What is Most Favoured nation status?
Most favoured nation is a term promoted by World Trade Organization (WTO) for promoting free and fair trade among its participating countries. Most favored nation (or MFN) treatment is synonymous with non-discriminatory trade policy as it votes for equal trading practices rather than exclusive trading privileges. For example, if one nation reduces tariffs by 5% for one nation, the MFN clause states that all WTO members will have their tariffs cut by 5% into that nation. Similarly benefits given to one nation should be extended to all other nations, so that they all remain equal. Most favoured nation status mean the countries which are the recipients of this title must receive equal trade advantages (like low tariffs or high import quotas) by the country granting such treatment.
Note: Though Most Favored nation clause seems like giving a special treatment to some nation, but it actually denotes the equal treatment to all countries coming under WTO.
It leads to equal treatment amongst countries and ensures a more stable, predictable, reliable and competitive international trade. MFN status is very desirable between trading partners because it allows each country the greatest access into the other’s domestic markets without the hindrances of tariffs or quotas.
Most favoured nation rules by WTO
According to WTO, all countries must follow these trading system to ensure free and fair trade.
- Nondiscriminatory– A country should not discriminate between its trading partners
- Free– Countries must bring down trade barriers
- Predictable and Investor friendly- Foreign investors and govts should have confident that tariffs and barriers will not be arbitrary raised.
- Competitive– Unfair practices like dumping, subsidies etc should not be allowed
- More friendly to weaker nations – Since there is a wide gap in economics conditions of rich nations and poor nations, there should be some advantages given to weaker nations so that they can compete against stronger nations. MFN status is critically important for smaller and developing countries for several reasons. It gives them access to the larger market. It lowers the cost of their exports since trade barriers are the lowest given. That makes their products more competitive.
Example of MFN status given by countries
MFN status by United states
The United States extends MFN status to all nations except those who have had their status suspended by specific legislation. Of the 29 nations that have had their MFN status suspended at some point in the past, only two remain suspended: Cuba and North Korea. The status of 10 nations — Azerbaijan, Belarus, Kazakhstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan and Vietnam — are still temporary and subject to fulfilling annual conditions.
MFN status by India
In case of goods, India has extended MFN status to member countries of WTO. As regards SAARC countries, Bangladesh, Maldives, Nepal and Sri Lanka are members of WTO and except the Pakistan, these countries have extended MFN status to India. India has extended MFN status to all these SAARC countries. India suspended MFN status to Pakistan due to terrorism activities on its soil in 2019.
This withdrawal of the MFN treatment accorded to Pakistan will effectively close down trade further between the two countries. Pakistan still hasn’t granted India with MFN status, but has chosen to adopt the NDMA with India is due to political mistrust and a history of border conflicts.
Advantage of Most favoured nation principle
- Creation of trade and lowering trade diversion – Countries signed to WTO and providing MFN status to member countries will see increase in trade efficiency and productivity, as it will source material from most efficient countries. They will also be protected with unnecessary trade barriers like tariffs and subsidies, thus making their products competitive.
- Give muscles to smaller and weaker nations – Smaller and weaker nations like Asian and African countries will have support of WTO to negotiate on the trading agreement with stronger developed nations.
- Improve administrative cost – With single rule to all member countries, it will help in improving administrative hassles and cost which will come when we have different set of rules of different countries.
- Avoid protectionism– MFN restrains domestic special interests from obtaining protectionist 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.
Challenges to the most favoured nation principle
Recently there has been rise of regional trade blocks like European Union (EU), North American Free Trade Agreement (NAFTA) and many others, which lower or eliminate tariffs among their member countries. These trade blocs create hindrance in free global trade, as countries will be giving differential treatment to different countries. This is biggest cause of concern for Most favoured nation principle.
There is also a consistent demand that MFN rules should be relaxed to accommodate need of developing nations, and there should be preferential treatment to exports of the developing countries.