
Most-Favored-Nation Clause
A most-favored-nation (MFN) clause requires a country to provide any concessions, privileges, or immunities granted to one nation in a trade agreement to all other World Trade Organization member countries. Nations designated as developing by the WTO receive special consideration from the U.S. In the case of benefits free-trade agreements provide, like those that were laid out in the North American Free Trade Agreement (NAFTA), those are not subject to the MFN clause as long as the goods are traded between the participating countries only. A most-favored-nation (MFN) clause requires a country to provide any concessions, privileges, or immunities granted to one nation in a trade agreement to all other World Trade Organization member countries. In international trade, MFN treatment is synonymous with non-discriminatory trade policy because it ensures equal trading among all WTO member nations rather than exclusive trading privileges. To avoid the confusion that MFN status signified a special or exclusive relationship, U.S. legislators began using the term normal trade relations in place of MFN in 1998.

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What Is the Most-Favored-Nation Clause?
A most-favored-nation (MFN) clause requires a country to provide any concessions, privileges, or immunities granted to one nation in a trade agreement to all other World Trade Organization member countries. Although its name implies favoritism toward another nation, it denotes the equal treatment of all countries.



Most-Favored-Nation Clause Explained
In international trade, MFN treatment is synonymous with non-discriminatory trade policy because it ensures equal trading among all WTO member nations rather than exclusive trading privileges. For example, if a nation reduces tariffs by 5% for one nation, the MFN clause states that all WTO members will have their tariffs cut by 5% into that nation.
In the case of benefits free-trade agreements provide, like those that were laid out in the North American Free Trade Agreement (NAFTA), those are not subject to the MFN clause as long as the goods are traded between the participating countries only. To avoid the confusion that MFN status signified a special or exclusive relationship, U.S. legislators began using the term normal trade relations in place of MFN in 1998.
The MFN only covers normal trade relations and not free-trade agreements such as NAFTA, assuming trade remains only between those countries.
The Political Implications of the MFN Clause
During Bill Clinton’s presidency (1993–2001), congressional representatives debated the merits of dropping the embargoes and quotas placed on China and Vietnam and granting them MFN status. Proponents of granting MFN status argued that tariff reductions on Chinese and Vietnamese goods might give the American consumer access to quality products at relatively low prices and enhance a mutually beneficial trade relationship with the two rapidly developing economies.
Meanwhile, opponents argued that granting MFN status to the two nations may be unfair given their history of human rights violations. Others thought the inflow of cheaper goods from China or Vietnam could cause Americans to lose their jobs. Both countries ended up receiving MFN status.
Real World Example of a Most-Favored-Nation Clause
The United States extends MFN status to all nations except those who have had their status suspended by specific legislation.
Of the 29 nations that have had their MFN status suspended at some point in the past, only two remain suspended — Cuba and North Korea.
The vast majority of suspensions since World War II were mandated under the Trade Agreements Extension Act of 1951. Countries with their MFN statuses suspended under the 1951 law can be and have been restored on a temporary or permanent basis through procedures laid out in the Trade Act of 1974 that apply to non-market economy countries, specific legislation, or presidential order. The U.S. gives special consideration to countries the World Trade Organization classifies as developing.
Related terms:
Antitrust
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Asia-Pacific Economic Cooperation (APEC)
Asia-Pacific Economic Cooperation (APEC) is a 21-member economic forum that promotes free trade and sustainable development in Pacific Rim economies. read more
Embargo
An embargo is a government order that restricts commerce or exchange with a specified country, usually as a result of political or economic problems. read more
North American Free Trade Agreement (NAFTA)
The North American Free Trade Agreement (NAFTA) was implemented in 1994 to encourage trade between the countries of United States, Mexico, and Canada. read more
Smoot-Hawley Tariff Act
The Smoot-Hawley Tariff Act raised U.S. import taxes to protect American businesses from foreign competition. Global trade plummeted as a result. read more
Taft-Hartley Act
The Taft-Hartley Act is a 1947 federal law that limits the activities and power of labor unions. read more
Trade Act of 1974
The Trade Act of 1974 passed to expand U.S. participation in international trade and reduce trade disputes through the reduction of barriers to trade. read more