In international economic relations and international politics, "most favoured nation" (MFN) is a status or level of treatment accorded by one state to another in international trade. ... (Trade advantages include low tariffs or high import quotas.)
The MFN status
The General Agreement on Tariffs and Trade (GATT) was negotiated in 1947.
GATT’s articles of agreement were signed by all its founding members—including India and Pakistan—in October 1947, and ratified the following year by both countries.
While signing GATT, nations agreed to abide by its cornerstone principle—non-discrimination in trade relations, whereby an importing country may not discriminate against imports based on their country of origin.
This principle of non-discrimination, articulated in Article I, is referred to by GATT as “General MFN Treatment”.
It means that any “favour” in trade granted to another member country shall be immediately and unconditionally granted to all other member countries.
No doubt, the terminology is confusing: MFN does not imply favouritism, but actually rules it out. More importantly, it rules out discrimination in trade against any member country.
Now, anticipating that some countries in future would wish to pursue comprehensive economic integration with other members, GATT also permitted departures from the principle of non-discrimination and permitted for formation of preferential trade areas, example EU (Article XXIV)
In the same spirit, GATT observed that India and Pakistan had once been an integrated economic unit, it provided exception to trade relation between India and Pakistan under article XXIV.
In simple terms, it meant that India and Pakistan can enter into special arrangements with respect to the trade between them and enjoy closer bilateral trade relationship.
The exception is that they would not be required to extend the same special arrangements to other GATT nations.