The Most Favoured Nation is one of the principles of WTO (World Trade Organisation) which gives the privileges to the one country to another for non-discriminatory trade policy commitment on a reciprocal basis that means both the countries enjoy lowest import-duty and quota-restrictions on imports from each other.
As per Article I of the General Agreement on Tariffs and Trade (GATT) and its successor World Trade Organization (WTO), all signatory states must extend this treatment to one another. Common markets, customs unions, and free trade areas, however, are exempt from MFN provisions.
Concept of WTO’s Most Favoured Nation
Most favoured nation (MFN) according to the international economic relations and international politics is a status or level of treatment accorded by one state to another in international trade. The term means the country which is the recipient of this treatment must, nominally, receive equal trade advantages as the "most favoured nation" by the country granting such treatment.
Clauses of WTO’s Most Favoured Nation
The clauses of “most favoured nation” is basically a contract provision in which one country (seller) agree to provide another country (buyer) the best possible terms that makes available to any other country (buyer).
1. Increases trade creation and decreases trade diversion. A country that grants MFN on imports will have its imports provided by the most efficient supplier if the most efficient supplier is within the group of MFN. Otherwise, that is, if the most efficient producer is outside the group of MFN and additionally, is charged higher rates of tariffs, then it is possible that trade would merely be diverted from this most efficient producer to a less efficient producer within the group of MFN (or with a tariff rate of 0). This leads to economic costs for the importing country, which can outweigh the gains from free trade.
2. MFN allows smaller countries, in particular, to participate in the advantages that larger countries often grant to each other, whereas on their own, smaller countries would often not be powerful enough to negotiate such advantages by themselves.
3. Granting MFN has domestic benefits: having one set of tariffs for all countries simplifies the rules and makes them more transparent. Theoretically, if all countries in the world confer MFN status to each other, there will be no need to establish complex and administratively costly rules of origin to determine which country a product (that may contain parts from all over the world) must be attributed to for customs purposes. However, if at least one nation lies outside the MFN alliance, then customs cannot be done away with.
4. MFN restrains domestic special interests from obtaining protectionist measures. For example, butter producers in country A may not be able to lobby for high tariffs on butter to prevent cheap imports from developing country B, because, as the higher tariffs would apply to every country, the interests of A's principal ally C might get impaired.
5. As MFN clauses promote non-discrimination among countries, they also tend to promote the objective of free trade in general.
MFN status is very good concept for smaller and third world countries (developing nation) because it increases the realm of market at lowest cost of export with low trade barriers which makes their product more competitive.