The Most Favoured Nation (MFN) principle is a fundamental rule under the World Trade Organization (WTO) that ensures non-discriminatory trade practices among member countries. It mandates that any trade benefit, tariff reduction, or market access granted to one WTO member must be extended to all other WTO members without discrimination.
For India, as a developing economy and a WTO member since 1995, the MFN principle plays a crucial role in shaping its trade policies, international agreements, and economic diplomacy. However, exceptions and geopolitical considerations sometimes lead to deviations from MFN obligations, such as in India's trade relations with Pakistan and China.
Understanding the Most Favoured Nation (MFN) Principle
1. Definition and Concept
- MFN means "treating all trading partners equally."
- If India reduces import duties on a product from one WTO member, the same must be offered to all other WTO members.
- This prevents preferential treatment and promotes free and fair trade.
2. Legal Basis in the WTO Regime
- Article I of the General Agreement on Tariffs and Trade (GATT) 1994) establishes MFN for goods trade.
- Article II of the General Agreement on Trade in Services (GATS) extends MFN treatment to services trade.
- Article IV of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) applies MFN to intellectual property rights.
3. India's Adherence to MFN under WTO
India, as a founding member of WTO, follows the MFN principle in:
- Tariff Reductions: India offers the same tariff rates to all WTO members unless a preferential agreement exists.
- Service Sector Commitments: Indian IT, finance, and professional services benefit from equal treatment in global markets.
- Patent and IP Laws: India’s patent laws comply with WTO’s TRIPS agreement under MFN obligations.
4. Exceptions to MFN Principle
Although MFN ensures equal treatment, certain exceptions are allowed:
- Regional Trade Agreements (RTAs): Countries can form Free Trade Agreements (FTAs) or regional economic blocs (e.g., India-South Asia Free Trade Agreement (SAFTA)), where MFN does not apply.
- Generalized System of Preferences (GSP): Developed nations grant special trade benefits to developing countries (e.g., India's past GSP benefits from the US).
- National Security Clause (Article XXI of GATT): Countries can suspend MFN trade for security reasons.
- Example: In 2019, India revoked Pakistan’s MFN status following the Pulwama attack.
- Anti-Dumping and Countervailing Duties: If a country is found guilty of unfair trade practices, MFN treatment can be suspended through trade remedies.
India and MFN: Case Studies & Challenges
1. Revocation of MFN Status for Pakistan
- India granted MFN status to Pakistan in 1996, but Pakistan never reciprocated.
- In February 2019, after the Pulwama terror attack, India withdrew MFN treatment for Pakistan and imposed 200% tariffs on Pakistani imports.
- This action was justified under the national security exception in WTO rules.
2. India-China Trade & MFN Dilemma
- India grants MFN status to China under WTO but has imposed trade restrictions due to border tensions (e.g., banning Chinese apps, restricting FDI).
- India has not revoked MFN status but has used anti-dumping duties, import restrictions, and security reviews to curb unfair trade practices by China.
3. India’s MFN Strategy in Free Trade Agreements (FTAs)
- India is negotiating several FTAs (e.g., with the UK, EU, UAE, and Australia) that involve preferential treatment, bypassing MFN obligations.
- RCEP Exit: India refused to join RCEP (Regional Comprehensive Economic Partnership) in 2020, fearing unfair competition from China.
Other Similar Trade Concepts in the WTO Regime
1. National Treatment Principle
- Under Article III of GATT, foreign and domestic products must be treated equally once they enter the domestic market.
- Example: India cannot impose additional taxes on foreign goods after import, beyond what is applied to Indian-made goods.
2. Generalized System of Preferences (GSP)
- Allows developed countries to offer special trade benefits to developing and least-developed countries (LDCs).
- Example: The US revoked India's GSP benefits in 2019 over market access issues.
3. Special and Differential Treatment (S&DT) for Developing Countries
- WTO allows developing countries (like India) more flexibility in implementing trade commitments.
- Example: India enjoys extended timelines for reducing agricultural subsidies and tariff cuts.
4. Trade Facilitation Agreement (TFA)
- Ensures simplified customs procedures and faster trade processes for global trade efficiency.
- Example: India implemented electronic customs clearance to meet TFA commitments.
5. Anti-Dumping and Safeguard Measures
- WTO permits imposing duties on unfairly priced imports that harm domestic industries.
- Example: India regularly imposes anti-dumping duties on Chinese steel and electronic products.
Way Forward for India in the MFN Regime
1. Strengthening India’s Trade Negotiations
- India should use MFN strategically in trade agreements while protecting domestic industries.
- Negotiating fairer WTO rules for developing nations is crucial.
2. Addressing China Trade Concerns
- While maintaining MFN status, India can continue using non-tariff barriers, quality control measures, and anti-dumping duties.
- Strengthening domestic manufacturing (Atmanirbhar Bharat) and PLI schemes will reduce dependency on China.
3. Enhancing FTAs while Balancing MFN Commitments
- India’s FTAs with the EU, UAE, and UK must complement MFN obligations while ensuring preferential market access.
4. Sustainable Trade Policy with WTO Compliance
- India should promote sustainable trade practices, agricultural support, and digital trade policies in line with WTO rules.
Conclusion
The Most Favoured Nation (MFN) principle is a core tenet of the WTO, ensuring equal treatment in global trade. For India, MFN obligations influence tariff policies, FTAs, and trade relations with Pakistan, China, and major economies. While India benefits from non-discriminatory trade access, it also strategically uses exceptions (like security concerns, anti-dumping duties, and FTAs) to protect national interests.
Moving forward, India must balance its WTO commitments, negotiate favorable trade agreements, and strengthen domestic industries to remain competitive in the global economy.
