What is the Most-Favoured Nation Status?

Most-Favoured Nation

This article explains the Most-favoured nation (MFN) status of the World Trade Organisation (WTO).

The World Trade Organisation (WTO) is the  global international organisation dealing with the rules of trade between two or more countries. The agreements in WTO are lengthy and complex and they cover a wide range of activities (agriculture, textile, banking, communication, food sanitation, intellectual property etc) .

A number of simple, fundamental principles run through the documents concerning these activities, which lay the foundation of a multilateral trading system. One such principle is Trade without discrimination which prevents countries from discriminating between their trading partners. This is known as the principle of “Most Favoured Nations” which states that countries cannot normally discriminate between their trading partners, i.e. If a country grants advantages to one of its trading partner, the same advantages have to be offered to all WTO members.

So, if a country reduces tariffs for one country, it has to be reduced for all the members of WTO. So, MFN status leads to reduction in trade barrier between countries

There are, however, few exceptions in which case the member countries may deviate from granting MFN status provided they comply with certain conditions:

1. General exceptions: Right to take measures to protect, for example human, animal or plant life or health, which may restrict trade in goods.
2. Security exceptions: Right to take measures to protect essential national security interests, which may restrict trade in goods.
3. Exceptions for regional trade agreements: Right to depart from the MFN principle in order to grant preferential treatment to goods or services suppliers from trading partners within a customers Union or a free trade area without extending such treatment to all WTO members.
4.Balance of payments(BOP) – Right to take measures to safeguard a member’s external financial positions and its BOPs
5. WaiversTemporary waivers granted with the authorisation of the other members, in exceptional circumstances.

The developing countries are major beneficiaries of the MFN status since they acquire access to wider markets for trade goods and reduced cost of export goods resulting from reduction in tariffs and trade barriers. It also cuts down bureaucracy hurdles and various kinds of tariffs are set at par for import goods which gives a boost to demand and stimulates the economy and export sector.

One caveat of this status is that the country has to give same treatment to other trade partners who are members of WTO, which could result in price wars and vulnerability of domestic industry. The country cannot protect its domestic industries from cheap imports and some firms might face heavy losses.

India granted the MFN status to Pakistan in 1996 but Pakistan has not reverted in the two decades since. Both India and Pakistan are the members of WTO. The country agreed to grant the MFN status to India, renaming it as non-discriminatory market access in 2011 but the decision was postponed and has still not been evoked due to political mistrust and a history of border conflicts.

For years, the two countries have insisted on negotiating trade along with non trade issues (kashmir issue) ensuing endless meetings, talks and political animosity. Pakistan’s step towards trying to bring back Kashmir justifies India’s unwillingness to any firm commitment or cooperation.

In response to the recent Uri attack, there are news of India’s withdrawal of the MFN status to Pakistan. Even though India would be able to raise tariffs on Pakistani exports after the withdrawal, it may not have a significant impact, given the relatively small magnitude of bilateral trade. The cancellation will only have a symbolic effect.

India could also drag Pakistan to WTO’s dispute settlement body and demand the grant of MFN status, something it hasn’t done so far.

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