China’s Most Favoured Nation Status:

By Amisha 10 Minutes Read

Most-favoured-nation (MFN) status is an economic position in which a state  enjoys the simplest trade terms given by its trading partner. The most-favoured-nation clause in two countries’ trade agreements confers that status. (MFN[1]) may be a status or level of treatment accorded by one state to a difference in international trade. The term means the country which is that a recipient of this treatment must nominally receive equal trade advantages because the “most favoured nation” by the country granting such treatment (trade advantages include low tariffs or high import quotas). In effect, a state  that has been accorded MFN status might not be treated less advantageously than the other country with MFN status by the promising country.

While the term suggests special preference for the country given MFN status, it actually means it would be treated equally as all others. According to the World Trade Organisation rules, countries cannot normally discriminate between their trading partners. If one country is granted a trade concession such as, for example, lower import duties, then all WTO members must be extended the same concessions. This principle is known as the Most Favoured Nation treatment. Despite repeated promises, Pakistan has never granted MFN status to India.[2] The US gave China permanent MFN status in 2001, an equivalent year that China became a WTO member. U.S. companies wanted to sell to the most important population within the world. As China’s GDP grew, they thought, so would its consumer spending. “Most favoured nation” relationships extend reciprocal bilateral relationships following both GATT and WTO norms of reciprocity and non-discrimination.

In bilateral reciprocal relationships a specific privilege granted by one party only extends to other parties who reciprocate that privilege, while during a multilateral reciprocal relationship an equivalent privilege would be extended to the group that negotiated a specific privilege[3]. Despite the friendly start to the 21st century, the 2 countries have since become locked in an ongoing trade dispute. Citing unfair trade practices, including intellectual theft, the Trump administration began imposing tariffs on Chinese imports in 2018. China soon introduced tariffs in retaliation. More rounds of tariffs from each side followed throughout 2018 and 2019. As of November 15, 2019, the trade dispute is ongoing[4].

Under rules of the parent Trade Organisation (WTO), a member country isn’t allowed to discriminate between trade partners and if a special status is granted to at least one trade partner, the country is required to increase it to all or any members of the WTO. In a nutshell, MFN may be a non-discriminatory national trading policy because it ensures equal trading among all WTO member nations instead of exclusive trading privileges.

Most-Favored-Nation Clause Explained:

In international trade, MFN treatment is synonymous with non-discriminatory national trading policy because it ensures equal trading among all WTO member nations instead of exclusive trading privileges. For instance, if a nation reduces tariffs by 5% for one nation, the MFN clause states that each one WTO member will have their tariffs cut by 5% into that nation.

Some exceptions are allowed. For instance, countries can find out a trade agreement that applies only to goods traded within the group — discriminating against goods from outside. Or they will give developing countries special access to their markets[5]. Or a state can raise barriers against products that are considered to be traded unfairly from specific countries. And in services, countries are allowed, in limited circumstances, to discriminate. But the agreements only permit these exceptions under strict conditions. Generally, MFN means whenever a state lowers an import barrier or exposes a market, it’s to try to so for an equivalent goods or services from all its trading partners — whether rich or poor, weak or strong[6].

Advantages of Most Favoured Nation[7]:

  • Increases trade creation and reduces trade diversion. A state that grants MFN on imports will have its imports provided by the foremost efficient supplier if the foremost efficient supplier is within the group of MFNs. Otherwise, that is, if the foremost efficient producer is outside the group of MFN and additionally, is charged higher rates of tariffs, then it’s possible that trade would merely be diverted from this most effective producer to a less efficient producer within the group of MFNs (or with a tariff rate of 0).
  • MFN allows smaller countries, especially, to participate within the advantages that larger countries often grant to each other, whereas on their own, smaller countries would often not be powerful enough to barter such advantages by themselves.
  • Giving MFN a local benefit of having one set of tariffs for all countries simplifies the principles and makes them more transparent. However, if a minimum of one nation lies outside the MFN alliance, then customs can’t be done away with.
  • MFN restrains domestic special interests from obtaining protectionist measures. As MFN clauses promote non-discrimination among countries, they also tend to market the target of trade generally.

Disadvantages of Most Favoured Nation[8]:

  • The disadvantage of MFN status is that the country must also grant equivalent trade benefits to all or any other members of the arrangement or the planet Trade Organization. Some industries get exhausted since they cannot compete within the market. It’s one among the disadvantages of trade agreements
  • Countries sometimes subsidise their domestic industries that permits subsidised companies to export at incredibly cheap prices. Once that happens, the country reduces the subsidy, prices rise, but now there is a monopoly—no other companies remain within the industry to stay prices competitive. This practice is understood as dumping. this will get rustic in trouble with the WTO and therefore the policy adopted so as to stop dumping is “Antidumping”.
  • Many countries within the past were excited to urge MFN status and start cheaply exporting goods to the U.S., only to seek out they lost their local agricultural industry. Many farmers had to maneuverer to the cities to seek out jobs. Then, when food prices escalated, there were food riots.

The Political Implications of the MFN Clause[9]:

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 an interdependent trade relationship with the 2 rapidly developing economies.

Meanwhile, opponents argued that granting MFN status to the 2 nations could also 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.

[1] Most favoured nation
[2] Source Link.
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