Question

What is MFN status? How does the WTO reconcile the principle of equal treatment with the preferential treatment created by regional trade agreements?

Answer 1

Before going to the actual answer, let me explain what MFN status is in brief. MFN is the abbreviation of Most Favored Nation. This comes in the context of international trade relations among the WTO member countries around the world. If country A grants MFN status to country B, country B also reciprocates by granting MFN to country A, then according to this MFN agreements they would not have any tariffs for trade or the tariffs would be lowered between these countries.

MFN status is mentioned in three agreements (GATT, GATS and TRIPS) of WTO. First article of General agreement on Tariffs and Trade (GATT) gives guidelines regarding the goods. MFN principle is covered in Article 2 of General agreement on Trade in Services (GATS). MFN is mentioned in Article 4 of agreement related to Trade related Aspects of Intellectual Property Rights (TRIPS). In each of these agreements, the concept of MFN is held in a little different manner with some exceptions. World Trade Organization’s (WTO) General Agreement on Tariffs and Trade (GATT) governs the Most Favored Nation (MFN) status. As soon as we look at MFN status we may think is as a contradiction to WTO norms. But it is not. MFN proposes special treatment and at the same time it promotes non-discrimination.

According to WTO, the member countries should not give more advantage to specific countries and less advantage to some other countries. No member country is supposed to discriminate other country. If a country lowers the tariffs or customs duties, it should be applicable to all the member countries, it should not put higher tariffs to one country and lower to another country. As per the rule, the MFN status shall be extended to each other automatically by the member countries. Exceptions are there in case of developing countries and customs unions. One of the challenges to the MFN is that of by regional trade agreements such as European Union and NAFTA, where lowering/eliminating of tariffs is benefitting only the member nations. Here in case of these regional trade agreements, non-member nations of these groups continue to pay tariffs.

WTO is in the opinion that the regional trade agreements reduce the trade opportunities of non-member countries, by imposing higher tariffs for non-members than the members. However, at the same time WTO believes that the positive externalities of the regional trade agreements outweigh the negative externalities and also after certain period of time, these regional agreements can be expanded to the wider section.