Most favoured nation
Encyclopedia
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 quota
s.) 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 BIT
's 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 area
s and customs union
s. 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.
, 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 Asia
n 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.
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.
As MFN clauses promote non-discrimination among countries, they also tend to promote the objective of free trade
in general.
Another challenge to the most favoured nation principle has been posed by regional trade bloc
s 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
.
created controversy because of its sales of sensitive military technology
. China's most favoured nation status was made permanent in 2000. All of the former Soviet states
, including Russia
, were granted most favoured nation status in 1992. On a bilateral level, however, the United States
cannot grant MFN status to some members of the former Soviet Union
, including the Russian Federation, because of the Jackson-Vanik amendment
. This presents an obstacle to those countries' accession to the WTO.
In the United States
, "most favored nation status" has been renamed "permanent normal trade relations" (NTR) in 1998 as all but a handful of countries had this status already, making it a misnomer. (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 favored nation" 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-favored-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 sustains 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.
Sovereign state
A sovereign state, or simply, state, is a state with a defined territory on which it exercises internal and external sovereignty, a permanent population, a government, and the capacity to enter into relations with other sovereign states. It is also normally understood to be a state which is neither...
to another in international trade
International trade
International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...
. 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 quota
Import quota
An import quota is a type of protectionist trade restriction that sets a physical limit on the quantity of a good that can be imported into a country in a given period of time....
s.) 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 BIT
Bilateral Investment Treaty
A bilateral investment treaty is an agreement establishing the terms and conditions for private investment by nationals and companies of one state in another state. This type of investment is called foreign direct investment . BITs are established through trade pacts...
's include only substantive rules or also procedural protections.
The members of the World Trade Organization
World Trade Organization
The World Trade Organization is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade , which commenced in 1948...
(WTO) agree to accord MFN status to each other. Exceptions allow for preferential treatment of developing countries
Developing country
A developing country, also known as a less-developed country, is a nation with a low level of material well-being. Since no single definition of the term developing country is recognized internationally, the levels of development may vary widely within so-called developing countries...
, regional free trade area
Free trade area
A free trade area is a trade bloc whose member countries have signed a free trade agreement , which eliminates tariffs, import quotas, and preferences on most goods and services traded between them. If people are also free to move between the countries, in addition to FTA, it would also be...
s and customs union
Customs union
A customs union is a type of trade bloc which is composed of a free trade area with a common external tariff. The participant countries set up common external trade policy, but in some cases they use different import quotas...
s. Together with the principle of national treatment
National treatment
National treatment is a principle in international law vital to many treaty regimes. It essentially means treating foreigners and locals equally. Under national treatment, if a state grants a particular right, benefit or privilege to its own citizens, it must also grant those advantages to the...
, 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.
History
In the early days of international tradeInternational trade
International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...
, 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
Jay Treaty
Jay's Treaty, , also known as Jay's Treaty, The British Treaty, and the Treaty of London of 1794, was a treaty between the United States and Great Britain that is credited with averting war,, resolving issues remaining since the Treaty of Paris of 1783, which ended the American Revolution,, and...
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 Asia
Asia
Asia is the world's largest and most populous continent, located primarily in the eastern and northern hemispheres. It covers 8.7% of the Earth's total surface area and with approximately 3.879 billion people, it hosts 60% of the world's current human population...
n nations by the more powerful Western countries (see Open Door Policy
Open Door Policy
The Open Door Policy is a concept in foreign affairs, which usually refers to the policy in 1899 allowing multiple Imperial powers access to China, with none of them in control of that country. As a theory, the Open Door Policy originates with British commercial practice, as was reflected in...
). One particular example of "most favoured nation" status is the Treaty of Nanking
Treaty of Nanking
The Treaty of Nanking was signed on 29 August 1842 to mark the end of the First Opium War between the United Kingdom of Great Britain and Ireland and the Qing Dynasty of China...
as part of the series of unequal treaties
Unequal Treaties
“Unequal treaty” is a term used in specific reference to a number of treaties imposed by Western powers, during the 19th and early 20th centuries, on Qing Dynasty China and late Tokugawa Japan...
. It was implemented in the aftermath of the First Opium War
First Opium War
The First Anglo-Chinese War , known popularly as the First Opium War or simply the Opium War, was fought between the United Kingdom and the Qing Dynasty of China over their conflicting viewpoints on diplomatic relations, trade, and the administration of justice...
between Great Britain and Chinese Qing Dynasty
Qing Dynasty
The Qing Dynasty was the last dynasty of China, ruling from 1644 to 1912 with a brief, abortive restoration in 1917. It was preceded by the Ming Dynasty and followed by the Republic of China....
involving the Hong Kong
Hong Kong
Hong Kong is one of two Special Administrative Regions of the People's Republic of China , the other being Macau. A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour...
islands.
After World War II
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
, tariff
Tariff
A tariff may be either tax on imports or exports , or a list or schedule of prices for such things as rail service, bus routes, and electrical usage ....
and trade
Trade
Trade is the transfer of ownership of goods and services from one person or entity to another. Trade is sometimes loosely called commerce or financial transaction or barter. A network that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and...
agreements were negotiated simultaneously by all interested parties through the General Agreement on Tariffs and Trade
General Agreement on Tariffs and Trade
The General Agreement on Tariffs and Trade was negotiated during the UN Conference on Trade and Employment and was the outcome of the failure of negotiating governments to create the International Trade Organization . GATT was signed in 1947 and lasted until 1993, when it was replaced by the World...
(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
Bilateral Investment Treaty
A bilateral investment treaty is an agreement establishing the terms and conditions for private investment by nationals and companies of one state in another state. This type of investment is called foreign direct investment . BITs are established through trade pacts...
concluded between capital exporting and capital importing countries after the Second World War.
Benefits
Trade experts consider MFN clauses to have the following benefits:- A country that grants MFN on imports will have its imports provided by the most efficient supplier. This may not be the case if tariffs differ by country.
- MFN allows smaller countries, in particular, to participate in the advantages that larger countries often grant to each other, whereas on their own, smaller countries would often not be powerful enough to negotiate such advantages by themselves.
- Granting MFN has domestic benefits: having one set of tariffs for all countries simplifies the rules and makes them more transparent. It also lessens the frustrating problem of having to establish rules of originRules of originRules of origin are used to determine the country of origin of a product for purposes of international trade. There are two common types of rules of origin depending upon application, the preferential and non-preferential rules of origin...
to determine which country a product (that may contain parts from all over the world) must be attributed to for customs purposes. - MFN restrains domestic special interests from obtaining protectionistProtectionismProtectionism is the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow "fair competition" between imports and goods and services produced domestically.This...
measures. For example, butter producers in country A may not be able to lobby for high tariffs on butter to prevent cheap imports from developing country B, because, as the higher tariffs would apply to every country, the interests of A's principal ally C might get impaired.
As MFN clauses promote non-discrimination among countries, they also tend to promote the objective of free trade
Free trade
Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. 'Free' trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from...
in general.
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 (established in 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 trade bloc
Trade bloc
A trade bloc is a type of intergovernmental agreement, often part of a regional intergovernmental organization, where regional barriers to trade, are reduced or eliminated among the participating states.-Description:...
s such as the European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
and the North American Free Trade Agreement
North American Free Trade Agreement
The North American Free Trade Agreement or NAFTA is an agreement signed by the governments of Canada, Mexico, and the United States, creating a trilateral trade bloc in North America. The agreement came into force on January 1, 1994. It superseded the Canada – United States 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
Economic integration
Economic integration refers to trade unification between different states by the partial or full abolishing of customs tariffs on trade taking place within the borders of each state...
.
United States
In the 1990s, continued most favoured nation status for the People's Republic of ChinaPeople's Republic of China
China , officially the People's Republic of China , is the most populous country in the world, with over 1.3 billion citizens. Located in East Asia, the country covers approximately 9.6 million square kilometres...
created controversy because of its sales of sensitive military technology
Military technology
Military technology is the collection of equipment, vehicles, structures and communication systems that are designed for use in warfare. It comprises the kinds of technology that are distinctly military in nature and not civilian in application, usually because they are impractical in civilian...
. China's most favoured nation status was made permanent in 2000. All of the former Soviet states
Soviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....
, including Russia
Russia
Russia or , officially known as both Russia and the Russian Federation , is a country in northern Eurasia. It is a federal semi-presidential republic, comprising 83 federal subjects...
, were granted most favoured nation status in 1992. On a bilateral level, however, the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
cannot grant MFN status to some members of the former Soviet Union
Soviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....
, including the Russian Federation, because of the Jackson-Vanik amendment
Jackson-Vanik amendment
The Jackson–Vanik amendment is a 1974 provision in United States federal law, intended to affect U.S. trade relations with countries with non-market economies that restrict freedom of emigration and other human rights...
. This presents an obstacle to those countries' accession to the WTO.
In the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, "most favored nation status" has been renamed "permanent normal trade relations" (NTR) in 1998 as all but a handful of countries had this status already, making it a misnomer. (The impetus for the change in terminology came from irritation voiced by some Americans that various totalitarian
Totalitarianism
Totalitarianism is a political system where the state recognizes no limits to its authority and strives to regulate every aspect of public and private life wherever feasible...
governments around the world enjoyed being a "most favored nation" of the United States).
The ideas behind MFN policies can first be seen in US foreign policy during the opening of Japan
Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
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-favored-nation in all U.S. statutes. This change was included in section 5003 of the Internal Revenue Service Restructuring and Reform Act of 1998
Internal Revenue Service Restructuring and Reform Act of 1998
The Internal Revenue Service Restructuring and Reform Act of 1998, also known as Taxpayer Bill of Rights III, , resulted from hearings held by the United States Congress in 1996 and 1997...
(P.L. 105-206). However, Title IV of the Trade Act of 1974
Trade Act of 1974
The Trade Act of 1974 was passed to help industry in the United States become more competitive or phase workers into other industries or occupations.-Fast track authority:...
(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
Jackson-Vanik amendment
The Jackson–Vanik amendment is a 1974 provision in United States federal law, intended to affect U.S. trade relations with countries with non-market economies that restrict freedom of emigration and other human rights...
). 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 sustains 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.