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In international economic relations and international politics,most favoured nation (MFN) is a status or level of treatment accorded by onestate to another ininternational trade.[1] 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 lowtariffs or highimport 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 inbilateral investment treaties include only substantive rules or also procedural protections.[2] The members of theWorld Trade Organization (WTO) agree to accord MFN status to each other. Exceptions allow for preferential treatment ofdeveloping countries, regionalfree trade areas andcustoms unions.[3] Together with the principle ofnational treatment, MFN is one of the cornerstones of WTOtrade law.
"Most favoured nation" relationships extendreciprocal bilateral relationships following both theGeneral Agreement on Tariffs and Trade (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. Thenon-discriminatory component of GATT/WTO applies areciprocally negotiated privilege to all members of GATT/WTO without respect to their status in negotiating the privilege.
Most favoured nation status is given to an international trade partner to ensure non-discriminatory trade between all partner countries of the WTO. A country which provides MFN status to another country has to provide concessions, privileges, and immunity in trade agreements. It is the first clause in the GATT. Under rules of WTO, a member country is not allowed to discriminate between trade partners and if a special status is granted to one trade partner, the country is required to extend it to all members of WTO. In a nutshell, MFN is a non-discriminatory trade policy as it ensures equal trading among all WTO member nations rather than exclusive trading privileges.
The most favoured nation status starts to appear in the 18th century, when the division of conditional and unconditional most favoured nation status also began.[1] A 1778 trade treaty between the United States and France was a prominent early examples of a conditional most-favoured nation clause.[1] It was common in subsequent trade treaties made by the US.[1][4][5][6][7][8] By the mid-19th century, it was heavily used in trade treaties between European states and by Latin American states and Japan.[1]
In the early days ofinternational 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. In theTreaty of Madrid (1667), Spain granted England "most favoured nation" trading status.[9] With theJay Treaty in 1794, the US also granted the same to Britain. In theJoseon–United States Treaty of 1882, the Korean kingdomJoseon was compelled by the United States to give it most favoured nation status.[10]
AfterWorld War II,tariff andtrade agreements were negotiated simultaneously by all interested parties through theGeneral Agreement on Tariffs and Trade (GATT), which ultimately resulted in theWorld Trade Organization in 1995. The WTO requires members to grant one another "most favoured nation" status. A "most favoured nation" clause is also included in mostbilateral investment treaties concluded between capital exporting and capital importing countries after World War II.[citation needed]
Trade experts consider MFN clauses to have the following benefits:[citation needed]
As MFN clauses promote non-discrimination among countries, they also tend to promote the objective offree trade in general.
GATT members recognized in principle that the "most favoured nation" rule should be relaxed to accommodate the needs ofdeveloping countries, and theUN Conference on Trade and Development (established in 1964) has sought to extend preferential treatment to the exports of the developing countries.[11]: fol.93
Another exception to the "most favoured nation" principle has been posed by regionaltrade blocs such as theEuropean Union and theNorth 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 regionaleconomic integration.[citation needed]
WTO rules allow any country to revoke the MFN status that it had previously accorded to another: in particular, Article 21 (National Security) allows it to do so without further explanation.[12]
In February 2019, following the2019 Pulwama attack that killed over 40 CRPF personnel, India withdrew the MFN status that it had accorded to Pakistan.[12]
In March 2022, in response to the2022 Russian invasion of Ukraine, theG7 countries resolved jointly to withdraw 'most favoured nation' status fromRussia and to impose punitivetariffs.[13] In a statement, the group declared that "Russia cannot grossly violate international law and expect to benefit from being part of the international economic order".[14]
As per the obligation under their World Trade Organization (WTO) treaties of accession, the member countries of WTO automatically extend most favoured nation (MFN) status to each other unless otherwise specified in the agreement or schedule notified to the WTO by that member country. Pursuant to that provision,India has extended MFN status for goods to most member countries of WTO.[citation needed]
Within theSouth Asian Association for Regional Cooperation (SAARC),Bangladesh,Maldives,Nepal,Pakistan andSri Lanka are members of the WTO and all exceptingPakistan have extended MFN status to India,[citation needed] which had extended MFN status to all SAARC countries. In 2019, India revoked its MFN status towardsPakistan.[12] So far as exception to MFN status (if any) is concerned, each member country has indicated the same services in its schedule of services commitments, as notified to the WTO.[citation needed]
Amost favoured nation clause (also called amost favoured customer clause ormost 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.[15] 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.[16]
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.[17]
The most favoured nation clause can also be included in an agreement between a state and a company or an investor. This involves the provision of special privileges and advantages although the state cannot use contractual mechanisms to avoid its MFN treatment obligations with other countries.[18] Unlike the relationship among states where a nation accorded an MFN status cannot be treated less advantageously than another, the host nation does not breach MFN treatment if it provides different privileges to different investors. TheUnited Nations Conference on Trade and Development clarified this when it stated that "a host country cannot be obliged to enter into an individual investment contract" and that "freedom of contract prevails over the MFN standard."[19] This general principle, however, is not absolute.[18]
The current EU competition law position is that MFN clauses will infringe Article 101(i) if in the individual circumstances of the case result in an appreciable adverse effect on competition in the European Union. This is likely to happen when the parties to the agreement have substantial market power.
It is recognised by EU courts and regulators that such clauses are widely used in a number of industries including most topically with online travel agents. However the regulatory tide in the EU appears to be turning against the use of these clauses. In a number of recent EU cases in the UK and Germany, MFNs have been condemned when used by companies with significant market power.[citation needed]
In its multiform variations of phrasing this clause provides in effect that each of the contracting parties shall grant to the other any privilege or favor of commerce, navigation, or other specified matters, which it grants or may thereafter grant to third countries. The object of such a provision is to assure each of the contracting parties that its economic interests in the other country will not be discriminated against in comparison with the treatment given to the economic interests of other foreign countries.
