Most Favored Nation Clause

What is a 'Most Favored Nation Clause'

A most favored nation (MFN) clause is a level of status given to one country by another and enforced by the World Trade Organization. A country grants this clause to another nation if it is interested in increasing trade with that country. Countries achieving most favored nation status are given specific trade advantages, such as reduced tariffs on imported goods.

BREAKING DOWN 'Most Favored Nation Clause'

In international trade, MFN treatment is understood as being synonymous with non-discriminatory trade policy, because it ensures equal rather than exclusive trading privileges between two partners. MFN status is very desirable between trading partners because it allows each country the greatest access into the other's domestic markets without the hindrances of tariffs or quotas. To avoid the confusion that MFN status signified a special or exclusive relationship, U.S. legislators began using the term "normal trade relations" (NTR) in place of "most favored nation" in 1998.

As the term "non-discriminatory" implies, the United States extends MFN, or NTR, status to all nations except those who have had their status suspended by specific legislation. The vast majority of suspensions since World War II were mandated under the Trade Agreements Extension Act of 1951. MFN status for those countries suspended under the 1951 law can be and have been restored on a temporary or permanent basis through a number of means, including following procedures laid out in the Trade Act of 1974 that apply to non-market economy (NME) countries, specific legislation or presidential order. Out of the 29 nations that have had their MFN status suspended at some point in the past, only two remain suspended: Cuba and North Korea. The status of 10 nations — Belarus, Vietnam, Turkmenistan, Azerbaijan, Kazakhstan, Moldova, Russia, Tajikistan, Ukraine and Uzbekistan — are still temporary and subject to the fulfilling of annual conditions.

Special consideration is given to countries that are classified as "developing" by the World Trade Organization.

The Political Factors of Granting MFN Status

During the Clinton presidency, congressional representatives heartily debated the merit of granting most favored nation status to China and Vietnam. Proponents of granting MFN status argued that a reduction in tariffs on Chinese and Vietnamese goods might give the American consumer access to quality products at relatively low prices and could serve to enhance a mutually beneficial trade relationship with the two rapidly developing economies. Meanwhile, opponents argued that granting MFN status to the two nations may be unfair given their history of human rights violations. Others thought the inflow of cheaper goods from China or Vietnam could put some Americans out of work. Both countries ended up receiving MFN status, although Vietnam's is still on a temporary, conditional basis.