Most favoured nation

• 1. Introduction

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  Most favoured nation status sounds like a prize, a gold seal stamped across a country's passport to global commerce. But the phrase carries an almost deliberate irony: being "most favoured" does not mean being special. It means being equal. The promise at the heart of MFN is that no trading partner will be treated worse than the best deal on offer to anyone else.

  How does a principle built on equality become one of the foundations of the entire global trading order? How did a concept born in bilateral treaties between monarchies become the glue holding together an organisation with more than a hundred and fifty member states? And what happens when a country decides to tear up that status and use it as a weapon?

  Those are the questions that follow. From a 1667 agreement between Spain and England to a joint statement by the G7 in 2022, the story of Most Favoured Nation status is a story about how countries decide who deserves to be treated fairly and who does not.

• 2. From Treaties to Trade Law

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  In the Treaty of Madrid in 1667, Spain granted England a trading privilege that would become a template for the next three centuries. England was to receive whatever terms Spain offered to any other partner. That simple idea spread quickly through the courts and chancelleries of Europe.

  A trade treaty between the United States and France in 1778 established one of the most prominent early examples of a conditional most-favoured nation clause. The United States would go on to include similar clauses in subsequent treaties throughout that era. By the mid-19th century, the practice had spread beyond Europe to Latin American states and Japan.

  The Jay Treaty of 1794 extended the same terms to Britain that England had earlier secured from Spain, and the pattern repeated. In the Joseon-United States Treaty of 1882, the Korean kingdom Joseon was compelled by the United States to grant it most favoured nation status. The word "compelled" in that record is a reminder that these arrangements were not always arrived at between equals.

  The bilateral model persisted until the wreckage of the Second World War demanded something larger. Tariff and trade agreements began to be negotiated simultaneously by all interested parties through the General Agreement on Tariffs and Trade, known as GATT. That process ultimately produced the World Trade Organization in 1995, and MFN moved from a clause exchanged between two governments to a legal obligation binding every member of the new body.

• 3. The Logic of Non-Discrimination

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  Together with the principle of national treatment, MFN is described as one of the cornerstones of WTO trade law. The distinction between the two is worth understanding. National treatment concerns how a country treats foreign goods once they are inside its borders. MFN concerns how it treats foreign countries at the gate.

  The non-discriminatory component of GATT and WTO rules works in a specific and somewhat counterintuitive way. When two countries negotiate a tariff reduction between themselves, that reduction does not stay private. Under WTO rules, the benefit extends automatically to all other members, regardless of whether they participated in the negotiation.

  Trade experts identify several practical advantages flowing from this arrangement. Smaller countries gain access to the deals that larger economies strike with each other, which they would not have the negotiating weight to secure on their own. A country that grants MFN status on imports will, in principle, source those imports from the most efficient supplier within the MFN group, provided that supplier is indeed part of the group.

  There is also a domestic political argument for MFN. When a single set of tariffs applies to all countries, lobby groups find it harder to carve out special protections. If butter producers in one country try to raise tariffs on imports from a developing nation, those higher tariffs would apply to every country, potentially harming the interests of key allies. That structural feature can blunt protectionist pressure in ways that country-by-country negotiations cannot.

• 4. Exceptions and Cracks

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  GATT members recognised early on that strict non-discrimination could itself become a form of unfairness when applied between wealthy and poor countries. The principle that everyone gets the same terms sounds neutral, but a developing country competing against industrialised economies on identical tariff schedules is not on equal footing.

  The UN Conference on Trade and Development, established in 1964, emerged in part from that tension. It has sought to extend preferential treatment to the exports of developing countries as a deliberate exception to the MFN rule.

  Regional trade blocs introduced a different kind of crack. The European Union and the North American Free Trade Agreement, known as NAFTA, lowered or eliminated tariffs among their own members while maintaining barriers between those members and the rest of the world. Trade agreements generally allow for these regional integration exceptions, but they sit in some tension with the universal logic of MFN.

  The result is a system that holds MFN as its stated norm while surrounding that norm with a layered structure of carve-outs. The debate in legal circles over whether MFN clauses in bilateral investment treaties cover only substantive rules or also procedural protections adds another dimension to that complexity, one that treaty negotiators and arbitration panels continue to work through.

• 5. Revocation as Foreign Policy

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  Article 21 of WTO rules allows any member to revoke MFN status it had previously granted to another, citing national security, and to do so without further explanation. That provision has proved significant in two episodes that show MFN operating not as a trade principle but as a diplomatic instrument.

  In February 2019, following the Pulwama attack that killed over 40 CRPF personnel, India withdrew the MFN status it had accorded to Pakistan. The revocation was immediate and framed explicitly as a response to a security event rather than a trade dispute.

  Three years later, in March 2022, the G7 countries resolved jointly to withdraw most favoured nation status from Russia in response to the invasion of Ukraine. The group issued a statement that read: "Russia cannot grossly violate international law and expect to benefit from being part of the international economic order." The coordinated withdrawal was accompanied by the imposition of punitive tariffs, converting a trade privilege into a sanction applied by the world's largest economies acting together.

  Within the South Asian Association for Regional Cooperation, the pattern reflects the same logic at a regional scale. Bangladesh, Maldives, Nepal, Pakistan and Sri Lanka are all WTO members. All of them except Pakistan have extended MFN status to India. India had extended MFN status to all SAARC countries until the 2019 revocation changed that picture.

• 6. MFN Beyond Trade Borders

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  The most favoured nation clause has migrated well beyond the vocabulary of state-to-state trade. In contract law, the same phrase describes a provision in which a seller or licensor agrees to give a buyer or licensee the best terms it makes available to any other buyer or licensee.

  In institutional investment advisory contracts, this can mean that a client who meets certain conditions becomes entitled to the lowest fee offered to other clients with a substantially identical investment strategy and the same or lower level of assets under management. The principle is recognisable: whoever you are, you cannot be offered worse terms than the best terms on the table.

  Online ebook retailers contracting with publishers provide one context where such clauses have become commonplace. But the same clauses have drawn regulatory scrutiny. The current EU competition law position is that an MFN clause will infringe Article 101(i) if, in the individual circumstances of the case, it results in an appreciable adverse effect on competition within the European Union. That outcome is considered more likely when the parties to the agreement hold substantial market power.

  EU courts and regulators have recognised that these clauses appear widely in industries including online travel agents. Cases in the United Kingdom and Germany have seen MFN clauses condemned when used by companies with significant market power. The United Nations Conference on Trade and Development has also weighed in on the contract-law version, clarifying that a host country cannot be obliged to enter into an individual investment contract and that freedom of contract prevails over the MFN standard, though that general principle is not treated as absolute.