference programs

It advocates for the provision of all tariff concessions under the most favored nation pricing given to the third party gets granted to the contracting party as well per the 1948 General Agreement on Tariffs and Trade (GATT) and WTO.

Although the US has also participated in the MFN of WTO, it has specific conditions. For example, the Jackson-Vanik amendment has applied to MFN via the Trade Act of 1974, which prohibited all trade benefits to non-marketing economies like the Soviet Union in the cold war era and currently in Azerbaijan, Uzbekistan, Kazakhstan, Tajikistan, Turkmenistan, and Belarus. Moreover, China got the most-favored-nation status by America in 2000.

Let us use a few examples to understand the topic.

Example #1

Let us say the US and Mexico are engaged in international trade. Both countries have agreed to the most favored nation status under the WTO. Hence, America, looking to promote its manufacturing sector, decided to lower import tariffs on textiles from Singapore to 5%.

According to the most favored nation provision, the USA must extend the same % tariff rate of 5% to all other trading partners with MFN status, including Mexico. Therefore, this ensures that Mexico is treated equally favorably as Singapore regarding import tariffs on textiles.

As a result, Mexico benefits from the reduced tariffs, making its textile exports to the USA more competitive. Hence, this principle prevents discrimination and ensures that trade advantages granted to one trading partner are extended to all partners, promoting fairness and equal treatment in international trade.

Example #2

President Joe Biden stated on March 11, 2022,  that the goal of the United States, the G7 countries, and the European Union is to deprive Russia of its “most favored nation” status. Biden needs Congressional approval since he can’t accomplish this on his own.

As such, Russia is regarded as the MFN in the WTO, which grants it equal access to all WTO members’ markets and ensures equivalent tariffs.

According to the World Trade Organisation, it also pertains to anti-discrimination, which forbids nations from discriminating against their trading partners. Hence, some exclusions are permitted under the provision, such as separate free trade agreements or preferential market access for developing nations.

The House of Representatives passed a bill to forbid the import of Russian coal, natural gas, and oil. Moreover, an amendment to the law that would have permanently suspended normal trade relations between Russia and Belarus was included in an earlier draught.

Example #3

South Korea has given MFN to all WTO members. Hence it charges tariffs on imported goods from all the member countries equally. But Canada does not pay any tariff on the goods it exports to South Korea because of a free trade agreement that supersedes the MFN as per WTO principles.

Let us look at the advantages and disadvantages of MFN:

Advantages

The modern world has become interconnected with each other via trade. Every country has accepted globalization as the mainstay of business and trade. Under this scenario, MFN plays an essential role in providing benefits to global trade in the following manner:

1. Exports costs reduce: It reduces Red Tape, i.e., excessive trade regulations. In addition, since all imports are the same, different tariffs, duties, and tax calculations are unnecessary.
2. Competition increases: The negative consequences of trade protectionism are lessened due to the status. As a result, domestic industries find the need to secure their protected status, yet doing so might make them stronger and more competitive.
3. Access to a bigger market: The nation's industries can enhance their goods by catering to this sizable market. To accommodate the rising demand, their businesses will expand. They gain from the economies of scale. Their exports grow as a result, and their nation's economy also grows.

Disadvantages

However, this clause comes with certain disadvantages too. They include the following:

1. Can be a victim of dishonest business practices: Sometimes, nations provide financial aid to their native industry without checking the fundamental values of the business. Thus, supported businesses can export their goods for low prices. In addition, dumping is a practice that can get a country into an issue with the WTO. 
2. Same benefits to all nations: Another MFN status disadvantage is that the nation must provide the same trade benefits to all other MFN agreement's members or the WTO.
3. High import taxes for developing nations: The WTO has received reports from developing nations stating that they continue to deal with tariff peaks on goods like textiles, clothes, and fish products.

Let us use the table below to know the difference between the two: 

Thus, this principle of most favored nation treatment forms the main foundation of the multilateral trading process that came into existence after World War II. It curbs all kinds of problems and frictions that are related to bilateral trades. It gives a proper framework of rules and regulations in which the right to trde will not depend on economic and political capacity of a nation. Rather, all participants of the system will be able to access the trade related help and conditions that are given to one nation. Therefore, all participants will benefit from the most favored nation treatment, without any negotiation.

This article has been a guide to Most Favored Nation & its meaning. We explain its principles, examples, history, advantages & disadvantages. You may find some useful articles here -

• NAFTA
• Non-Tariff Barriers
• Trade Agreement