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In international economic relations and international politics, most favoured nation (MFN) is a status or level treatment accorded by one state to another in international trade. The term means the country which is the recipient of this treatment must, nominally, receive equal trade advantages as the "most favored nation" by the country granting such treatment. (Trade advantages include low tariffs or high import quotas.) In effect, a country that has been accorded MFN status may not be treated less advantageously than any other country with MFN status by the promising country.

The members of the World Trade Organization (WTO) agree to accord MFN status to each other. Exceptions allow 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.

Most favoured nation relationships contrast with reciprocal bilateral relationships, since in reciprocal relationships a particular privilege granted by one party only extends to other parties who reciprocate that privilege, rather than to all parties with which it has a most favoured nation agreement.

In United States federal law, MFN is termed permanent normal trade relations.

Contents

History

In the early days of international trade, most favoured nation status was usually used on a dual-party, state-to-state basis. A nation could enter into a most favoured nation treaty with another nation. With the Jay Treaty in 1794, the U.S. granted most favoured nation trading status to Britain.

Generally bilateral, in the late 19th and early 20th century unilateral most favoured nation clauses were imposed on Asian nations by the more powerful Western countries (see Open Door Policy). One particular example of "most favoured nation" status is the Treaty of Nanking as part of the series of unequal treaties. It was implemented in the aftermath of the First Opium War between Great Britain and Chinese Qing Dynasty involving the Hong Kong islands.

After World War II, tariff and trade agreements were negotiated simultaneously by all interested parties through the General Agreement on Tariffs and Trade (GATT), which ultimately resulted in the World Trade Organization in 1995. The World Trade Organization requires members to grant one another most favoured nation status. A most favoured nation clause is also included in the majority of the numerous bilateral investment treaties concluded between capital exporting and capital importing countries after the Second World War.

Benefits

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. 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.

As MFN clauses promote non-discrimination among countries, they also tend to promote the objective of free trade in general.

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 (established in 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 trade blocs such as the European Union and the North American Free Trade Agreement (NAFTA), which have lowered or eliminated tariffs among the members while maintaining tariff walls between member nations and the rest of the world. Trade agreements usually allow for exceptions to allow for regional economic integration.

Specific countries' policies

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United States

In the 1990s, continued most favoured nation status for the People's Republic of China created controversy because of its sales of sensitive military technology. China's most favoured nation status was made permanent in 2000. All of the former Soviet states, including Russia, were granted most favoured nation status in 1992. On a bilateral level, however, the United States cannot grant MFN status to some members of the former Soviet Union, including the Russian Federation, because of the Jackson-Vanik amendment. This presents an obstacle to those countries' accession to the WTO.[1]

In the United States, "most favored nation status" has been renamed "permanent normal trade relations" (NTR) in 1998 as all but a handful of countries had this status already, making it a misnomer. (The impetus for the change in terminology came from irritation voiced by some Americans that various totalitarian governments around the world enjoyed being a "most favored nation" of the United States).

The ideas behind MFN policies can first be seen in US foreign policy during the opening of Japan in the mid to late 1850s, when they were included as a clause in the Commercial Treaty of 1858, which signalled the opening of the Japanese market.

Since 1998, the term normal trade relations (NTR) has replaced most-favored-nation in all U.S. statutes. This change was included in section 5003 of the Internal Revenue Service Restructuring and Reform Act of 1998 (P.L. 105-206). However, Title IV of the Trade Act of 1974 (P.L. 93-618) established conditions on U.S. MFN/NTR tariff treatment to certain non-market economies, one of which is certain freedom-of-emigration requirements (better known as the Jackson-Vanik amendment). The act authorizes the president to waive a country’s full compliance with Jackson-Vanik under specified conditions, and this must be renewed by June 3 of each year. Once the president does so, the waiver is automatic unless Congress passes (and sustains a presidential veto of) a disapproval resolution.

MFN/NTR status for China, a non-market economy, which had been originally suspended in 1951, was restored in 1980 and was continued in effect through subsequent annual Presidential extensions. Following the brutal suppression of pro-democracy demonstrators in Tiananmen Square in 1989, however, the annual renewal of China’s MFN status became a source of considerable debate in the Congress; and legislation was introduced to terminate China’s MFN/NTR status or to impose additional conditions relating to improvements in China’s actions on various trade and non-trade issues. Agricultural interests generally opposed attempts to block MFN /NTR renewal for China, contending that several billion dollars annually in current and future U.S. agricultural exports could be jeopardized if that country retaliated. In China’s case, permanent normal trade relations (PNTR) status was accorded in P.L. 106-286. PNTR paved the way for China’s accession to the WTO in December 2000; it provides U.S. exporters of agricultural products the opportunity to benefit from China’s WTO agreements to reduce trade barriers and open its agricultural markets.

See also

References

  • W. J. Davey / J. Pauwelyn, MFN-Unconditionality, in: T. Cottier / P. C. Mavroidis (eds.), Regulatory Barriers and the Principle of Non-Discrimination in World Trade Law: Past, Present, and Future, 2000

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