Most Favoured Status (MFN)

Syllabus: GS3/Economy

Context

• Under the World Trade Organization (WTO) framework, the Most Favored Nation (MFN) principle requires member countries to treat all trade partners equally by extending the same trade benefits (e.g., reduced tariffs or market access) to all signatories.

MFN in the Context of India-US Trade

• US Trade Deficit Concern: The U.S., under its America First Trade Policy, has consistently raised concerns over its trade deficit with India (over $35 billion in FY24) and demanded reduced tariffs on products of interest, particularly agricultural goods.
• India’s MFN Compliance: In 2023, India agreed to lower import duties on frozen turkey, duck, cranberries, and blueberries following U.S. demands. However, due to the MFN principle, these tariff reductions were applied to all WTO member countries, not just the U.S.

Most Favoured Status (MFN)

• Aim: The MFN principle was designed to prevent countries from giving different treatment to one partner over the other.
  • Each member treats all the other members equally as “most-favoured” trading partners. 
• If a country improves the benefits that it gives to one trading partner, it has to give the same “best” treatment to all the other WTO members so that they all remain “most-favoured”.
• Principle: It seeks to replace the frictions and distortions of power-based (bilateral) policies with the guarantees of a rules-based framework where trading rights do not depend on the individual participants’ economic or political clout.
• Countries outside the WTO: Countries such as Russia, Iran, North Korea, Syria and Belarus are not a part of WTO & WTO members can impose whatever trade measures they wish without flouting global trading rules.
• Exceptions: There can be exceptions to allow for preferential treatment of developing countries, regional free trade areas and customs unions.

Removal of MFN status

• There is no formal procedure for suspending MFN treatment, it does formally allow the members to increase import tariffs or impose quotas on goods, or even ban them.
• In 2019 India suspended Pakistan’s MFN status after a suicide attack by a Pakistan-based Islamist group. Pakistan never applied MFN status to India.

What does losing MFN status mean?

• Revoking MFN status sends a strong signal that the member countries do not consider the losing country an economic partner.
• Members can increase import tariffs or impose quotas on goods, or even ban them, and to restrict services out of the country. 

Source: BL