preferential tariff

A preferential tariff is a reduced rate or other advantage granted to one or more nations over others. This practice is often seen in regional trading groups, where member countries offer each other lower duties. For example, within the European Union, producers from one member state can export to another without paying duties, giving them an advantage over producers from outside the EU.12

Historically, such arrangements were part of "imperial preference," where parts of an empire granted favorable trade terms to each other, prioritizing domestic producers first, then empire producers, and lastly foreign producers. While these preferences can create new trade, they can also divert trade from more efficient foreign producers to less efficient partners, a concept known as trade diversion. The unconditional most-favoured-nation (MFN) clause, now part of the World Trade Organization agreements, aims to ensure equal trading opportunities by extending any tariff concession granted to one country to all other MFN partners.3245