Everything about Most Favoured Nation totally explained
Most favoured nation (MFN), also called
Normal Trade Relations in the
United States, is a status awarded by one
nation to another in
international trade. It means that the receiving nation will be granted all trade advantages - such as low
tariffs - that any other nation also receives. In effect, having MFN status means that one's nation won't be treated worse than anyone else's nation.
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.
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. 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 China
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. 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.
Most favoured nation relationships contrast with
reciprocal 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.
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. 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 (for example in
NAFTA or the
EU), trade agreements usually allow for exceptions.
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.
In the
1990s continued most favoured nation status for the
People's Republic of China sparked U.S. controversy because of its sales of sensitive
military technology and its use of prison labour, and its most favoured nation status was only made permanent in
2000. All of the former
Soviet states, including
Russia, were granted most favoured nation status in
1992. However, on a bilateral level, the
United States can't grant NTR status to some members of the former
Soviet Union, including the
Russian Federation, because the
Jackson-Vanik amendment hasn't yet been repealed by the US Congress (as of December 2007). This presents an obstacle to those countries' accession to the
WTO
In the United States
In the
United States, "most favored nation status" has been renamed
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.
Further Information
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