Most favoured nation

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.^[1]

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.^[2] 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.

History

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.^[3] 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 US granted "most favoured nation" trading status to Britain.

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.

Benefits

Trade experts consider MFN clauses to have the following benefits:

• Increases trade creation and decreases trade diversion. A country that grants MFN on imports will have its imports provided by the most efficient supplier if the most efficient supplier is within the group of MFN. Otherwise, that is, if the most efficient producer is outside the group of MFN and additionally, is charged higher rates of tariffs, then it is possible that trade would merely be diverted from this most efficient producer to a less efficient producer within the group of MFN (or with a tariff rate of 0). This leads to economic costs for the importing country, which can outweigh the gains from free trade.
• 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. Theoretically, if all countries in the world confer MFN status to each other, there will be no need to establish complex and administratively costly 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. However, if at least one nation lies outside the MFN alliance, then customs cannot be done away with.
• MFN restrains domestic special interests from obtaining protectionist 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 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.^[4]: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.

Specific countries' policies

United States

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 and China's serious and continuous persecution of human rights.^[5] 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.^[6] At the urging of Vice President Joe Biden,^[7] the Jackson-Vanik amendment was repealed on December 14, 2012.^[8]

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.^[9] 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.

India

MFN status to Pakistan, Bangladesh and Vietnam,but review on withdrawl MFN status of Pakistan .^[10]

Pakistan

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 India.

In contract law

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.^[11] 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.^[12]

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.^[13]

European Union

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.

See the attached table for a comparison between the alternative models to EU membership, which shows the rights and restrictions of a MFN country against other EU member states and non-EU countries.

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.

In January 2014, the UK competition regulator, the Office of Fair Trading (“OFT”) accepted binding commitments from leading on-line booking platforms, Expedia and Booking.com to alter the way they operated their MFN clauses with a major hotel chain International Hotel Group. The decision is being appealed by the price comparison website Skyscanner,^[14] and supported by online travel agent, Skoosh.

See also

• Group of Two
• National Treatment
• Commercial treaty
• Prerogative

References

Further reading

• Davey, W. J.; Pauwelyn, J. (2000). "MFN-Unconditionality". In Cottier, T.; Mavroidis, P. C. Regulatory Barriers and the Principle of Non-Discrimination in World Trade Law: Past, Present, and Future. Ann Arbor: University of Michigan Press. ISBN 0472111000. 

External links

• Most-Favoured-Nation Clause – Bibliographies on the topics of the International Law Commission (no. 10 in the list) (UNOG Library)
• World Bank's MFN Weighted Average Tariff World level for various products from 2008 to 2012
• ITC's Market Access Map, an online database of customs tariffs and market requirements.