The term most favored nation (MFN) refers to a status that is bestowed by one country to another to indicate that that particular country will enjoy specific benefits in trading. Typically, this takes the form of lower import taxes, called tariffs, and higher quotas set on imported goods. This means the county that is bestowed most favored nation status is equal to any other country receiving the status. It is usually given when one country wants to increase trade with another country.
Prior to the creation of the World Trade Organization (WTO) in 1994, most potential trade agreements were mediated by the General Agreement on Tariffs and Trade (GATT). GATT was formed in 1949 after World War II. The involved nations at that time had attempted to negotiate a deal to create the International Trade Organization (ITO), but had failed. Mediated by the United Nations, GATT was then formed. The WTO still operates under the main tenets of GATT and is the body now responsible for enforcing any MNF agreements.
The main purposes of granting most favored nation status are for diplomatic reasons or to improve trade between two countries. There are many advantages to doing this, not the least of which can be improved relations with a country. Other advantages include ease of calculating fees, and the same tariffs and import limits are charged to any nation with most favored nation status, so there is no need to have a different rate of calculation. It also equalizes the market for small countries that might not be able to achieve or negotiate better trade agreements on their own, as well as keeps any potential disagreements between different countries from causing them to retaliate with higher tariffs.
Despite its advantages, most favored nation status has its challenges and potential drawbacks. One drawback is that developing nations may not be able to keep up with exports. It has been suggested that developing countries be given preferential treatment according to GATT, but it has been difficult to regulate. Other potential conflicts have been in the arena of prior disputes or disagreements, such as war, that have caused two nations to have superseding reasons not to do trade. Some of these issues are treated as exceptions and have been worked around in the form of amendments or repealing of the conflicting doctrine.
Other issues deal with regional trading. Some configurations, such as the European Union, have much freer trade amongst themselves then between member countries and other nations. A similar situation has resulted as the rest of the North American Free Trade Agreement (NAFTA) in the Americas. These issues are typically considered exceptions, but may lead to a different form of trade in the future. The United States, for instance, has already renamed most favored nation status to permanent normal trade relations, simply because most nations already had the status and the term seemed outdated.