What Is the Most-Favored Nation Clause?
A most-favored nation (MFN) clause requires a country to provide any concessions, privileges, or immunities granted in a trade agreement to one nation to all other World Trade Organization member countries. Although its name implies favoritism toward another nation, it denotes the equal treatment of all countries.
Most-Favored Nation Clause Explained
In international trade, MFN treatment is synonymous with non-discriminatory trade policy because it ensures equal trading among all WTO member nations rather than exclusive trading privileges. For example, if one nation reduces tariffs by 5% for one nation, the MFN clause states that all WTO members will have their tariffs cut by 5% into that nation.
- MFN requires that a country act fairly with all WTO member countries, extending the same privileges and immunities granted to one country to all members.
- MFN advocates for non-discriminatory trade policy, ensuring equal trading among all WTO member nations.
- Nations designated as developing by the WTO receive special consideration from the U.S.
In the case of benefits free-trade agreements provide, like those that were laid out in the North American Free Trade Agreement (NAFTA), those are not subject to the MFN clause as long as the goods are traded between the participating countries only. To avoid the confusion that MFN status signified a special or exclusive relationship, U.S. legislators began using the term normal trade relations in place of MFN in 1998.
The MFN only covers normal trade relations and not free-trade agreements such as NAFTA, assuming trade remains only between those countries.
The Political Implications of the MFN Clause
During Bill Clinton’s presidency (1993-2001), congressional representatives debated the merits of dropping the embargoes and quotas placed on China and Vietnam and granting them MFN status. Proponents of granting MFN status argued that tariff reductions on Chinese and Vietnamese goods might give the American consumer access to quality products at relatively low prices and 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 cause Americans to lose their jobs. Both countries ended up receiving MFN status.
Real World Example of a Most-Favored Nation Clause
The United States extends MFN status to all nations except those who have had their status suspended by specific legislation.
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 vast majority of suspensions since World War II were mandated under the Trade Agreements Extension Act of 1951. Countries with their MFN statuses suspended under the 1951 law can be and have been restored on a temporary or permanent basis through procedures laid out in the Trade Act of 1974 that apply to non-market economy countries, specific legislation, or presidential order. The U.S. gives special consideration to countries the World Trade Organization classifies as developing.