In international trade, most-favored-nation (MFN) treatment means a policy of non-discrimination towards all the WTO members. Although the name implies favoritism and exclusive trading privileges toward one particular nation, it actually means equal treatment of all member countries.
So, for example, if a country reduces tariffs by 5% for one nation, the MFN clause says that all WTO members should have their tariffs reduced by 5% when trading with that nation. So basically, In the WTO, MFN means a member state cannot discriminate among the other members.
MFN status works well for smaller and developing countries due to the following reasons:
- Because trade barriers are lowered, it lowers the cost of their exports allowing them to access a larger market.
- Their products will become more competitive and their businesses will have more opportunities for growth, as they receive the benefits of economies of scale.
- It reduces red tape as different tariffs and customs don’t have to be calculated for each import, since they are all calculated the same way. In general, the ill effects of trade protectionism are reduced.
- Over time, exports will increase and the country also experiences economic growth.
To counter this, some countries may subsidize their domestic industries allowing such companies to export at incredibly cheap prices putting companies in the trade partner’s country out of business; once that happens, the country removes the subsidy because of which prices rise, but now there’s no competition within the industry to keep prices competitive.
This is known as dumping and considered as unfair practice by WTO.
Related: Role of WTO in global trade
India had given Pakistan the most-favoured nation (MFN) status in 1996; however, despite being granted the MFN status, the trade figures have not been in favor of Pakistan.
One of the reasons cited is that the gesture of granting MFN was followed by the imposition of several non-tariff barriers (such as high regulatory standards) by the Indian side, which ironically crippled the access of the Pakistani products to the Indian market.
India later scrapped the MFN status in 2019 as ties between the two countries deteriorated after terrorist attacks in India. After the withdrawal of MFN status to Pakistan, higher customs duty of 200% was imposed on all imports from Pakistan, and India is now free to increase customs duties to any level on goods coming from Pakistan, even exceeding earlier agreed rates.
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