Most favored nation (MFN), also termed as Normal Trade Relations (NTR) in the US, is a privilege or special favor of trade advantages from a country to any of its trading partner, such as, low tariffs or reduced customs duty rate for its products, services or even intellectual property rights. However, since under the World Trade Organization (WTO) Rules countries cannot normally discriminate among their trading partners, the grantor country must extend the same facility to all other members of the World Trade Organization.
The significance of MFN is that every time a country opens up a market or reduces a trade barrier, it has to do so for the same goods or services for all trading partners.
The principle of “most favored nation” is so important that it enshrined in Article 1 of the General Agreements on Tariffs and Trade (GATT) that regulates trading in goods. In 1948 the USA had joined the GATT, the predecessor of the WTO. MFN is also a priority consideration in the General Agreement on Trade in Services (GATS) (Article 2) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) (Article 4).
The benefits of MFN are manifold. It enables imports only from the most efficient supplier or importer, in the absence of tariff difference by country. It facilitates international trade under transparent norms and simple rules with only one set of tariff for different countries. Moreover, by virtue of the MFN principle, smaller countries with lower bargaining power get the advantages that larger nations often grant to each other. Further, MFN discourages anti completive or protectionist measures.
Exceptions to the MFN principle permit preferential treatment of developing countries and regional free trade areas and customs unions. It implies that a group of countries may set up a free trade agreement that applies only to goods and services traded within the participating nations, discriminating against those outside the trading bloc. Similarly, advanced countries can give developing countries special access to their markets. Moreover, a country may raise trade barriers against products unfairly traded from specific nations. Further in the services sector, countries are allowed to discriminate, in limited circumstances. However, these exceptions are allowed only under very stringent or rigorous conditions.
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