Most-Favored Nation (MFN) (Encyclopedia of Business)
The term "most-favored nation" (MFN) refers to a trade status granted by countries to one another as part of a formalized and reciprocal trade agreement. Under an MFN clause a country that grants trade concessions to one party of the agreement must grant the same concessions to all signatories of the agreement. The impetus for such a trade agreement is the reduction of tariffs and import taxes. This reduction of tariffs fosters international trade by opening and expanding markets. Reciprocal trade agreements and their all-important MFN clauses serve as the basis for the foreign trade policies of most nations.
The idea of granting reciprocal concessions to encourage trade probably began with Islamic and Byzantine commerce. In an effort to persuade European merchants (mostly from Spanish, French, and Italian commercial areas and ports) to settle in eastern trading centers, foreign merchants were granted the same rights and guarantees as the citizens of host countries.
At the outset of the American Revolution, John Adams suggested that a commercial treatyith what today would be called MFN languageetween the colonies and France would keep that country on the side of the Americans against the British. Adams felt a commercial treaty would be beneficial to both sides and less entangling than a political treaty. In his "Farewell Address of 1796," George Washington, however, advised his fellow countrymen to trade impassionately and without regard to political discrimination.
Future generations of American policy makers, however, often disregarded Adams's and Washington's advice. In the late 1700s and through much of the 1800s, the United States drew a distinction between unconditional MFN and conditional MFN status. Unconditional MFN charges a country to grant a trading partner all concessions it grants to a third party. With conditional MFN status, however, only the opportunity to be the recipient of trade concessions is guaranteed. Concessions are available only if the potential recipient is willing to replicate reciprocities granted by a third state. If the United States, for instance, grants a trade concession to France in reciprocity, under conditional MFN status the United States will grant the same concessions to Great Britainut only if Great Britain matches French reciprocity. Under unconditional MFN language, Great Britain obtains the concessions granted by the United States to France without having to match French reciprocity (Cline 1982). Although still abiding by treaty arrangements, the United States has routinely and for political reasons revoked its MFN agreements with many socialist countries including at one time or another the former Soviet Union, Poland, Hungary, Romania, and Nicaragua.
The granting of MFN status to a country can also be used to induce or at least attempt to induce a country to a particular course of action. This strategy can turn trade policy into an impassioned political football. In the 1970s the Soviet Union routinely prohibited many of its Jewish citizens from immigrating to Israel. In 1974 Senator Henry "Scoop" Jackson linked Soviet-American trade to that country's treatment of Jews. According to the Jackson-Vanik Amendment to the Trade Act of 1974, the status of most-favored nation was to be granted at the discretion of the president. Since 1980 when the People's Republic of China was granted MFN status, American presidents and Congressional policy makers have been at odds over this issue. At stake is tens of billions of dollars in trade. Both Presidents George Bush and Bill Clinton have renewed China's MFN status but not without Congressional battles. China, for its part, has often felt humiliated and compromised by the wrangling. In 1994 Clinton sought to separate MFN status from China's dismal human-rights record, claiming China was too powerful a country and too big of a trading partner to be isolated from the world community. In 1997 Clinton reiterated his stance claiming that renewing MFN status is the "best way to integrate China further into the family of nations and to secure our interest and ideals." Representative Frank Wolf differed, claiming that the People's Republic of China has "tortured and killed Buddhist monks and nuns," and that they have "more gulags than the Soviet Union." Wolf also said that Saddam Hussein used Chinese-manufactured weapons against U.S. forces during the Gulf War. Under Jackson's "freedom-of-emigration" legislation, China's MFN status must be renewed annually. If it were not renewed, China would have to pay substantially higher duties on 95 percent of its exports to the United Stateshich in 1995 totaled $45,555 million.
The most comprehensive teciprocal trade agreement is the General Agreement on Tariffs and Trade (GATT). GATT was signed in Geneva in 1947 by 23 countries, including the United States. By the early 1990s there were 90 signatories to the trade accord. An integral part of GATT is the unconditional MFN clause.
Cline, William R. Reciprocity: A New Approach to World Trade Policy? Washington: Institute for International Economics, 1982.
Neff, Stephen C. Friends but No Allies: Economic Liberalism and the Law of Nations. New York: Columbia University Press, 1990.
Omicinski, John. "'Most-Favored-Nation Trade' Legislation Got Start in the 1970s with Jackson's Help." Seattle: Seattle Times Company, 1997. Available from www.seattletimes.com/extralbrowse/html97/althist-052097.html.
Online Newshour. "Favoring China." Alexandria, VA: Public Broadcasting Service, 1997. Available from .
Pregelj, Vladimir N. "Most-Favored-Nation Status of the People's Republic of China." Washington: Congressional Research Service, 1996. Available from .