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The Mystery of Most Favored Nation: How Does It Shape Global Trade?
In today’s global trading system, “most-favored-nation” (MFN) is a ubiquitous yet often misunderstood concept. This treatment is granted by one country to another in international trade, so that the country receiving the treatment obtains equal trade advantages. This means that if a country grants most-favored-nation treatment to another country, then the employer should not treat foreign imports from these countries any differently, such as with lower tariffs or higher import quotas.
Most-Favoured-Nation treatment ensures equal, non-discriminatory trade among trading partners.
In short, Most Favored Nation Treatment is a non-discriminatory trade policy that aims to ensure fair trade among all WTO (World Trade Organization) members. Under WTO rules, if a country grants special treatment to a trading partner, it must extend that treatment to all WTO members.
Historical BackgroundThe concept of most-favored-nation treatment has its roots in early international trade, dating back to the 11th century. Over time, the characteristics of today's most-favored-nation treatment began to emerge in the 18th century. For example, in the Treaty of Madrid in 1667, Spain offered most-favored-nation treatment to Britain. The trade agreements concluded after World War II eventually led to the establishment of GATT and WTO, and required member countries to recognize the importance of most-favored-nation treatment.
"Most-favored-nation treatment" is not only bilateral, but can also be reflected in the multilateral trading system.
Benefits of Most-Favoured-Nation Treatment
Trade experts believe that most-favored-nation provisions help promote trade creation and reduce trade diversion. If a country applies most-favored-nation treatment to imported products, it can obtain products from the most efficient supplier, even if that supplier is not on the MFN list. This helps smaller countries better participate in international trade, as they typically have difficulty gaining the same trade advantages as larger countries.
Most-favored-nation treatment simplifies trade rules, increases transparency, and enables many small countries to share the trade benefits of large countries.
Exceptions
Although most-favored-nation treatment applies to all WTO members in principle, there are still exceptions in practice. For example, GATT members generally treat developing countries more leniently. In addition, some regional trade agreements, such as the European Union and the North American Free Trade Agreement (NAFTA), allow member countries to reduce or eliminate tariffs on each other while maintaining tariff barriers externally.
Withdrawal of Most-Favoured-Nation Treatment
Under WTO rules, any country can withdraw most-favored-nation treatment previously granted to another country. In 2019, India withdrew its MFN treatment to Pakistan due to security issues. Similarly, in 2022 the G7 decided to withdraw most-favored-nation status to Russia due to its invasion of Ukraine.
Specific national policies
The United States' Most Favored Nation Policy
In the 1990s, the United States' most-favored-nation status for China caused a lot of controversy, mainly because of China's problems with military technology and human rights. In 2001, China's MFN status was finally permanently established. Although the United States nominally retains the obligation of most-favored-nation treatment, in reality some former Soviet countries have not been able to obtain this treatment.
India's Most Favoured Nation Policy
Under India's agreement with the WTO, India extended most-favored-nation status to most members and extended it to other countries in the South Asian Organisation for Regional Cooperation (SAARC), except Pakistan.
The future of MFN
As the global trade environment changes, the role of most-favored-nation treatment continues to evolve. As countries balance domestic needs and international pressures through different trade agreements, how will the principles of MFN continue to influence the global trade architecture? Is this still a question worth pondering?
