Most Favored Nation Meaning
The most Favored Nation (MFN) refers to a special clause of the world trade organization (WTO) applicable to its members for providing equal trading opportunities to all its member countries. WTO does it to promote equal trading opportunities, especially for the smaller and developing nations. As a result, MFN has become a system of fair, undistorted, and open competition.
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WTO advocates gradual and progressive liberalization of trade between its members. As a result, developing nations have a longer duration to fulfill MFN obligations. It promotes economic reforms and non-discriminatory trade policies amongst WTO member countries. It encourages the lowering of trade barriers. MFN helps nations create jobs, stabilize business environments, and maintain economic stability.
Table of contents
- Most favored nation meaning
- Most Favored Nation Clause Explained
- Principles
- Example
- Frequently Asked Questions (FAQs)
- Recommended Articles
Key Takeaways
- The most favored nation clause means granting an equal trading opportunity to every member state of WTO while granting to any of the nations by a member.
- 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.
Most Favored Nation Clause Explained
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 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.
Types
Two different types of MFN exist:
#1 – Conditional
It has the following provisions:
- 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 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 as per the 1948 General Agreement on Tariffs and Trade (GATT) and (WTO).
Although the U.S. 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.
History
Organizations like WTO have used the MFN clause to prepare trade treaties for hundreds of years. For example, a World Trade Organization 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 U.S. embargo, are the only nations that are now not eligible for normal trade relations, or most favored nation, U.S. import duty rates.
Principles
The principle of MFN 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. The WTO made the main principle of MFN.
Moreover, WTO 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:
- Treat 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.
- Free trade agreement between member countries of special groups overrules MFN.
- Give special access to developing economies.
- Raising barriers against products traded unfairly by some countries.
- To treat local and globally produced goods at par are treated nationally.
- National treatment gets applied only once the product has entered the market.
- However, import duty over such imported products does not violate national treatment.
Example
Let us look at the most favored nation example to interpret the principle easily. 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.
Advantages & Disadvantages
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:
- Exports costs reduce: It reduces Red tape. In addition, since all imports are the same, different tariffs, duties, and tax calculations are unnecessary.
- Competition increases: Trade protectionism‘s negative consequences 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.
- 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 are the following –
- 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.
- 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 World Trade Organization.
- 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.
Frequently Asked Questions (FAQs)
It is a clause in WTO under the name of MFN where all nations become equal in terms of trading benefits.
It means the giver of the MFN and the receiver have come to an understanding to open their markets for each other’s benefit. They act without any restriction on other countries of the same.
American senate voted in favor of granting MFN to China on Sep 19, 2000, under the regime of President Clinton of the United States.
It is a clause to liberalize the world economies, albeit slowly, so that every nation has access to other markets without any discrimination.
Recommended Articles
This article has been a guide to Most Favored Nation and its meaning. Here, we explain it in detail with its types, principles, example, advantages & disadvantages. You may find some useful articles here –
- NAFTA
- Non-Tariff Barriers
- Trade Agreement
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