The most-favoured-nation clause is a provision in a trade agreement that mandates a country to provide concessions, rights, or immunities to one nation or to all other countries that are members of the World Trade Organization (WTO). It is a position in international economic relations that is intended to promote equal treatment of all member countries in international trade. It is a crucial topic in the Economy syllabus for the UPSC Examination. The article below briefs the Most Favoured Nation (MFN) followed by detailed explanations.

What is World Trade Organization (WTO)?

• The World Trade Organization is an organization whose goal is to keep international trade between countries regulated
• The World Trade Organization is headquartered in Geneva, Switzerland.
• The organization's highest decision-making body is the Ministerial Conference, which meets twice a year and is made up of all member states.
• The World Trade Organization (WTO) is made up of 164 countries (160 UN countries, EU, Hong Kong, Macau and Taiwan).

What is the Most Favoured Nation (MFN)?

• The most favoured nation (MFN) principle is based on the idea that governments should treat all of their trade partners equally—that no one country should be "more favoured."
• This means that no country should treat commodities or services from a single trading partner differently.
• For example, imagine a country within the World Trade Organization generally applies a 5% tariff to one country but a 7% duty to all other members. They must impose a 5% tax on all member countries under the most favoured nation provision.
• All WTO members have equivalent most-favoured-nation status with the United States.
• The General Agreement on Tariffs and Trade (GATT) was the first multilateral trade agreement to grant most-favoured-nation treatment.

History

• As early as the 11th century, governments created the most-favoured-nation status.
• The current notion first originated in the 18th century, when it was used to describe a relationship between two governments in which one granted the designation of "most favoured nation" to the other.
• Following World War II, the General Agreement on Tariffs and Trade (GATT) negotiated numerous trade agreements and tariffs, culminating in the foundation of the World Trade Organization in 1995.

Further Understanding

• The most-favoured-nation clause is a basis of WTO trade law, along with the principle of national treatment, which is an international law principle that demands equal treatment of foreigners and locals.
• The organization's trade law is intended to encourage member countries to pursue non-discriminatory trade practices.
• Developing countries that can obtain preferential treatment over the most favoured nation may be granted an exception to the most-favoured-nation clause.
• Favourable treatment may include the utilization of trade advantages such as:
  • Low tariffs
  • High import quotas
  • Free trade agreements
  • Custom unions

Tariffs

• A tariff is a levy imposed on imports and exports between trading partners.
• It is a taxation policy that is usually in place to discourage the consumption of imported goods and stimulate the use of native ones.
• Tariffs are often employed by governments as a source of revenue.
• A low tariff is advantageous for exporting countries since it allows them to trade more freely.

Import Quotas

• Import quotas are a type of trade restriction that places a limit on the number of commodities that can be imported into a country in a specific period of time.
• It encourages less use of foreign goods while also encouraging consumption of native goods, similar to tariffs.
• Securing a large import quota is advantageous for exporting countries since it allows them to export more goods.

Free Trade Agreement

• A free trade agreement is an international treaty or agreement that establishes a free-trade zone between collaborating countries.
• It promotes increased commerce and may lead to the removal of taxes and import quotas.

Custom Unions

• A customs union is a form of trade bloc that consists of a zone of free trade among member countries that has a single external tariff with non-members.
• They are formed through trade agreements and foster more open commerce among member countries.

Benefits of Most Favoured Nation (MFN) Status

Increases free trade

• The most-favoured-nation clause encourages more free trade between countries by increasing trade creation and decreasing trade diversion.
• It enables more efficient outcomes since low-cost producers can export commodities to high-demand locations without the need for government involvement.

Equal treatment of disadvantaged countries

• The most-favoured-nation clause permits smaller countries to take advantage of benefits that they might otherwise miss out on because they are ignored by the major global trade actors.
• The provision enables minor countries to negotiate favourable trade conditions that they would not otherwise be able to obtain.

Simplifies trade laws

• The application of the most-favoured-nation clause simplifies the complicated bilateral trade agreements that exist between countries.
• It is much easier to pass trade regulations when all countries are subject to the same trading terms.

Impact of India Withdrawing MFN status to Pakistan

• In the aftermath of the Pulwama terror attack, India revoked Pakistan's Most Favoured Nation (MFN) designation in an attempt to send a strong message to the country.
• The magnitude of that impact is debatable, given India's overall trade with Pakistan in 2017-18 was only $2.4 billion, with only $488.56 million of that being imports from Pakistan, which is negligible. As a result, it appears that withdrawing Pakistan's MFN status is more of a symbolic gesture.
• It may give a boost to illegal trade between the two countries, which occurs through border loopholes and third-country intermediaries.
• It could also provide a lever for Pakistani extremists to escalate their vitriol against India.
• However, India's intention to revoke Pakistan's MFN designation is aimed at isolating the country diplomatically and squeezing its economy.
• This action will harm Pakistan's reputation as a trading partner and investment powerhouse.

Conclusion

According to studies, without the WTO, the average country's export duties would increase by 32 percentage points. The WTO has boosted commerce since its arrival. Thus through the principle of WTO, its importance has grown over time and limits.