What is Most Favoured Nation status?
Most Favoured Nation is a treatment accorded to a trade partner to ensure non-discriminatory trade between two countries vis-a-vis other trade partners.
The importance of MFN is shown in the fact that it is the first clause in the General Agreement on Tariffs and Trade (GATT). Under WTO rules, a member country cannot discriminate between its trade partners. If a special status is granted to a trade partner, it must be extended to all members of the WTO.
MFN at the same time allows some exemptions as well:
Right to engage in Free Trade Agreements: This means members can participate in regional trade agreements or free trade agreements where there is discrimination between member countries and non-member countries.
Members can give developing countries special and differential treatment like greater market access. This special concession are in different forms like reduced tariff rates from developing country imports, concessions that allows developing countries to give subsidies to their production sectors etc.
All these exceptions are subjected to strict conditions.
What are the pros of MFN?
MFN status is extremely gainful to developing countries. The clear upsides are access to a wider market for trade goods, reduced cost of export items owing to highly reduced tariffs and trade barriers. These essentially lead to more competitive trade.
MFN also cuts down bureaucratic hurdles and various kinds of tariffs are set at par for all imports. It then increases demands for the goods and giving a boost to the economy and export sector.
It also heals the negative impact caused to the economy due to trade protectionism. This irks the domestic industry.
A country that grants MFN on imports will have its imports provided by the most efficient supplier. This may not be the case if tariffs differ by country.
Granting MFN has domestic benefits:having one set of tariffs for all countries simplifies the rules and makes them more transparent. It also lessens the frustrating problem of having to establish rules of origin to determine which country’s part of the product (that may contain parts from all over the world) must be attributed to for customs purpose.
As MFN clause promotes non-discrimination among countries, they also tend to promote the objective of free trade in general.
What are the disadvantages of MFN?
The main disadvantage is that the country has to give the same treatment to all other trade partners who are members of the WTO. This translates into a price war and vulnerability of the domestic industry as a result. The country is not able to protect domestic industry from the cheaper imports and in this price war, some domestic players have to face heavy losses or growth restrictions.