Most Favoured Nation Status

Most favoured nation (MFN) status provides that for all countries that are members of the World Trade Organization (WTO), all foreign suppliers should be treated equally and without discrimination in respect of all tariffs and other charges and the rules and formalities connected with imports and exports. In effect, MFN says that within the WTO, a member country cannot have any favorite countries for which it cuts a special trade deal.

Alternatively, a member country cannot punish another member country by giving it a worse trade deal. The basic premise is that a member country cannot treat any one member less favorably than any other member on the conditions of goods or services entering its country. MFN ensures that each member country is afforded the same terms of trade.

MFN is at the heart of the WTO's rules for international commerce and has been part of the modern world trade system since the inception of the General Agreement on Tariffs and Trade (GATT) in 1947. With the beginning of the WTO in 1994, member nations were bound by MFN commitments for goods (GATT, Article I), services (General Agreement on Trade in Services [GATS], Article II), and intellectual property (Trade-Related Aspects of Intellectual Property Rights [TRIPS], Article 4).

MFN has been a very powerful way of liberalizing the world trading system. It has two wide-ranging effects. First, in certain cases, it multilateralizes bilateral or “minilateral” (a few countries) negotiations. Generally, the toughest trade talks are between major supplier countries and major consumer countries. That is, if India is a major supplier of software and the European Union (EU) is a major consumer of such software, their negotiators will spend a long time considering the terms of trade, including other India-EU international commerce. Likewise, India may be a major importer of foods. Once a deal is struck, say the EU decides to cut its tariffs on imported software by 50% and to allow Indian software engineers (service providers) easier access into the EU, while in return, India lowers its tariff 20% on imported wheat, corn, and wine, all other members states of the WTO receive the benefits of the deal. In this case, other nations that export software, such as the United States, Israel, Japan, and others, now can enjoy a 50% reduction in the tariff levels into the EU. Likewise, countries such as Argentina and Brazil that export high quantities of grains and Australia, New Zealand, and the United States that export large volumes of wine now have the lower rate into India. These other nations in effect take a “free ride” from the hard work of the Indian and European negotiators and enjoy the outcome of the negotiations in the form of new opportunities for their country's products and services into these markets. So in effect, MFN takes something that is bilateral (India-EU) and makes it multilateral by extending the benefits to all member states.

There is a second element of MFN related to bilateral or minilateral negotiations. The starting point, [Page 1447]here, is a multilateral negotiation among the 149 member states (as of December 2005) of the WTO. While it may be useful to get each country's input as to how to handle each product, service, intellectual property, foreign direct investment, labor, environmental, and other issues, it is very difficult for the 149 members to have such discussions on each item of trade. If inclusion was mandated, the sheer volume of work and number of items would more than likely grind the WTO to a stop. MFN simplifies matters by allowing those countries that have a big stake in a sector or in another trade area (say the general receipt of foreign direct investment or intellectual property rules over medicines for epidemic diseases) to come together in smaller-sized groups. There is much give and take in these smaller negotiations because trade negotiators generally have a mercantilist view that if they reduce a tariff they are “giving up something” and therefore must “get something in return” such as better access into the foreign market. That said these smaller negotiations generally have a greater chance to succeed than negotiations among all the countries together. MFN assures that every member state enjoys the fruits of these smaller-scale negotiations.

...