The Group of Seven (G7) countries and the European Union, have decided to take action that will deny Russia Most Favoured Nation (MFN) status relating to key products. This will revoke important benefits of Russia’s membership of the World Trade Organisation (WTO) and ensure that the products of Russian companies no longer receive MFN treatment in those countries. 

What is MFN status?

• The term ‘most favoured’ suggests special treatment, but in the World Trade Organisation it actually means non-discrimination — treating virtually everyone equally.

• The WTO’s 164 members commit to treating other members equally so they can all benefit from each other’s lowest tariffs, highest import quotas and fewest trade barriers for goods and services. 

• Under the WTO agreements, countries cannot normally discriminate between their trading partners. This principle of non-discrimination is known as Most Favoured Nation (MFN) treatment.

• In other words, if a country gives favourable treatment to one country regarding a particular issue, it must treat all WTO members equally with respect to the same issue.

• It is so important that it is the first article of the General Agreement on Tariffs and Trade (GATT), which governs trade in goods. 

• There are some exceptions, such as when members strike bilateral trade agreements or when members offer developing countries special access to their markets. Or a country can raise barriers against products that are considered to be traded unfairly from specific countries. And in services, countries are allowed, in limited circumstances, to discriminate. But the agreements only permit these exceptions under strict conditions.

• For countries outside the WTO, such as Iran, North Korea, Syria or Russian ally Belarus, WTO members can impose whatever trade measures they wish without flouting global trading rules.

• In general, MFN means that every time a country lowers a trade barrier or opens up a market, it has to do so for the same goods or services from all its trading partners — whether rich or poor, weak or strong.

The importance of MFN treatment

• The idea of MFN treatment has a long history. Prior to the General Agreement on Tariffs and Trade (GATT), an MFN clause was often included in bilateral trade agreements, and as such it contributed greatly to the liberalisation of trade. 

• However, in the 1930s, measures were taken that limited the functioning of the MFN principle. It is said that these measures led to the division of the world economy into trade blocs.

• Lessons were learned from this mistake.

• In the wake of World War II, an unconditional MFN clause was included in the GATT, on a multilateral basis, and has contributed to the stability of trade around the world.

• Against this background, the MFN principle in particular must be observed as a fundamental principle for sustaining the multilateral trading system. 

India and MFN status

• As per the obligation under the WTO, the member countries shall extend MFN status to each other automatically, unless otherwise specified in the agreement or schedule notified to the WTO by the member country. Pursuant to this provision, in case of goods, India has extended MFN status to member countries of WTO. 

• In February 2019, following the Pulwama terror attack, India withdrew the MFN status to Pakistan. India had granted MFN status, which provides non-discriminatory access to its market, to Pakistan in 1996. Pakistan has not accorded MFN status to India.

• There is no formal procedure for suspending MFN treatment.

What does losing MFN status mean?

• Revoking Russia’s MFN status sends a strong signal that the US and its Western allies do not consider Russia a economic partner in any way, but it does not in itself change conditions for trade.

• It does formally allow the Western allies to increase import tariffs or impose quotas on Russian goods, or even ban them, and to restrict services out of the country. They could also overlook Russian intellectual property rights.

• Ahead of MFN status removal, the US had already announced a ban on imports of Russian oil and gas.

• Over the years, the US has revoked the MFN status of more than two dozen countries, generally for political reasons, with the Cold War bringing the sanction against the then-Soviet Union and other communist countries, for example. With the exception of Cuba and North Korea, the preferred status of those nations was eventually restored. 

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