What Is the Most-Favored-Nation Clause?

A most-favored-nation (MFN) clause requires a country providing a trade concession to one trading partner to extend the same treatment to all. Used in trade treaties for hundreds of years, the MFN clause and its principle of universal equal treatment underpin the World Trade Organization.

In U.S. trade legislation, most-favored-nation treatment is now described as "permanent normal trade relations" to avoid the implication it confers preferential status.

With the advent of the NAFTA regional trade bloc (and its successor treaty known in the U.S. as USMCA), most-favored-nation has been used to describe the status of non-qualifying imports subject to tariffs. The term has spread to commercial law, where it is used to denote the requirement of equal treatment for all customers.

Most-Favored-Nation Clause Explained

In international trade, MFN treatment is synonymous with non-discriminatory trade policy. For example, if a country belonging to the WTO reduces or eliminates a tariff on a particular product for one trading partner, the treaty's MFN clause obligates it to extend the same treatment to all members of the organization.

Note that there is no requirement under MFN that the trade concession be reciprocal: countries benefiting from a lower tariff are not required to automatically drop theirs in return (though that can certainly happen under trade agreements).

The WTO provides the following exemptions from MFN provisions for the following:

• trade blocs like the USMCA and the European Union, which are allowed to discriminate against imports from outside the bloc
• trade barriers in response to unfair competition
• for trade preferences extended to developing countries
• for trade in services, on a limited basis
  

Evolution of the MFN Clause in U.S. Trade Policy

In the U.S., the Jackson-Vanik amendment to the Trade Act of 1974 denied the trade benefits of most-favored-nation status to non-market economies restricting emigration. Initially applied to the Soviet Union, China and Vietnam, among others, the Jackson-Vanik amendment was repealed for China in 2002 and Vietnam in 2006. In 2012, the Magnitsky Act repealed the Jackson-Vanik amendment as it applied to Russia, normalizing U.S.-Russia trade relations.

The Jackson-Vanik amendment remains in force, subject to annual presidential waiver, for Azerbaijan, Belarus, Kazakhstan, Uzbekistan, Tajikistan, and Turkmenistan.

The only countries currently ineligible for normal trade relations, or most favored nation, U.S. import duty rates are Cuba and North Korea, which remain subject to a U.S. embargo.

In September 2020, a World Trade Organization panel ruled the Trump administration violated WTO rules by imposing discriminatory import tariffs on $200 billion of Chinese goods.

Most-Favored-Nation Benefits and Drawbacks

In global trade, the non-discriminatory principle enshrined in the most-favored-nation clause extends the benefits of trade liberalization measures as widely as possible, while protecting smaller exporters against preferential terms secured by larger ones.

In practice, the WTO enforcement mechanism can only authorize that an injured party, not the organization collectively, impose retaliatory tariffs when discriminated against. That leaves smaller countries depending on larger ones to comply with rulings voluntarily.

Some have suggested the WTO's ineffective enforcement mechanism actually helps shield countries that violate MFN principles from punishment.

The proliferation of regional trade blocs and unilateral sanctions for "unfair trade" have also eroded the principle of universality enshrined in the most-favored-nation clause.

In December 2019, the Trump administration sidelined the WTO's appellate body by blocking all appointments to the seven-member panel. It claimed the panel had overstepped its mandate. In October 2021, the Biden administration's nominee to the WTO appeals panel said she would work to restore WTO rules enforcement.

The Cost of Losing Most-Favored-Nation Status

In March 2022, the Congressional Research Service said the loss of permanent normal trade relations status by Russia as a result of Western sanctions would raise import duties on Russian titanium products exports to the U.S. from 15% to 45%, costing U.S. importers an additional $32.4 million based on 2021 trade value.