Most Favored Nation Status: Pros and Cons

How It Lowers Your Shopping Bill

Image shows the pros and cons of most favored nation status, including pros such as access to a larger market, reduces export costs, and increases competitiveness. Cons include must give members the same benefits, easy to become a victim of shady trade practices, and developing countries still face high tariffs on selected goods.

The Balance / Julie Bang

Most favored nation (MFN) status is an economic position in which a country enjoys the best trade terms given by its trading partner(s). That means it receives the lowest tariffs, the fewest trade barriers, and the highest import quotas (or none at all). In other words, all MFN status trade partners must treat each other equally.

Learn more about most favored nation status and what it means for countries that join the World Trade Organization.

Key Takeaways

  • Most favored nation is a trade status given to members of the World Trade Organization.
  • MFN grants equal and fair trade between members under most conditions.
  • Most favored nation status requires negotiations between countries to reach common ground on trade policies.
  • The World Trade Organization laid down specific principles for member nations to follow to ensure equal treatment and fairness.
  • Lawmakers and the Biden administration suspended normal trade relations with Russia in April 2022.

What Is a Most Favored Nation?

Most favored nation status (MFN) is given by members of the World Trade Organization (WTO) to other members. This status confers trade benefits to member nations that are not given to others by treating each country as an equal trade partner. It acts as an incentive for countries to join the WTO and reduces friction between member countries by creating equality in trading policies.

  • Acronym: MFN
  • Alternate name: Permanent normal trade relations

For example, a WTO member cannot grant special trading favors to another member without extending the same favors to other organization members.

China Most Favored Nation Status

The United States gave China permanent MFN status in 2001 when China became a WTO member. U.S. companies wanted to sell goods and services to the largest population in the world. They thought the country's consumer spending would pick up as its GDP grew.

Despite the friendly start to the 21st century, the two countries have become locked in an ongoing trade dispute. Citing unfair trade practices, including intellectual theft, the Trump administration began imposing tariffs on Chinese imports in 2018, an action continued by the Biden administration. However, China remains a most favored nation as of April 2022.

Russia Most Favored Nation Status

Even in light of military actions against Ukraine in 2022, Russia remains a member of the World Trade Organization. Member nations of the WTO are required to be given most favored nation status, and Russia maintains that status unless member nations have statutes that allow them to revoke MFN status.

In the U.S., Congress can grant and revoke Permanent Normal Trade Relations, its most non-discriminatory trade status. On April 8, 2022, President Joe Biden signed a bill sent to him by Congress suspending permanent normal trade relations with Russia and Belarus in response to Russia's ongoing invasion of Ukraine.

How Does the Most Favored Nation Status Work?

The most favored nation clause in two countries' free trade agreements confers the favorable status. To receive the most favored nation status, a country needs to join the World Trade Organization. Criteria for doing so are that a country needs to have full autonomy over the conduct of its trade policies and that all existing members of the WTO agree to the country's accession.

After joining, countries receive the MFN status. The WTO published the following principles for members to follow:

  • Most-favoured-nation (MFN)
  • Freer trade
  • Predictable trade actions
  • Promote fairness
  • Encourage economic development and reform

Most Favored Nation

All members of the WTO receive the most favored nation status. That means they all receive the same trade benefits as all other members. The only exceptions are developing countries, regional trade areas, and customs unions.

Removal of MFN status generally only allows member countries to impose tariffs and sanctions without violating any agreements or organizational rules. Blocking and banning trade is left to the countries themselves, and the offending country is not removed from the WTO unless it is voted out.

National Treatment

Member countries are still free to charge customs duties or tariffs on imports from other members. However, after products and services enter a country, that country is not supposed to treat them any differently than local goods and services.

For example, a locally made product and an imported equivalent must be taxed at the same rate when on the market; otherwise, the country that allows the different tax is violating the trade agreement.

Freer Trade

Joining a trade organization is an indication that a country wants to expand its trading footprint globally. Expansion is challenging in an already established global economy with leaders who command large market shares. The WTO attempts to make it easier for smaller and emerging economies to break through trade barriers and enter the global marketplace.

Predictability

The markets within each country are expected to change with various economic, political, or geographic circumstances. Countries that belong to the WTO are allowed to alter trade circumstances and barriers, but it is required that negotiations take place. This prevents market destabilization and gives members a way to seek some recourse if they do not benefit from the changes.

Fairness

The WTO is not so much a free-trade entity as it is a fair-trade entity. This means that countries can impose tariffs and other forms of protection on member countries, but these measures should be fair. Practices should also be fair so that countries do not intentionally work to undermine or adversely influence other members' market shares.

Economic Development

Developing countries receive preferential treatment without having to return it, so their economies can grow. Developed economies benefit in the long run—as economies grow in developing economies, so does their demand for imports. That provides a bigger market for the developed countries' products.

Pros and Cons of Most Favored Nation Status

For smaller countries or emerging markets, MFN has several advantages and disadvantages.

Pros
  • Access to a larger market

  • Reduces export costs

  • Increases competitiveness

Cons
  • Must give all members the same benefits

  • Easy to become a victim of shady trade practices

  • Developing countries still face high tariffs on selected goods

Pros Explained

  • Access to a larger market: The country's industries have a chance to improve their products as they service this large market. Their companies will grow to meet increased demand. They receive the benefits of economies of scale. That, in turn, increases their exports and their country's economic growth.
  • Reduces export costs: It also cuts down on red tape. Different tariffs and customs don't have to be calculated for each import since they are all the same.
  • Increases competitiveness: The status reduces the ill effects of trade protectionism. Even though domestic industries may not like to lose their protected status, they could become healthier and more competitive.

Cons Explained

  • All members receive the same benefits: The downside of MFN status is the country must also grant the same trade benefits to all other members of the agreement or the World Trade Organization.
  • Can fall victim to shady trade practices: Countries sometimes subsidize their domestic industries. That allows subsidized companies to export at incredibly low prices. This practice is known as dumping and can get a country in trouble with the WTO.
  • High tariffs for developing countries: Developing countries have reported to the WTO that they still face very high tariffs, called tariff peaks, on products like fish, fish products, textiles, and clothing.

Frequently Asked Questions

What countries are most favored nation status?

There are 164 countries with most favored nation status. Examples are Germany, Haiti, Guyana, India, Japan, and the United States.

What does most favored nation status mean?

Most favored nation status means a country must be treated fairly by other WTO member nations regarding trade.

Does China still have a most favored nation status?

China still maintains its most favored nation status, although it and the U.S. continue to implement tariffs on each other on top of MFN rates.

Article Sources

  1. The White House, President George W. Bush. "President Grants Permanent Trade Status to China."

  2. Council on Foreign Relations. "What’s Next for U.S. Trade With China?"

  3. Library of Congress. "H.R.7108 - Suspending Normal Trade Relations With Russia and Belarus Act."

  4. World Trade Organization. "WTO Accessions."

  5. World Trade Organization. "Principles of the Trading System."

  6. World Trade Organization. "Members and Observers."

  7. World Trade Organization. "The General Agreement on Tariffs and Trade (GATT 1947)."

  8. World Trade Organization. "The WTO Agreements Series 2, General Agreement on Tariffs and Trade," Page 3.

  9. World Trade Organization. "Anti-Dumping, Subsidies, Safeguards: Contingencies, Etc."

  10. World Trade Organization. "Some Issues Raised."

  11. U.S. Department of Agriculture Economic Research Service. "Retaliatory Tariffs Reduced U.S. States' Exports of Agricultural Commodities."