Most favoured nation (or most favored nation, MFN) is a term used in international trade. It refers to a relationship between nations as trading partners, with respect to exports by one nation that are imported by the other. A most favoured nation clause is a clause in a trade agreement between two nations providing that each will extend to the other any trading privileges it extends to third nations. Most favoured nation clauses are generally subject to exceptions for free trade areas and customs unions.

History

In the beginning, most favoured nation 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).

After the 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. In practice, this could be circumvented by highly restrictive non-tariff trade barriers. This is why the WTO prefers tariffs to non-tariff barriers.

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.

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 China sparked U.S. controversy because of its sales of sensitive military technology and its use of prison labor, 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.

Normal Trade Relations of the United States

In the United States, "most favoured nation status" is now known as Normal Trade Relations, as all but a handful of countries have this status. (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 favoured nation" of the United States.)

Criticism

The term is somewhat misleading, since it merely implies equal treatment rather than any sort of privileged treatment. If a country has been given most favoured nation status by a trading partner, its exports to that partner will face tariffs that are no higher and no lower than tariffs faced by any other country that has been given most favoured nation status by that same trading partner. Thus, all parties with most favoured nation status enjoy the same, equal, most favourable possible tariff treatment offered by the given trading partner.

The clause ensures equal commercial opportunities, especially concerning import duties and freedom of investment.

Such a wide exchange of concessions is intended to promote free trade, although there has been criticism of the principle of equal trading opportunities on the grounds that free trade benefits the economically strongest countries.