jWe note that an MFN tariff is somewhat of a legally meaningless concept for countries such as Ethiopia and Iran as they are not WTO members and are thus not bound by the multilateral agreement. From: Handbook of Commercial Policy, 2016
Most favored nation (MFN) status is an economic position in which a country enjoys the best trade terms given by its trading partner(s). That means it receives the lowest tariffs, the fewest trade barriers, and the highest import quotas (or none at all). In other words, all MFN status trade partners must treat each other equally. Learn more about most favored nation status and what it means for countries that join the World Trade Organization.
Most favored nation status (MFN) is given by members of the World Trade Organization (WTO) to other members. This status confers trade benefits to member nations that are not given to others by treating each country as an equal trade partner. It acts as an incentive for countries to join the WTO and reduces friction between member countries by creating equality in trading policies.
For example, a WTO member cannot grant special trading favors to another member without extending the same favors to other organization members. The United States gave China permanent MFN status in 2001 when China became a WTO member. U.S. companies wanted to sell goods and services to the largest population in the world. They thought the country's consumer spending would pick up as its GDP grew. Despite the friendly start to the 21st century, the two countries have become locked in an ongoing trade dispute. Citing unfair trade practices, including intellectual theft, the Trump administration began imposing tariffs on Chinese imports in 2018, an action continued by the Biden administration. However, China remains a most favored nation as of April 2022. Even in light of military actions against Ukraine in 2022, Russia remains a member of the World Trade Organization. Member nations of the WTO are required to be given most favored nation status, and Russia maintains that status unless member nations have statutes that allow them to revoke MFN status. In the U.S., Congress can grant and revoke Permanent Normal Trade Relations, its most non-discriminatory trade status. On April 8, 2022, President Joe Biden signed a bill sent to him by Congress suspending permanent normal trade relations with Russia and Belarus in response to Russia's ongoing invasion of Ukraine. The most favored nation clause in two countries' free trade agreements confers the favorable status. To receive the most favored nation status, a country needs to join the World Trade Organization. Criteria for doing so are that a country needs to have full autonomy over the conduct of its trade policies and that all existing members of the WTO agree to the country's accession. After joining, countries receive the MFN status. The WTO published the following principles for members to follow:
All members of the WTO receive the most favored nation status. That means they all receive the same trade benefits as all other members. The only exceptions are developing countries, regional trade areas, and customs unions.
Removal of MFN status generally only allows member countries to impose tariffs and sanctions without violating any agreements or organizational rules. Blocking and banning trade is left to the countries themselves, and the offending country is not removed from the WTO unless it is voted out. Member countries are still free to charge customs duties or tariffs on imports from other members. However, after products and services enter a country, that country is not supposed to treat them any differently than local goods and services. For example, a locally made product and an imported equivalent must be taxed at the same rate when on the market; otherwise, the country that allows the different tax is violating the trade agreement. Joining a trade organization is an indication that a country wants to expand its trading footprint globally. Expansion is challenging in an already established global economy with leaders who command large market shares. The WTO attempts to make it easier for smaller and emerging economies to break through trade barriers and enter the global marketplace. The markets within each country are expected to change with various economic, political, or geographic circumstances. Countries that belong to the WTO are allowed to alter trade circumstances and barriers, but it is required that negotiations take place. This prevents market destabilization and gives members a way to seek some recourse if they do not benefit from the changes. The WTO is not so much a free-trade entity as it is a fair-trade entity. This means that countries can impose tariffs and other forms of protection on member countries, but these measures should be fair. Practices should also be fair so that countries do not intentionally work to undermine or adversely influence other members' market shares. Developing countries receive preferential treatment without having to return it, so their economies can grow. Developed economies benefit in the long run—as economies grow in developing economies, so does their demand for imports. That provides a bigger market for the developed countries' products. For smaller countries or emerging markets, MFN has several advantages and disadvantages.
Pros
Cons
There are 164 countries with most favored nation status. Examples are Germany, Haiti, Guyana, India, Japan, and the United States.
Most favored nation status means a country must be treated fairly by other WTO member nations regarding trade.
China still maintains its most favored nation status, although it and the U.S. continue to implement tariffs on each other on top of MFN rates. |