Most favored nation refers to a status conferred by a clause in which a country promises that it will treat another country as well as it treats any other country that receives preferential treatment. Most favored nation clauses are frequently included in bilateral investment treaties. Under such a clause, if the host state lowers a tariff for one trading partner, it must lower it for all trading partners. The purpose of the most favored nation clause is to ensure equality between trading partners and that benefits later extended to other parties are also extended to the parties making the current agreement.
As most major trading states are members of the WTO, the WTO's trade agreements have superseded many pre-existing bilateral investment treaties. However, there are still unsettled legal issues between the operation of the WTO basic treaty and existing BITs.
The concept has been incorporated into other legal fields. In domestic contract law, most favored nation clauses operate similarly and are especially common in oil and gas contracts. In tort law, most favored nation status refers to provisions in settlement agreements that requires a defendant to pay the difference between the lesser settlement amount with the most favored nation provision and any future higher paying settlement with another claimant.
[Last updated in July of 2023 by the Wex Definitions Team]