MFN is a standard of treatment which has been linked by some to the principle of the equality of States; the prevailing view is that a MFN obligation exists only when a treaty clause creates it. In the absence of a treaty obligation (or for that matter, an MFN obligation under national law); nations retain the possibility of discriminating between foreign nations in their economic affairs.
Most favored nation (MFN), also called Normal trade relations in the United States; is a status awarded by one nation to another in international trade. Somewhat contradictorily, it does not confer particular advantages on the conferring nation, but means that the receiving nation will be granted all trade advantages, such as low tariffs that any third nation also receives. In effect, having MFN status means that one’s nation will not be treated worse than anyone else’s nation, as reflected by the American term. The members of the World Trade Organization, which include all developed nations, accord MFN status to each other. Exceptions exist for preferential treatment of developing countries, regional free trade areas and customs unions. Together with the principle of national treatment, MFN is one of the cornerstones of WTO trade law.
Under the WTO agreements, countries cannot normally discriminate between their trading partners. 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. This principle is known as most-favoured-nation (MFN) treatment. It is so important that it is the first article of the General Agreement on Tariffs and Trade (GATT); which governs trade in goods. MFN is also a priority in the General Agreement on Trade in Services (GATS) (Article 2) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) (Article 4); although in each agreement the principle is handled slightly differently. Together, those three agreements cover all three main areas of trade handled by the WTO.
Some exceptions are allowed. For example, countries can set up a free trade agreement that applies only to goods traded within the group — discriminating against goods from outside. Or they can give developing countries special access to their markets. Or a country can raise barriers against products that are considered to be traded unfairly from specific countries. And in services, countries are allowed, in limited circumstances, to discriminate. But the agreements only permit these exceptions under strict conditions. In general, MFN means that every time a country lowers a trade barrier or opens up a market; it has to do so for the same goods or services from all its trading partners — whether rich or poor, weak or strong.
The Background of Rules: Most-Favoured-Nation Treatment (MFN)
“Most-Favoured-Nation treatment” or “MFN,” which requires Members to accord the most favourable tariff and regulatory treatment given to the product of any one Member at the time of import or export of “like products” of all other Members, is one of the bedrock principles of the WTO. Under the Most-Favoured-Nation rule, should WTO Member state A agree in negotiations with state B, which needs not be a WTO Member, to reduce the tariff on the same product X to five percent, this same “tariff rate” must also apply to all other WTO Members as well. In other words, if a country gives favourable treatment to one country regarding a particular issue, it must handle all Members equally regarding the same issue.
The idea of Most-Favoured-Nation treatment in and of itself has a long history. Prior to the GATT, an MFN clause was often included in bilateral trade agreements, and as such it contributed greatly to the liberalization of trade. However, in the 1930s, several measures that limited the functioning of the Most-Favoured-Nation principle were taken. It is said that these measures led to the division of the world economy into trade blocs.
Having learned from this mistake, after World War II, the unconditional Most-Favoured-Nation clause was then included in the GATT, on a multilateral basis, and has contributed to the stability of trade around the world. Against this background; the MFN principle in particular must be observed as a fundamental principle for sustaining the multilateral free trade system. Regional integration and related exceptions need to be carefully administered so as not to undermine the MFN principle as a fundamental principle of the WTO.
Trade experts consider MFN clauses to have the following benefits:
- A country that grants MFN on imports will have its imports provided by the most efficient supplier. This may not be the case if tariffs differ by country.
- 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 tariffs for all countries simplifies the rules and makes them more transparent. It also lessens the frustrating problem of having to establish 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.
- MFN restrains domestic special interests from obtaining protectionist measures. E.g., 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.
As MFN clauses promote non-discrimination among countries, they also tend to promote the objective of free trade in general. However, as MFN rules may conflict with other objectives such as; regional economic integration (e.g. in NAFTA or the EU), trade agreements usually allow for exceptions
GATT members recognized in principle that the most favoured nation rule should be relaxed to accommodate the needs of developing countries; and the UN Conference on Trade and Development (est. 1964) has sought to extend preferential treatment to the exports of the developing countries. Another challenge to the most favoured nation principle has been posed by regional trading groups such as; the European Union, which have lowered or eliminated tariffs among the members; while maintaining tariff walls between member nations and the rest of the world.
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Written By: Abhishek Khare Advocate