The term "Most Favoured Nation" is misleading to me. Please explain

Question

My understanding

If Country A extends MFN status to Country B with reduced tariffs for a product, then it must treat all other nations in the same way. By this WTO encourages multilateral concessions rather than trade-distorting bilateral concessions.

Question

What is the point of granting Country B, the MFN status if it's going to be the same for all countries? Also, the term 'Most Favoured Nation' is completely misleading here. Country A could have announced that it's going to reduce tariffs for that specific product to all WTO members rather than bringing Country B into the whole picture.

Please explain what's the point of a country granting another MFN status, and why does it apply to all WTO members if only two countries are involved here.

Answer 1

You seem to have it the wrong way around.

The act of country A extending Most Favoured Nation status to country B only affects the import tariffs on country B's products, not those on other countries' products. MFN status means that the tariffs on the Most Favoured Nation's products cannot be higher than the lowest import tariff on similar products from other countries to country A. (Hence the name 'most favoured', as it will have the lowest tariff.) Similar products from other countries without MFN status from country A may have higher tariffs than those imposed on country B's products.

There are some caveats. E.g. if country A is in a free trade zone with countries X and Y and charges no tariffs at all on their products then even if country A grants country B Most Favoured Nation status, it does not mean it cannot impose any tariffs against country B's products. Basically country B has to get the lowest tariff, but free trade zones are not regarded as having 0 tariffs, rather as being exempt from tariffs.