Just when you thought it couldn’t get any worse, worse it got. At the start of 2022, global companies were struggling with the ongoing effects of COVID lockdowns as well as a shipping crisis that manifested itself in the form of port congestion. Then in late February, Russia invaded Ukraine triggering an unprecedented flurry of sanctions and other restrictions that included the U.S. and fellow G7 countries revoking Moscow’s Most Favored Nation (MFN) status.
Companies involved in commercial activities in Russia or with Russian-based organizations had to quickly expand their denied party screening processes as well as reconfigure their supply chains to ensure they were complying with new international trade regulations. And, where they were permitted to interact with Russian entities, it made business sense, albeit in a more expensive tariff environment.
What is the Most Favored Nation status?
Although the U.S. renamed it to normal trade relations (NTR) in 1998, the term Most Favored Nation (MFN) remains more commonly used. To clearly understand MFN status, even going back to the Middle Ages won’t do. The concept is as old as the 1,000s – just when nations (or rather, cities and chiefdoms) became a thing and where parties agreed in situations of mutual interest to treat each other’s products with preference. Sort of a super-duper-barter trade arrangement.
A few hundred years of paperwork later, the MFN status was introduced more officially in the Spain-England relations just before the turn of the 18th century. From there it grew to encompass other nations. This more or less equally beneficial treatment made trade between countries easier – less emphasis on trade compliance and, perhaps most importantly, lower duties.
Impact of Russia losing its MFN status
With the General Agreement on Tariffs and Trade (GATT) comes a duty reduction scheme mostly applicable for MFN partners, and the ‘regular’ duty rates are rarely relevant. The World Trade Organization membership is currently the official road (more or less) to MFN status, although countries can grant MFN status on an individual basis (for example the U.S. did with China in 1980). In fact, they’re only relevant when countries lose MFN status, for example, because of their military actions.
In this case, the U.S. (as well as other G7 countries) revoked Russia’s MFN status because of Moscow’s invasion of Ukraine. According to an EU statement: "Russia cannot grossly violate international law and expect to benefit from being part of the international economic order". The consequences of Moscow’s military actions are considerable, since the loss of MFN privileges, and especially the lower duty rates, has a huge impact. The regular rates are easily double, triple, or even quadruple the MFN rates, or in cases where the MFN rate is 0%, it may increase duty rates up to 50%. This makes it practically impossible for countries without MFN status to export/sell (specific products) at competitive prices – in order to make up for the additional duties, the Cost of Goods Sold will have to be up to 50% less than that of an MFN country.
Yet, having made the case of the impact, it is important to note that not all exports are affected. For example, it is not uncommon that essential goods (e.g. food, gas) are subject to low or zero duty rates coming in from any given country, and losing MFN rates may have minor to no consequences on that. Case in point: the import of natural gas (for example into Germany) is not impacted at all by the change in status as both the MFN and non-MFN rates are zero. In those cases, penalty rates (comparable to the additional rates imposed on imports of steel from China) could do the trick but in the current economic climate and the dependency on Russian gas, penalty rates appear a step too far.
How Descartes can help organizations with international trade compliance
To meet fast-evolving and emerging compliance requirements, Descartes provides a range of online international trade compliance tools including:
- Source for alternative suppliers by investigating other markets to purchase products, parts, and raw materials
- HTS classification and landed cost analysis of the business viability of new source countries
- Screen new suppliers against denied parties lists