MFN Status

The Most Favoured Nations or MFN principle is one of the main pillars of the multilateral trading system. MFN secures non-discrimination among trading countries. If a WTO (World Trade Organisation) member grants a country an advantage, it has to give that same advantage to all WTO members. Members of the World Trade Organisation can be seen as members of a club. The basic essence of the Most Favoured Nations (MFNs) is that each member will grant all other members equal and the best possible treatment it provides to any other trading nation. 

MFN Principle

Principle of “Most Favoured Nation”:- Principle of MFN calls for WTO member nations to give the best possible trade tariff and regulatory treatment provided to any member nation when making an import or export of the “similar products traded” to all other member nations.

• In general, the MFN principle ensures that every time a WTO lowers a trade barrier or opens up a market, it has to do so for the light goods or services from all WTO members without any regard to the member’s economic size or level of development. 
• It is worth noting that the MFN principle requires a WTO member to accord to other WTO members any advantage given to any other country whether or not that country is a member of the WTO. 
• Note that the opposite is not an obligation i.e. a WTO member could give an advantage to other WTO members with no obligation to accord that same treatment or advantage to Non-WTO members. 
• The MFN principle is applicable to the field of trade in goods, trade in services, and trade-related aspects of Intellectual Property Rights (IPR). 
• The MFN provisions extend that all WTO members should enjoy the most favourable treatment for the international trade granted by one country to another.

Background Of MFN

Now, let’s discuss the historical background of MFN. 

• In the early 18th century, the term “Most favoured Nation” commonly known as the MFN clause was used by the US after World War. Its existence can be traced back to the cornerstone of the 1934 US Reciprocal Trade Agreements Act. 
• Before the General Agreement on Tariffs and Trade, an MFN provision was added to bilateral trade agreements and led to its contribution to trade liberalisation. However, countries around the world adopted protectionist steps because of the adverse effect of the world depression (in the 1930s). 
• Several systems to mitigate MFN treatment, including trade-restrictive steps by the British Commonwealth of Nations and the Franc bloc (of France), etc. were introduced. 
• It is believed that these restrictions separated the world economy into trade blocks which ultimately resulted in World War II. Lessons were learned from this mistake and, in the wake of World War II, an unconditional MFN clause was added to the GATT providing global trade stability. It was then succeeded by the WTO. 

Economic Implications of MFN

• Increased Efficiency in the World Economy:- MFN treatment makes it possible for the WTO member nations to import from the most efficient supplier nation on the basis of the principle of comparative advantage.
• Stabilisation of the Multilateral Trading System:- The MFN rule requires that favourable treatment granted to one country must be granted to all other countries. MFN boosts predictability, thereby, increasing trade and investment by stabilising the free trade policy.
•  Reduction of the Cost of Maintaining the Multilateral Trading System:- MFN reduces the cost of maintaining the multilateral trading system as the equal treatment demanded by the MFN principle tends to act as a force for unifying treatment at the most advantageous level (for trade that means the most liberal level).

Exception To MFN

1. Quotas:- When exceptionally permitted subject to MFN obligation. GATT Article XIV permits discriminatory administration of quotas in case of balance of payment problems. It enables members to target exports and imports to maximise earnings and retention of convertible foreign currencies. In practice, it is insufficient to correct the balance of payment problems.
2. Waivers:- If a member has difficulties meeting its obligations under some exceptional circumstances that have been defined, this exception of waivers can be requested. It is granted by the Ministerial Conference or General Council (by consensus) approved primarily to benefit developing countries. As per the June 1999 General Council Waiver decision on Preferential Tariff Treatment, developed countries are permitted to provide such preferential tariff treatment on a generalized, non-reciprocal, and non-discriminatory basis to least-developed countries on a “non-discriminatory basis” extended until 2029 in October 2019. 

Conclusion

We have so far discussed in this article the important points of the Most Favoured Nations Principle. We have also discussed the background of MFN that can be traced back prior to the General Agreement on Trade and Tariffs. The exceptions to MFN (namely quotas and waivers) have also been covered.