Most-favoured-nation clause
Contractual provision in a trade agreement ensuring that any future advantage granted to a third party will automatically be extended to the agreement partner.
Definition and distinction
The most-favoured-nation (MFN) clause is a provision inserted in trade agreements whereby each party commits to granting the other any trade advantage it may grant to a third country. It differs from the WTO MFN principle in that it is contractual (bilateral) in nature, whereas the WTO principle is multilateral and automatic.
How it works
The MFN clause functions as an automatic alignment mechanism: if country A, bound by an MFN clause with country B, subsequently grants an advantage to country C, that same advantage is automatically extended to country B. This ensures the partner is never treated less favourably than a competitor.
Applications
The MFN clause is found in:
- Bilateral Investment Treaties (BITs): investor protection
- Free trade agreements: automatic extension of concessions
- Tax treaties: avoidance of double taxation
- The GATT (Article I): multilateral application
Key considerations
- The clause may contain exceptions (regional integration, developing countries)
- In investment law, the MFN clause is controversial as it allows importing protections from other treaties
- The exact scope (procedural and/or substantive) is subject to divergent jurisprudence in arbitration tribunals