A method of establishing equality of trading opportunity among states by guaranteeing that if one country is given better trade terms by another, then all other states must get the same terms.
In the twentieth century, the history of world trade is dominated by the move from protective tariffs to free trade. International agreements have permitted most of the world's nations to export their products without facing discriminatory duties. A key concept in the liberalization of trade is most-favored-nation (MFN) status.
MFN status is a method of preventing discriminatory treatment among members of an international trading organization. MFN status provides trade equality among partners by ensuring that an importing country will not discriminate against another country's goods in favor of those from a third. Once the importing country grants any type of concession to the third-party country, this concession must be given to all other countries.
For example, assume that the United States government negotiates a bilateral trade agreement with Indonesia that provides, among other things, that a duty of $1 will be charged for imported Indonesian television sets. All countries that have MFN status will pay no more than a $1 duty to export televisions to the United States. If the United States later negotiates a duty of 75¢ with Japan for imported televisions, Indonesia and all other MFN countries will pay 75¢, despite Indonesia's original agreement to pay more duty.
The number of countries with MFN status increased after world war ii with the general agreement on tariffs and trade (GATT) treaty, which was signed by many nations in 1948. Article I of the GATT requires that exports of all contracting parties to the treaty should be treated alike by other contracting parties, immediately and without condition. Thus, each member's exports are treated on the best terms (or "most favored" terms) available to any GATT member.
The MFN status proclaimed in the GATT has been granted to about 180 countries. Only a handful of communist countries have been denied MFN status.
The United States is forbidden by law to grant MFN status to communist countries that do not have free-market economies. The practical effect is that imports from these countries are subject to much higher tariffs. An amendment to the Trade Act of 1974, however, created a loophole. The president may waive the MFN restriction on an annual basis if the communist country permits free emigration or if MFN status would lead to increased emigration. By law, the president must tell Congress each year of the administration's intention to renew or deny MFN status benefits to a communist country. Congress has sixty days to overturn the decision and would then need a two-thirds majority to override a presidential veto.
China has been the main beneficiary of this loophole. Since 1979 China has been granted MFN status. After China suppressed its democracy movement and the Tiananmen Square protest in 1989, Congress opposed continuation of the country's MFN status, yet both President george h. w. bush and President bill clinton renewed China's MFN benefits.