Is this farewell to MFN, the non-discrimination principle of the world trading system?

One of the most important pillars of the modern world trading system is the principle established shortly after World War II that trading partners do not discriminate against one another. This principle, known as most favored nation (MFN), helped make trade an engine of global prosperity by making international commerce more efficient and effective. Now, at the outset of his second term, President Donald Trump has not only disrupted global trade with his tariffs, he has also massively withdrawn the United States from this principle.

MFN was established to stabilize the trading system and promote non-discrimination by requiring a country that lowers tariffs for one country to extend the same treatment to all other MFN partners. If Trump’s unraveling of MFN sets a precedent, it would inflict further damage to the global economy. Early in 2026, the European Union indicated it might follow suit, but so far no copycats have raised their hands.

In previous decades, the MFN principle suffered incursions, but research indicates that it broadly characterized world merchandise trade flows in the 21st century. In 2022, more than 80 percent of world merchandise trade took place under MFN terms.

Under MFN, countries are still permitted to reach free trade agreements among themselves—for example the North American Free Trade Agreement (NAFTA) and its successor  the United States-Canada-Mexico Agreement (USMCA). But Trump’s actions threaten what is known as unconditional MFN,[1] as observed among World Trade Organization (WTO) members, requiring that any concession in tariff rates or regulatory rules accorded by one member to any other member must be automatically extended to all 166 members without asking for compensation.

Conditional MFN has a variant in these rules. When two countries have previously subscribed to conditional MFN in their trade agreement, and one of them later grants a concession to an outsider in exchange for some concession from that third country, it can ask for equivalent compensation from its previous partner before giving the same concession.

In ancient times, going back to the 15th century, MFN clauses appeared in European trade agreements, but before World War II conditional MFN was most common. After World War II, as the United States and the United Kingdom championed liberal trade, unconditional MFN became a founding principle of the General Agreement on Tariffs and Trade (GATT 1947) and remained so with its successor, the WTO (1995). In fact, under WTO auspices, the General Agreement on Trade in Services (GATS) extended unconditional MFN to services trade.

Over the decades between 1950 and 2010, while unconditional MFN was generally observed, it was subject to important exceptions. Under the Generalized System of Preferences (GSP), adopted by the GATT in 1971, members were allowed to extend preferential tariffs to developing countries without extending the same rates to other countries. GATT codes adopted in the Tokyo and Uruguay Rounds of Multilateral Trade Negotiations (1974–79 and 1986–95, respectively) often contained preferential conditions for developing countries, while almost 300 free trade agreements (FTAs) enacted pursuant to GATT rules between 1980 and 2010 did not extend their benefits to WTO members not party to the agreements. Despite these exceptions, unconditional MFN remained the general rule for international trade in goods and services.

Shortly after he was inaugurated for his second term, Trump violated US tariff rates “bound” by commitments in the WTO and FTAs. On “Liberation Day” (April 2, 2025) and other occasions, Trump raised US tariff rates far above their bound levels. This violation in turn led to the violation of unconditional MFN since imports from many countries paid higher rates than Trump’s “universal” floor tariff of 10 percent.

Following this “rupture” in the world trading system,[2] in January 2026, EU Trade Commissioner Maroš Šefčovič proposed to weaken European observance of unconditional MFN. Under his proposal, low tariffs would no longer apply automatically but would instead be tied to “fair” practices and open markets in the partner country.

Thus, in 2025 and 2026, the policy landscape experienced a tectonic shift with the departure of the United States and European Union from their long advocacy of MFN. As a matter of history, the United States and several European countries that created the GATT had put MFN in Article I to signal its importance. The parents are now discarding their core principle.

The economic case for this change of heart was anticipated in 2002 by Pinar Cebi and Rodney Ludema, two scholars at Georgetown University. As the advanced countries progressively liberalized their tariffs, the benefits to “MFN free riders” among developing countries became large, and correspondingly the potential gains to the United States and the European Union from a course correction became substantial.

The economic case was evident for all to see by 2008 with the sputtering death of the ill-fated Doha Round of Multilateral Trade Negotiations. But the geopolitical case between China and the United States did not crystallize until 2018 in the middle of Trump’s first term as president.[3] Moreover, the US global departure from MFN awaited Trump’s second term, and its eruption in 2025 lacked the economic case spelled out by Cebi and Ludema. High US tariffs were imposed on most advanced countries, even though their MFN tariff rates on US exports were broadly similar to US rates.

Table 1, based on the authors’ calculations and data from the International Trade Centre Trade Map and the World Integrated Trade System (WITS), reports 2025 import shares for China, the European Union, and the United States. The table shows the share of imports from FTA partners, the share of imports under GSP schemes, and the estimated share of imports under MFN terms.

Because of preferential entry from its FTA partners, and importantly because of exceptional tariffs on imports from many countries (i.e., tariffs above the “universal floor” of 10 percent), only about 10 percent of US merchandise imports now enter under MFN terms.[4] For China, the MFN entry share is around 40 percent, and for the European Union more than 75 percent.

It should be emphasized that imports that enter under preferential terms—mainly from FTA partners—typically benefit from zero tariffs—in other words, tariffs generally lower than MFN rates. In 2022, some 17 percent of global merchandise imports entered under preferential terms. For China and the European Union, preferential imports are eroding the role of MFN as a pathway to lower tariffs. This pathway entails discrimination against “outsiders,” but the benefit from trade created may substantially exceed the loss from trade diverted.[5] To that extent, the farewell to MFN is a fond farewell.

However, for the United States, the farewell is much more troubling. In 2025, new US departures from MFN took the form of exceptional tariffs, much higher than the MFN rates bound in WTO schedules. Even imports entering the United States under Trump’s “universal” 10 percent tariff, while technically subject to a uniform MFN tariff, carries the burden of substantially higher tariffs than the rates bound in the US schedule filed with the WTO.

For now, Trump’s practice of chaotically imposing and reducing tariffs, with widely varying rates for different countries, is confined to the United States. That practice disrupts about 11 percent of two-way world merchandise trade.[6] If other major trading powers emulate Trump’s practice, even in a modest way, the cost in terms of global economic efficiency will be great. Fortunately, at the moment, there are no copycats.

Notes

1. In 1996, unconditional MFN was labeled “normal trade relations” (NTR) by the late Senator Patrick Moynihan (D-NY) in order to avoid the perception that MFN entailed a special privilege.

2. At the World Economic Forum in January 2026, Canadian prime minister Mark Carney characterized the world trading system as subject to an historic rupture not seen since World War II.

3. In 2018, Trump imposed 30 percent tariffs against a wide range of imports from China and China retaliated with lesser tariffs against US exports.

4. On February 20, 2026, after the Supreme Court ruled illegal the “Liberation Day” tariffs imposed under the International Emergency Economic Powers Act (IEEPA), Trump imposed a new tariff floor of 10 percent under Section 122 of the Trade Act of 1974.  One day later, Trump announced the new floor would be raised to 15 percent.

5. In 1950, Jacob Viner first distinguished between the trade creation and trade diversion impacts of a free trade agreement.

6. In 2024, two-way US merchandise trade is $5.4 trillion ($3.4 trillion in merchandise exports and $2 trillion in merchandise imports), and total two-way world trade is $49.3 trillion ($24.8 trillion in merchandise imports and $24.5 trillion in merchandise exports). The United States accounts for 11 percent of two-way world merchandise trade.