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In international economic relations and international politics, "most favoured nation" (MFN) is a status or level of treatment accorded by one state to another in international trade. The term means the country which is the recipient of this treatment must, nominally, receive equal trade advantages as the "most favoured nation" by the country granting such treatment. (Trade advantages include low tariffs or high import quotas.) In effect, a country that has been accorded MFN status may not be treated less advantageously than any other country with MFN status by the promising country. There is a debate in legal circles whether MFN clauses in bilateral investment treaties include only substantive rules or also procedural protections.
The members of the World Trade Organization (WTO) agree to accord MFN status to each other. Exceptions allow 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.
"Most favoured nation" relationships extend reciprocal bilateral relationships following both GATT and WTO norms of reciprocity and non-discrimination. In bilateral reciprocal relationships a particular privilege granted by one party only extends to other parties who reciprocate that privilege, while in a multilateral reciprocal relationship the same privilege would be extended to the group that negotiated a particular privilege. The non-discriminatory component of the GATT/WTO applies a reciprocally negotiated privilege to all members of the GATT/WTO without respect to their status in negotiating the privilege.
The earliest form of the most favoured nation status can be found as early as in the 11th century. Today’s concept of the most favoured nation status starts to appear in the 18th century, which is when the division of conditional and unconditional most favoured nation status also began. 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. With the Jay Treaty in 1794, the U.S. granted "most favoured nation" trading status to Britain.
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 Chinese Qing Dynasty involving the Hong Kong islands. During the Imperialism, some people viewed the most favoured nation status as a tool for Imperialist powers to plunder other weaker states’ economies. For instance, a Korean history textbook explains that US-Chosun Treaty of Amity and Trade in 1882 is an unequal treaty primarily because the treaty includes the most favoured nation article, which allowed the US to gain unfair benefits from the Chosun Dynasty. However, some people viewed the most favoured nation status as a safety net to protect the minimum interests of the weaker states. This is because superpowers of that time would have been able to simply forcibly extort everything from the weaker states without the most favoured nation status anyway.
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 in 1994. 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.
Trade experts consider MFN clauses to have the following benefits:
As MFN clauses promote non-discrimination among countries, they also tend to promote the objective of free trade in general.
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 (established in 1964) has sought to extend preferential treatment to the exports of the developing countries.:fol.93
Another challenge to the "most favoured nation" principle has been posed by regional trade blocs such as the European Union and the North American Free Trade Agreement (NAFTA), which have lowered or eliminated tariffs among the members while maintaining tariff walls between member nations and the rest of the world. Trade agreements usually allow for exceptions to allow for regional economic integration.
|The following text needs to be harmonized with text in Permanent normal trade relations.|
In the 1990s, continued "most favoured nation" status for the People's Republic of China by the United States created controversy because of its sales of sensitive military technology. China's MFN status was made permanent on December 27, 2001. All of the former Soviet states, including Russia, were granted MFN status in 1996. On a bilateral level, however, the United States could not grant MFN status to some members of the former Soviet Union, including the Russian Federation, because of the Jackson-Vanik amendment. This presented an obstacle to those countries' accession to the WTO. At the urging of Vice President Joe Biden, the Jackson-Vanik amendment was repealed on December 14, 2012.
In 1998, in the United States, "most favoured nation status" has been renamed "permanent normal trade relations" (NTR) as all but a handful of countries had this status already. (The impetus for the change in terminology came from irritation voiced by some Americans that various totalitarian governments around the world enjoyed being a MFN 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.
Since 1998, the term normal trade relations (NTR) has replaced most favoured nation in all U.S. statutes. This change was included in section 5003 of the Internal Revenue Service Restructuring and Reform Act of 1998 (P.L. 105-206). However, Title IV of the Trade Act of 1974 (P.L. 93-618) established conditions on U.S. MFN/NTR tariff treatment to certain non-market economies, one of which is certain freedom-of-emigration requirements (better known as the Jackson-Vanik amendment). The act authorizes the president to waive a country’s full compliance with Jackson-Vanik under specified conditions, and this must be renewed by June 3 of each year. Once the president does so, the waiver is automatic unless Congress passes (and avoids or overturns a presidential veto of) a disapproval resolution.
MFN/NTR status for China, a non-market economy, which had been originally suspended in 1951, was restored in 1980 and was continued in effect through subsequent annual Presidential extensions. Following the massacre of pro-democracy demonstrators in Tiananmen Square in 1989, however, the annual renewal of China’s MFN status became a source of considerable debate in the Congress; and legislation was introduced to terminate China’s MFN/NTR status or to impose additional conditions relating to improvements in China’s actions on various trade and non-trade issues. Agricultural interests generally opposed attempts to block MFN /NTR renewal for China, contending that several billion dollars annually in current and future U.S. agricultural exports could be jeopardized if that country retaliated. In China’s case, Congress agreed to permanent normal trade relations (PNTR) status in P.L. 106-286, President Clinton signed into law on October 10, 2000. PNTR paved the way for China’s accession to the WTO in December 2000; it provides U.S. exporters of agricultural products the opportunity to benefit from China’s WTO agreements to reduce trade barriers and open its agricultural markets.
Pakistan had committed in the past that it would grant MFN status to India. However there are increasing calls in Pakistan to grant the MFN status to China. During the negotiations for the $6.64 billion bailout package from the International Monetary Fund (IMF), Pakistan had given an undertaking that it would take positive steps to grant MFN status to New Delhi.
A most favoured nation clause (also called a most favoured customer clause or most favoured licensee clause) is a contract provision in which a seller (or licensor) agrees to give the buyer (or licensee) the best terms it makes available to any other buyer (or licensee). In some contexts, the use of such clauses may become commonplace, such as when online ebook retailers contract with publishers for the supply of e-books. Use of such clauses, in some contexts, may provoke concerns about anticompetitive influences and antitrust violations, while in other contexts, the influence may be viewed as procompetitive.
One example where most favoured nation clauses may appear is in institutional investment advisory contracts, where if a certain number of conditions are met, one client may be entitled to the lowest fee offered to other clients with a substantially identical investment strategy and the same or lower level of assets under management.