The MFN principle of the WTO states that each of the WTO member countries should “treat all the other members equally as ‘most-favoured’ trading partners.”
It leads to equal treatment amongst countries and ensures a more stable, predictable, reliable and competitive international trade.
MFN status is very desirable between trading partners because it allows each country the greatest access into the other’s domestic markets without the hindrances of tariffs or quotas. That means it receives the lowest tariffs, the fewest trade barriers, and the highest import quotas (or none at all). It reduces the ill effects of trade protectionism.
According to WTO the trading system should be:
• Without discrimination – a country should not discriminate between its trading partners (giving them equally “most-favoured-nation” or MFN status); and it should not discriminate between its own and foreign products, services or nationals (giving them “national treatment”);
• Freer – barriers coming down through negotiation;
• Predictable – foreign companies, investors and governments should be confident that trade barriers (including tariffs and non-tariff barriers) should not be raised arbitrarily; tariff rates and market-opening commitments are “bound” in the WTO;
• More competitive – discouraging “unfair” practices such as export subsidies and dumping products at below cost to gain market share; and
• More beneficial for less developed countries – giving them more time to adjust, greater flexibility, and special privileges.
MFN status is critically important for smaller and developing countries for several reasons. It gives them access to the larger market. It lowers the cost of their exports since trade barriers are the lowest given. That makes their products more competitive.
The country’s industries have a chance to improve their products as they service this large market. Their companies will grow to meet increased demand. They receive the benefits of economies of scale. That, in turn, increases their exports and their country’s economic growth.
India and MFN
In case of goods, India has extended MFN status to member countries of WTO.
As regards SAARC countries, Bangladesh, Maldives, Nepal, Pakistan and Sri Lanka are members of WTO and except the Pakistan, these countries have extended MFN status to India. India has extended MFN status to all these SAARC countries including Pakistan.