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. 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 General Agreement on Tariffs and Trade (GATT).

Under rules of the World Trade Organisation (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 the 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.

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, 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. In the Treaty of Madrid (1667), Spain granted England "most favoured nation" trading status.[4] With the Jay Treaty in 1794, the US also granted the same 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 1995. The WTO requires members to grant one another "most favoured nation" status. A "most favoured nation" clause is also included in most bilateral investment treaties concluded between capital exporting and capital importing countries after World War II.

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
Further information: Preferential trading area

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.[5]: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
Main article: 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 and China's serious and continuous persecution of human rights.[6] 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.[7] At the urging of Vice President Joe Biden,[8] the Jackson-Vanik amendment was repealed with Magnitsky Act (which attempts to punish human rights violations without hampering trade) on December 14, 2012.[9]

In 1998, the "most favoured nation status" in the United States has been renamed "permanent normal trade relations" (NTR) as all but a handful of countries had this status already. The country gives preferential treatment to some of its trading partners without this status. This is based on the U.S. Supreme Court interpretation of MFN principle as a mere prohibition to enact discriminatory legislation concerning duties on goods of like character imported from an MFN partner.[10] The court ruled that MFN does not constrain the U.S. from giving out special privileges to other countries.

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.[11] PNTR paved the way for China's accession to the WTO in December 2001; 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

As per the obligation under the World Trade Organization (WTO), the member countries of WTO are automatically extend Most Favoured Nation (MFN) status to each other unless otherwise specified in the agreement or schedule notified to the WTO by the member country. Pursuant to that provision, India has extended MFN status for goods to most member countries of WTO.

Within the South Asian Association for Regional Cooperation (SAARC), Bangladesh, Maldives, Nepal, Pakistan and Sri Lanka are members of WTO and have extended MFN status to India, which has likewise extended MFN status to all SAARC countries except Pakistan. So far as exception to MFN status, if any, in services is concerned, each member country has indicated the same in the schedule of commitments in services notified to WTO. Following the 2019 Pulwama attack in Kashmir, India revoked Pakistan's MFN status on its end.[12]

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.[13] 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.[14]

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.[15]

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.[16] 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. The United 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."[17] This general principle, however, is not absolute.[16]

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.

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.

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See also

References
  1. McCloure, Mike (2011-07-25). "Most Favoured Nation Clauses – No favoured view on how they should be interpreted" Archived 2011-10-07 at the Wayback Machine. Kluwer Arbitration Blog. Retrieved 2011-07-26.
  2. "WTO – Regional Trade Agreements – goods (GATT) provisions". Retrieved 12 May 2016.
  3. Yi, Seong Deong (2004). Commemorative Edition in Honour of Professor Paik, Choong-Hyun on his Retirement : Articles ; Most-Favoured-Nation Treatment: Its Historical Developments and Concept. Vol. 11 No. 1
  4. The Economist: Weekly Commercial Times, Banker's Gazette and Railway Monitor, Volume 1. Economist Newspaper Limited. 1845. p. 551.
  5. Understanding the WTO Handbook at WTO official website. (Note that the document's printed folio numbers do not match the pdf page numbers.)
  6. U.S.-China Trade and MFN Status, C-SPAN, June 12, 1991
  7. Russia, Jackson-Vanik Amendment Could Be Lifted By End Of 2008 – JRL 5-31-07
  8. "Biden urges repeal of Jackson-Vanik amendment". Archived from the original on 6 September 2012. Retrieved 12 May 2016.CS1 maint: BOT: original-url status unknown (link)
  9. "Statement by the Press Secretary on H.R. 6156". whitehouse.gov. Retrieved 12 May 2016.
  10. Hu, Jiang; Vanhullebusch, Matthias (2014). Regional Cooperation and Free Trade Agreements in Asia. Leiden: Brill Nijhoff. p. 354. ISBN 978-9004279858.
  11. Dumbaugh, Kerry RS20691: Voting on NTR for China Again In 2001, and Past Congressional Decisions at University of North Texas, April 27, 2001
  12. https://www.bbc.co.uk/news/world-asia-49267912
  13. "The "Most Favored Nation" landmine".
  14. "Developing an Administrable MFN Enforcement Policy" (PDF).
  15. Lemke and Lins, Regulation of Investment Advisers, §2:5.50 (Thomson West, 2013).
  16. Newcombe, Paul; Paradell, Lluis (2009). Law and Practice of Investment Treaties: Standards of Treatment. Austin: Wolters Kluwer. p. 227. ISBN 978-9041123510.
  17. UNCTAD (1999). Most-favoured-nation Treatment, Volume 3. New York: United Nations Publications. p. 6. ISBN 9211124506.

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