MOST FAVORED NATION (MFN)

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.