Hindu Editorial Analysis : 3-November-2023

The concept of Most Favoured Nation (MFN) status is fundamental in international trade, promoting equal treatment among nations. Recently, the Supreme Court’s ruling emphasized the need for separate notification by the central government to trigger the MFN clause in tax treaties.

What is Most Favoured Nation (MFN) Status?

MFN status ensures equal treatment among the World Trade Organization’s 164 members, facilitating mutual benefits through lowest tariffs, highest import quotas, and minimal trade barriers for goods and services. This non-discriminatory principle underpins the multilateral trading system established after World War II.

Exceptions and Challenges:
  • Bilateral trade agreements and special access for developing countries create exceptions to MFN treatment.
  • Nations outside the WTO, like Iran and North Korea, face unrestricted trade measures.
  • Challenges include potential dishonest practices, uniform trade benefits, and high import taxes for developing nations, especially in sectors like textiles and fish products.
Significance of MFN Status:
  • Rules-based Framework: Replaces power-based policies with a fair, rules-based system, ensuring equal rights for all participants.
  • Promotes Free Trade: Encourages trade creation, reducing trade diversion, and allowing efficient, government-free commerce.
  • Supports Disadvantaged Countries: Provides smaller nations a platform for advantageous trade negotiations, fostering fairer global trade.
  • Access to Larger Markets: Enables nations to tap into sizable markets, fostering economic growth and development.
India’s Challenge:

India faces challenges in dividend treatment within treaties, varying in applicability and rates. Clarity from the tax department is crucial to ensuring fair and uniform treatment across investments.

Why In News

The Supreme Court clarified that the most favoured nation (MFN) clause in a tax treaty is not automatically triggered and has to be notified separately by the central government, emphasizing the importance of explicit government notification to activate the MFN provision in international agreements.

MCQs about Navigating Most Favoured Nation Status

  1. What is the primary objective of Most Favoured Nation (MFN) status in international trade?
    A) To establish trade monopolies among powerful nations.
    B) To ensure equal treatment among WTO member countries.
    C) To favorably promote domestic industries.
    D) To limit trade access for developing nations.
    Correct Answer: B. To ensure equal treatment among WTO member countries.
    Explanation: MFN status aims to promote equal treatment among World Trade Organization member countries, allowing them to benefit from each other’s lowest tariffs, highest import quotas, and minimal trade barriers.
  2. Which of the following is a challenge associated with MFN status?
    A) Limited access to global markets for smaller countries.
    B) Unrestricted trade measures for countries outside the WTO.
    C) Potential dishonest business practices and uniform trade benefits.
    D) Preferential treatment for developing nations in all sectors.
    Correct Answer: C. Potential dishonest business practices and uniform trade benefits.
    Explanation: MFN status may lead to dishonest practices and requires nations to provide the same trade benefits to all other MFN agreement members, posing challenges in maintaining fairness.
  3. How does MFN status promote free trade among nations?
    A) By imposing high import taxes on goods.
    B) By encouraging trade diversion and restricting exports.
    C) By ensuring equal access to markets and minimizing trade barriers.
    D) By limiting the participation of developing countries in global trade.
    Correct Answer: C. By ensuring equal access to markets and minimizing trade barriers.
    Explanation: MFN status promotes free trade by ensuring equal access to markets, minimizing trade barriers, and encouraging efficient, government-free commerce among nations.
  4. Why is clarity from the tax department crucial for India in the context of MFN status?
    A) To promote protectionist trade policies.
    B) To maintain secrecy in international trade agreements.
    C) To ensure uniform and fair treatment of investments across treaties.
    D) To provide preferential treatment to specific industries.
    Correct Answer: C. To ensure uniform and fair treatment of investments across treaties.
    Explanation: Clarity from the tax department is essential for India to ensure uniform and fair treatment of investments across treaties, addressing the challenges associated with varying dividend treatment rates.

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