Most-Favored Nation Principle

Since Bretton Woods, the most-favored nation (MFN) principle has been identified with the nondiscrimination obligation contained in Article 1, Paragraph 1 of the General Agreements on Tariffs and Trade (GATT). Although a number of exceptions limit its scope, this bedrock of international trade law requires that national trade policy afford equal treatment to the products of all World Trade Organization (WTO) members.

The MFN is often seen as an indispensable component of liberal practice because it facilitated the GATT negotiations that have steeply reduced global trade barriers since 1948. Because the “multilateralism” of the MFN eliminates the preferential bilateral arrangements that contribute to tensions among trade competitors, it also has been embraced as a step toward international peace by advocates of the argument known as pacific liberalism.

It is therefore ironic that the MFN clause has been a common component of international trade [Page 576]treaties since at least the early seventeenth century, when it was adopted as an element of mercantilism, not liberalism. Representative is Article II of the first commercial treaty of the United States, signed with France in 1778, in which the parties “engage mutually not to grant any particular favor to other nations, in respect of commerce and navigation, which shall not immediately become common to the other party.” In that era, in which trade agreements were bilateral and episodic, the clause protected the signatory of one agreement from the erosion of benefits by a later treaty that conveyed more favorable treatment to another trade competitor. In effect, it was used jealously to guard the status of a mostfavored nation by guaranteeing that it would automatically receive privileges at least as favorable as any other.

As it became embodied in global treaties with an increasingly universal membership, and as the exceptions to it multiplied, MFN status became a misnomer. For example, members of regional trade organizations such as the European Union (EU) and North American Free Trade Agreement (NAFTA) enjoy tariffs lower than those of so-called most-favored nations. So, too, do most poor countries under provisions of the Generalized System of Preferences permitted as part of the differential treatment accorded them by GATT since the 1960s. Rather than guaranteeing the best treatment, MFN now merely prevents the worst. In 1998, for example, legislation changed the designation in American trade policy to normal trade relations (NTR), status denied a mere handful of nations by specific legislation: Cuba, Laos, and North Korea. Under U.S. trade law, all nations possess NTR status unless specifically exempted, and even then, waivers are frequently granted. The most famous were the annual U.S. Congressional votes that authorized NTR for China before its eventual accession into the WTO, usually after extensive airing of various grievances concerning Chinese human rights and trade practices.