Most favoured nation

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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. The term means the country which is the recipient of this treatment must nominally receive equal trade advantages as the "most favoured nation" by the country granting such treatment (trade advantages include low tariffs or high import quotas). In effect, a country that has been accorded MFN status may not be treated less advantageously than any other country with MFN status by the promising country. There is a debate in legal circles whether MFN clauses in bilateral investment treaties include only substantive rules or also procedural protections. [1] The members of the World Trade Organization (WTO) agree to accord MFN status to each other. Exceptions allow for preferential treatment of developing countries, regional free trade areas and customs unions. [2] Together with the principle of national treatment, MFN is one of the cornerstones of WTO trade law.

Contents

"Most favoured nation" relationships extend reciprocal bilateral relationships following both GATT and WTO norms of reciprocity and non-discrimination. In bilateral reciprocal relationships a particular privilege granted by one party only extends to other parties who reciprocate that privilege, while in a multilateral reciprocal relationship the same privilege would be extended to the group that negotiated a particular privilege. The non-discriminatory component of the GATT/WTO applies a reciprocally negotiated privilege to all members of the GATT/WTO without respect to their status in negotiating the privilege. Most Favoured Nation status is given to an international trade partner to ensure non-discriminatory trade between all partner countries of the WTO. A country which provides MFN status to another country has to provide concessions, privileges, and immunity in trade agreements. It is the first clause in the General Agreement on Tariffs and Trade (GATT).

Under rules of the World Trade Organisation (WTO), a member country is not allowed to discriminate between trade partners and if a special status is granted to one trade partner, the country is required to extend it to all members of the WTO. In a nutshell, MFN is a non-discriminatory trade policy as it ensures equal trading among all WTO member nations rather than exclusive trading privileges.

History

The earliest form of the most favoured nation status can be found as early as the 11th century. Today's concept of the most favoured nation status starts to appear in the 18th century, when the division of conditional and unconditional most favoured nation status also began. [3] In the early days of international trade, "most favoured nation" status was usually used on a dual-party, state-to-state basis. A nation could enter into a "most favoured nation" treaty with another nation. In the Treaty of Madrid (1667), Spain granted England "most favoured nation" trading status. [4] With the Jay Treaty in 1794, the US also granted the same to Britain.

After World War II, tariff and trade agreements were negotiated simultaneously by all interested parties through the General Agreement on Tariffs and Trade (GATT), which ultimately resulted in the World Trade Organization in 1995. The WTO requires members to grant one another "most favoured nation" status. A "most favoured nation" clause is also included in most bilateral investment treaties concluded between capital exporting and capital importing countries after World War II.[ citation needed ]

Benefits

Trade experts consider MFN clauses to have the following benefits:[ citation needed ]

As MFN clauses promote non-discrimination among countries, they also tend to promote the objective of free trade in general.

Exceptions

GATT members recognized in principle that the "most favoured nation" rule should be relaxed to accommodate the needs of developing countries, and the UN Conference on Trade and Development (established in 1964) has sought to extend preferential treatment to the exports of the developing countries. [5] :fol.93

Another challenge to the "most favoured nation" principle has been posed by regional trade blocs such as the European Union and the North American Free Trade Agreement (NAFTA), which have lowered or eliminated tariffs among the members while maintaining tariff walls between member nations and the rest of the world. Trade agreements usually allow for exceptions to allow for regional economic integration.[ citation needed ]

Specific countries' policies

United States

In the 1990s, continued "most favoured nation" status for the People's Republic of China by the United States created controversy because of its sales of sensitive military technology and China's serious and continuous persecution of human rights. [6] China's MFN status was made permanent on December 27, 2001. All of the former Soviet states, including Russia, were granted MFN status in 1996. On a bilateral level, however, the United States could not grant MFN status to some members of the former Soviet Union, including the Russian Federation, because of the Jackson-Vanik amendment. This presented an obstacle to those countries' accession to the WTO. [7] At the urging of Vice President Joe Biden, [8] the Jackson-Vanik amendment was repealed with Magnitsky Act (which attempts to punish human rights violations without hampering trade) on December 14, 2012. [9]

In 1998, the "most favoured nation status" in the United States has been renamed "permanent normal trade relations" (NTR) as all but a handful of countries had this status already. The country gives preferential treatment to some of its trading partners without this status. This is based on the U.S. Supreme Court interpretation of MFN principle as a mere prohibition to enact discriminatory legislation concerning duties on goods of like character imported from an MFN partner. [10] The court ruled that MFN does not constrain the U.S. from giving out special privileges to other countries.

The ideas behind MFN policies can first be seen in US foreign policy during the opening of Japan in the mid to late 1850s, when they were included as a clause in the Commercial Treaty of 1858, which signalled the opening of the Japanese market.

Since 1998, the term normal trade relations (NTR) has replaced most favoured nation in all U.S. statutes. This change was included in section 5003 of the Internal Revenue Service Restructuring and Reform Act of 1998 (P.L. 105-206). However, Title IV of the Trade Act of 1974 (P.L. 93-618) established conditions on U.S. MFN/NTR tariff treatment to certain non-market economies, one of which is certain freedom-of-emigration requirements (better known as the Jackson-Vanik amendment). The act authorizes the president to waive a country's full compliance with Jackson-Vanik under specified conditions, and this must be renewed by June 3 of each year. Once the president does so, the waiver is automatic unless Congress passes (and avoids or overturns a presidential veto of) a disapproval resolution.

MFN/NTR status for China, a non-market economy, which had been originally suspended in 1951, was restored in 1980 and was continued in effect through subsequent annual Presidential extensions. Following the massacre of pro-democracy demonstrators in Tiananmen Square in 1989, however, the annual renewal of China's MFN status became a source of considerable debate in the Congress; and legislation was introduced to terminate China's MFN/NTR status or to impose additional conditions relating to improvements in China's actions on various trade and non-trade issues. Agricultural interests generally opposed attempts to block MFN/NTR renewal for China, contending that several billion dollars annually in current and future U.S. agricultural exports could be jeopardized if that country retaliated. In China's case, Congress agreed to permanent normal trade relations (PNTR) status in Pub.L.   106–286 (text) (pdf), President Clinton signed into law on October 10, 2000. [11] PNTR paved the way for China's accession to the WTO in December 2001; it provides U.S. exporters of agricultural products the opportunity to benefit from China's WTO agreements to reduce trade barriers and open its agricultural markets.

India

As per the obligation under their World Trade Organization (WTO) treaties of accession, the member countries of WTO automatically extend Most Favoured Nation (MFN) status to each other unless otherwise specified in the agreement or schedule notified to the WTO by that member country. Pursuant to that provision, India has extended MFN status for goods to most member countries of WTO.[ citation needed ]

Within the South Asian Association for Regional Cooperation (SAARC), Bangladesh, Maldives, Nepal, Pakistan and Sri Lanka are members of the WTO and all excepting Pakistan have extended MFN status to India,[ citation needed ] which had extended MFN status to all SAARC countries. In 2020 the MFN status to Pakistan was revoked. [12] So far as exception to MFN status (if any) is concerned, each member country has indicated the same services in its schedule of services commitments, as notified to the WTO.[ citation needed ]

In contract law

A most favoured nation clause (also called a most favoured customer clause or most favoured licensee clause) is a contract provision in which a seller (or licensor) agrees to give the buyer (or licensee) the best terms it makes available to any other buyer (or licensee). In some contexts, the use of such clauses may become commonplace, such as when online ebook retailers contract with publishers for the supply of e-books. [13] Use of such clauses, in some contexts, may provoke concerns about anticompetitive influences and antitrust violations, while in other contexts, the influence may be viewed as procompetitive. [14]

One example where most favoured nation clauses may appear is in institutional investment advisory contracts, where if a certain number of conditions are met, one client may be entitled to the lowest fee offered to other clients with a substantially identical investment strategy and the same or lower level of assets under management. [15]

The most favoured nation clause can also be included in an agreement between a state and a company or an investor. This involves the provision of special privileges and advantages although the state cannot use contractual mechanisms to avoid its MFN treatment obligations with other countries. [16] Unlike the relationship among states where a nation accorded an MFN status cannot be treated less advantageously than another, the host nation does not breach MFN treatment if it provides different privileges to different investors. The United Nations Conference on Trade and Development clarified this when it stated that "a host country cannot be obliged to enter into an individual investment contract" and that "freedom of contract prevails over the MFN standard." [17] This general principle, however, is not absolute. [16]

European Union

The current EU competition law position is that MFN clauses will infringe Article 101(i) if in the individual circumstances of the case result in an appreciable adverse effect on competition in the European Union. This is likely to happen when the parties to the agreement have substantial market power.

It is recognised by EU courts and regulators that such clauses are widely used in a number of industries including most topically with online travel agents. However the regulatory tide in the EU appears to be turning against the use of these clauses. In a number of recent EU cases in the UK and Germany, MFNs have been condemned when used by companies with significant market power.[ citation needed ]

See also

Related Research Articles

Free-trade area Regional trade agreement

A free-trade area is the region encompassing a trade bloc whose member countries have signed a free trade agreement (FTA). Such agreements involve cooperation between at least two countries to reduce trade barriers, import quotas and tariffs, and to increase trade of goods and services with each other. If natural persons are also free to move between the countries, in addition to a free-trade agreement, it would also be considered an open border. It can be considered the second stage of economic integration.

The General Agreement on Tariffs and Trade (GATT) is a legal agreement between many countries, whose overall purpose was to promote international trade by reducing or eliminating trade barriers such as tariffs or quotas. According to its preamble, its purpose was the "substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis."

World Trade Organization Intergovernmental trade organization

The World Trade Organization (WTO) is an intergovernmental organization that regulates and facilitates international trade between nations. Governments use the organization to establish, revise, and enforce the rules that govern international trade. It officially commenced operations on 1 January 1995, pursuant to the 1994 Marrakesh Agreement, thus replacing the General Agreement on Tariffs and Trade (GATT) that had been established in 1948. The WTO is the world's largest international economic organization, with 164 member states representing over 96% of global trade and global GDP.

National treatment is a principle in international law. Utilized in many treaty regimes involving trade and intellectual property, it requires equal treatment of foreigners and locals. Under national treatment, a state that grants particular rights, benefits or privileges to its own citizens must also grant those advantages to the citizens of other states while they are in that country. In the context of international agreements, a state must provide equal treatment to citizens of the other states participating in the agreement. Imported and locally produced goods should be treated equally — at least after the foreign goods have entered the market.

The General Agreement on Trade in Services (GATS) is a treaty of the World Trade Organization (WTO) which entered into force in January 1995 as a result of the Uruguay Round negotiations. The treaty was created to extend the multilateral trading system to service sector, in the same way the General Agreement on Tariffs and Trade (GATT) provides such a system for merchandise trade.

Trade agreement

A trade agreement is a wide-ranging taxes, tariff and trade treaty that often includes investment guarantees. It exists when two or more countries agree on terms that help them trade with each other. The most common trade agreements are of the preferential and free trade types, which are concluded in order to reduce tariffs, quotas and other trade restrictions on items traded between the signatories.

The Generalized System of Preferences, or GSP, is a preferential tariff system which provides tariff reduction on various products. The concept of GSP is very different from the concept of "most favored nation" (MFN). MFN status provides equal treatment in the case of tariff being imposed by a nation but in case of GSP differential tariff could be imposed by a nation on various countries depending upon factors such as whether it is a developed country or a developing country. Both the rules comes under the purview of WTO.

Index of international trade articles

This is a list of international trade topics.

The status of permanent normal trade relations (PNTR) is a legal designation in the United States for free trade with a foreign nation. In the United States, the name was changed from most favored nation (MFN) to PNTR in 1998.

International trade law

International trade law includes the appropriate rules and customs for handling trade between countries. However, it is also used in legal writings as trade between private sectors. This branch of law is now an independent field of study as most governments have become part of the world trade, as members of the World Trade Organization (WTO). Since the transaction between private sectors of different countries is an important part of the WTO activities, this latter branch of law is now a very important part of the academic works and is under study in many universities across the world.

A free trade agreement (FTA) or treaty is an agreement according to international law to form a free-trade area between the cooperating states. There are two types of trade agreements - bilateral and multilateral. Bilateral trade agreements occur when two countries agree to loosen trade restrictions between the two of them, generally to expand business opportunities. Multilateral trade agreements are agreements among three or more countries, and are the most difficult to negotiate and agree.

Trade and Investment Framework Agreement

A Trade and Investment Framework Agreement (TIFA) is a trade pact that establishes a framework for expanding trade and resolving outstanding disputes between countries.

Market access Ability to sell goods and services across borders

In international trade, market access is a company's ability to enter a foreign market by selling its goods and services in another country. Market access is not the same as free trade, because market access is normally subject to conditions or requirements, whereas under ideal free trade conditions goods and services can circulate across borders without any barriers to trade. Expanding market access is therefore often a more achievable goal of trade negotiations than achieving free trade.

The Agreement on Trade-Related Investment Measures (TRIMs) are rules that are applicable to the domestic regulations a country applies to foreign investors, often as part of an industrial policy. The agreement, concluded in 1994, was negotiated under the WTO's predecessor, the General Agreement on Tariffs and Trade (GATT), and came into force in 1995. The agreement was agreed upon by all members of the World Trade Organization. Trade-Related Investment Measures is one of the four principal legal agreements of the WTO trade treaty.

The Banana Framework Agreement (BFA) outlines regulations on the treatment, sharing, and production of bananas and other various banana related activities. It was concluded in 1993 between the European Union and Costa Rica, Colombia, Nicaragua and Venezuela, following a dispute in the framework of the General Agreement on Tariffs and Trade (GATT) on the EU's banana import regime.

The spaghetti bowl effect is the multiplication of free trade agreements (FTAs), supplanting multilateral World Trade Organization negotiations as an alternative path toward globalization. The term was first used by Jagdish Bhagwati in 1995 in the paper: “US Trade policy: The infatuation with free trade agreements”, where he openly criticized FTAs as being paradoxically counter-productive in promoting freer and more opened global trades. According to Bhagwati, too many crisscrossing FTAs would allow countries to adopt discriminatory trade policies and reduce the economic benefits of trade.

The U.S.–China Relations Act of 2000 is an Act of the United States Congress that granted China permanent normal trade relations (NTR) status when China becomes a full member of the World Trade Organization (WTO), ending annual review and approval of NTR. It was signed into law on October 10, 2000 by United States President Bill Clinton. The Act also establishes a Congressional-Executive Commission to ensure that China complies with internationally recognized human rights laws, meets labor standards and allows religious freedom, and establishes a task force to prohibit the importation of Chinese products that were made in forced labor camps or prisons. The Act also includes so-called "anti-dumping" measures designed to prevent an influx of inexpensive Chinese goods into the United States that might hurt American industries making the same goods. It allows new duties and restrictions on Chinese imports that "threaten to cause market disruption to the U.S. producers of a like or directly competitive product."

China became a member of the World Trade Organization (WTO) on 11 December 2001, after the agreement of the Ministerial Conference. The admission of China to the WTO was preceded by a lengthy process of negotiations and required significant changes to the Chinese economy.

Afghanistan received membership to the World Trade Organization (WTO) at the 10th WTO Ministerial Conference in Nairobi, Kenya, December 17, 2015. Afghanistan is 164th in the world and 36th among the less-developed countries that have received WTO membership.

History of the World Trade Organization Aspect of history

The World Trade Organization (WTO) is an intergovernmental organization which regulates international trade. The WTO officially commenced on 1 January 1995 under the Marrakesh Agreement, signed by 123 nations on 15 April 1994, replacing the General Agreement on Tariffs and Trade (GATT), which commenced in 1948. The WTO deals with regulation of trade between participating countries by providing a framework for negotiating trade agreements and a dispute resolution process aimed at enforcing participants' adherence to WTO agreements, which is signed by representatives of member governments and ratified by their parliaments. Most of the issues that the WTO focuses on derive from previous trade negotiations, especially from the Uruguay Round (1986–1994).

References

  1. McCloure, Mike (2011-07-25). "Most Favoured Nation Clauses – No favoured view on how they should be interpreted" Archived 2011-10-07 at the Wayback Machine . Kluwer Arbitration Blog. Retrieved 2011-07-26.
  2. "WTO – Regional Trade Agreements – goods (GATT) provisions" . Retrieved 12 May 2016.
  3. Yi, Seong Deong (2004). Commemorative Edition in Honour of Professor Paik, Choong-Hyun on his Retirement : Articles ; Most-Favoured-Nation Treatment: Its Historical Developments and Concept. Vol. 11 No. 1
  4. The Economist: Weekly Commercial Times, Banker's Gazette and Railway Monitor, Volume 1. Economist Newspaper Limited. 1845. p. 551.
  5. Understanding the WTO Handbook at WTO official website. (Note that the document's printed folio numbers do not match the pdf page numbers.)
  6. U.S.-China Trade and MFN Status, C-SPAN, June 12, 1991
  7. Russia, Jackson-Vanik Amendment Could Be Lifted By End Of 2008 – JRL 5-31-07
  8. "Biden urges repeal of Jackson-Vanik amendment". Archived from the original on 6 September 2012. Retrieved 12 May 2016.CS1 maint: bot: original URL status unknown (link)
  9. "Statement by the Press Secretary on H.R. 6156". whitehouse.gov . Retrieved 12 May 2016 via National Archives.
  10. Hu, Jiang; Vanhullebusch, Matthias (2014). Regional Cooperation and Free Trade Agreements in Asia. Leiden: Brill Nijhoff. p. 354. ISBN   978-9004279858.
  11. Dumbaugh, Kerry RS20691: Voting on NTR for China Again In 2001, and Past Congressional Decisions at University of North Texas, April 27, 2001
  12. https://economictimes.indiatimes.com/news/politics-and-nation/pakistans-most-favoured-nation-status-crapped/articleshow/68018002.cms
  13. "The "Most Favored Nation" landmine". Apr 10, 2012. Retrieved Nov 2, 2020.
  14. "Developing an Administrable MFN Enforcement Policy" (PDF). Retrieved Nov 2, 2020.
  15. Lemke and Lins, Regulation of Investment Advisers, §2:5.50 (Thomson West, 2013).
  16. 1 2 Newcombe, Paul; Paradell, Lluis (2009). Law and Practice of Investment Treaties: Standards of Treatment. Austin: Wolters Kluwer. p. 227. ISBN   978-9041123510.
  17. UNCTAD (1999). Most-favoured-nation Treatment, Volume 3. New York: United Nations Publications. p. 6. ISBN   9211124506.

Further reading