Most-Favored-Nation Principle

Encyclopedia of American Foreign Policy, (2002) by Justus D. Doenecke, Michael R. Adamson

M OST -F AVORED -N ATION P RINCIPLE

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.

MFN TREATMENT IN PRACTICE, 1776–1887: CONDITIONAL MFN WITHIN PROTECTIONISM

In July 1776 the delegates to the Continental Congress were prepared to allow unrestricted imports into the U.S. market in order to gain diplomatic recognition and break Britain's hold on Atlantic trade. John Adams, assisted by Benjamin Franklin, drafted a model commercial agreement that was approved by the delegates. It instructed trade negotiators to obtain equal national treatment or unconditional MFN treatment to gain access to Europe's markets (and those of its colonies).

America's first trade treaty, the 1778 Franco-American Treaty of Amity and Commerce, secured neither equal national treatment nor unconditional MFN status for American goods. U.S. trade negotiators Benjamin Franklin, Silas Deane, and Arthur Lee settled for a conditional MFN clause (Article II).

Neither side wanted the treaty to benefit Britain; French negotiators feared the consequences of a possible U.S.–British political reconciliation. U.S. negotiators wanted Britain and other European countries to buy access to the U.S. market with reciprocal trading privileges to their home and colonial markets. French officials only offered access to its home market. In 1783, France reverted to unconditional treatment and tried to interpret Article II in this way. U.S. officials balked; they decided to use reciprocity to secure equality of treatment.

During the early national period, U.S. officials had little success in opening overseas markets to American goods. They concluded treaties with Sweden and the Netherlands, but only the latter offered MFN access to both its home and colonial markets. In 1784 U.S. negotiators initiated another round of trade talks, using the 1776 plan as a blueprint. They succeeded only in securing a pact with Prussia in 1785, which secured the conditional MFN treatment granted by France in the 1778 treaty. Officials such as John Jay and Elbridge Gerry became convinced that a strict reciprocity approach would best serve U.S. interests, at least until negotiators gained experience in trade matters and America gained in importance within the international economy.