Most Favored Nation (MFN)
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India announced on February 15 that the ‘Most Favoured Nation’ (MFN) status given to Pakistan stands withdrawn, in the wake of the heinous terrorist attack in Pulwama district of Jammu and Kashmir the previous day, which left over 39 CRPF personnel dead.

Meaning of Most Favoured Nation(MFN) Principle

he importance of MFN is shown in the fact that it is the first clause in the General Agreement on Tariffs and Trade (GATT). It is a treatment accorded by one state to another to ensure non-discriminatory trade practices between the two countries vis-à-vis other trade partners. According to WTO, 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”.

According to the World Trade Organisation rules, countries cannot normally discriminate between their trading partners. If one country is granted a trade concession then all WTO members must be extended the same concessions. It leads to equal treatment amongst countries and ensures a more stable, predictable, reliable and competitive international trade.

Some exceptions are allowed. For example, countries can set up a free trade agreement that applies only to goods traded within the group —   discriminating against goods from outside. Or they can give developing countries special access to their markets. Or a country can raise barriers against products that are considered to be traded unfairly from specific countries.

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When did India grant MFN to Pakistan?

India gave Pakistan the status in 1996. Pakistan, however, did not grant India the same status.

What does revoking MFN mean?

Revoking it means India can levy whatever import tariffs it wants. India can now make it very expensive for Pakistan to export its goods to India.

What are the pros of MFN?

MFN status is extremely advantageous for developing countries. It results in access to a wider market for trade goods, reduced cost of export items owing to highly reduced tariffs and trade barriers. It finally lead to more competitive trade.

MFN also cuts down bureaucratic hurdles and various kinds of tariffs are set at par for all imports. It then increases demands for the goods and giving a boost to the economy and export sector. It also reduces the negative impact caused to the economy due to trade protectionism. This may affect the domestic industries in the short run. However, in the long run, it makes them more competitive and robust.

What are the cons of MFN?

The main disadvantage is that the country has to give the same treatment to all other trade partners who are members of the WTO. This translates into a price war and vulnerability of the domestic industry as a result. The country is not able to protect the domestic industry from the cheaper imports and in this price war, some domestic players have to face heavy losses or growth restrictions.