Most-Favored-Nation Principle




Justus D. Doenecke and

Michael R. Adamson

From its inception, the United States has incorporated the most-favored-nation (MFN) principle into its trade policy. Until 1923 it adhered to its conditional form and thereafter to unconditional MFN treatment. Only with the passage of the 1934 Reciprocal Trade Agreements Act (RTAA), however, did Congress allow U.S. trade negotiators to use unconditional MFN treatment as an instrument of trade liberalization. That is, the MFN principle does not equate with free or freer trading environments. From 1778 until 1934, U.S. trade policy was explicitly protectionist. In this environment, the adoption by the State Department of unconditional MFN treatment did nothing to advance its program of trade liberalization. MFN treatment is an instrument of trade policy. Its use must be understood within the context of trade policy. In the United States, interest group pressures, the actions of policymakers, and the constraints and opportunities presented by the international political economy shaped policy over time.

MFN treatment means that policy discriminates among nationals and foreigners but treats all foreigners equally. National treatment extends the same privileges to foreigners and nationals alike. Equal treatment in general is known as nondiscrimination. As far as U.S. trade policy is concerned, two types of MFN treatment are relevant. Unconditional MFN treatment is provided gratuitously to nations eligible for MFN status. Under conditional MFN treatment, third parties must bargain and provide equal compensation in order to benefit from MFN status. Linked historically to MFN treatment in practice is the instrument of reciprocity. Reciprocity, or the exchange of trading privileges through bargaining, implies discrimination among trading partners. That is, benefits are not conferred freely.

The following example illustrates the difference between conditional and unconditional MFN treatment. Assume that the United States extends conditional MFN treatment to Germany, then signs a trade deal with Japan that provides for a reduced tariff on the import of Japanese televisions. Under conditional MFN, however, the United States will not allow German television imports at the new rate until German trade negotiators offer equivalent compensation. German trade negotiators may then offer, for instance, to accept imports of U.S. sewing machines at a lower rate. U.S. trade negotiators—since 1962, officials of the Office of the U.S. Trade Representative; before then, State Department officers—may accept the offer, if the increased value of American sewing machine exports to Germany balances the increased value of German television imports into America. If America were to extend unconditional MFN treatment to Germany, however, the latter would receive benefit of the U.S.–Japanese treaty without having to make any concessions.

As this illustration suggests, unconditional MFN treatment may constitute the means by which a multilateral trading regime is created from a series of bilateral agreements, since its use ensures that all eligible countries enjoy the benefits of past and future concessions. This has been the experience internationally during most of the post–World War II period. As discussed below, both the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO), incorporated unconditional MFN treatment into their charters.

BIBLIOGRAPHY

Boudreau, Donald G. "Beyond Tiananmen Square: China and the MFN Debate." World Affairs 153 (spring 1993): 140–147.

Culbertson, W. S. "Commercial Treaties." In Encyclopedia of the Social Sciences. New York, 1934. Puts MFN in broad historical context.

Eckes, Alfred E., Jr. Opening America's Market: U.S. Trade Policy Since 1776. Chapel Hill, N.C., 1995. A defense of protectionism in U.S trade policy.

——. "U.S. Trade History." In U.S. Trade Policy: History, Theory, and the WTO. Armonk, N.Y., 1999. An excellent overview of more than two hundred years of U.S. trade policy.

Goldstein, Judith. "Ideas, Institutions, and American Trade Policy." International Organization 42 (winter 1988): 179–217. Argues that state-based actor behavior is crucial to understanding U.S. trade policy.

Gordon, Wendell C. International Trade: Goods, People, and Ideas. New York, 1965. Contains examples of both conditional and unconditional MFN provisions in trade agreements.

Haggard, Stephan. "The Institutional Foundations of Hegemony: Explaining the Reciprocal Trade Agreements Act of 1934." International Organization 42 (winter 1988): 91–119. Focuses on the institutional changes in trade policy produced by the RTAA.

Hornbeck, Stanley K. The Most-Favored-Nation Clause in Commercial Treaties. Madison, Wis., 1910. A defense of conditional MFN treatment.

Lake, David A. Power, Protection, and Free Trade: International Sources of U.S. Commercial Strategy, 1887–1939. Ithaca, N.Y., 1988. Argues that executive branch responses to the constraints and opportunities of the international economic structure shaped policy in conjunction with congressional responses to interest-group pressures.

League of Nations Committee on Experts for Progressive Codification of International Law. "Report on the Most-Favored-Nation Clause." American Journal of International Law 20, supplement (1928).

Milner, Helen V., and David B. Yoffie. "Between Free Trade and Protectionism: Strategic Trade Policy and a Theory of Corporate Trade Demands." International Organization 43 (spring 1989): 239–272.

Moore, John Bassett. "Most-Favored-Nation Clauses." Digest of International Law 5 (1906).

Ratner, Sidney. The Tariff in American History. New York, 1972. Provides useful material on the reciprocal trade agreements of the 1930s and the GATT.

Rhodes, Carolyn. "Reciprocity in Trade: The Utility of a Bargaining Strategy." International Organization 43 (spring 1989): 273–299. Assesses the use of reciprocity to achieve trade liberalization within the GATT regime.

——. Reciprocity, U.S. Trade Policy, and the GATT Regime. Ithaca, N.Y., 1993. Argues that instruments of trade policy, such as reciprocity and unconditional MFN treatment, can be tools of liberalization or protectionism, depending on the overall direction of policy.

Schaefer, Donald D. A. "U.S. Foreign Policies of Presidents Bush and Clinton: The Influence of China's Most Favored Nation Status upon Human Rights Issues." Social Science Journal 35 (1998): 407–421.

Viner, Jacob. "The Most-Favored-Nation Clause in American Commercial Treaties." Journal of Political Economy 32 (1924). A vigorous argument against the use of conditional MFN treatment in U.S. trade policy by a University of Chicago economics professor and adviser to the Treasury Department during the Roosevelt administration.

Wang, Yangmin. "The Politics of U.S.–China Economic Relations: MFN, Constructive Engagement, and the Trade Issue Proper." Asian Survey 33 (May 1993): 441–462.

Wolman, Paul. Most Favored Nation: The Republican Revisionists and U.S. Tariff Policy, 1987–1912. Chapel Hill, N.C., 1992.

See also Dollar Diplomacy ; Economic Policy and Theory ; Reciprocity ; Tariff Policy .

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