The most-favored-nation clause has been the pillar of the system since the inception of the GATT in 1947 and is equally the cornerstone of the new WTO multilateral trading system. The provision of MFN treatment essentially means non-discriminatory treatment among the Members. Article I of GATT 1994 states that “any advantage, favor, privilege or immunity granted by any contracting party (Member) to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties (Members)”.
This commitment is the starting-point of the WTO system of rights and obligations. It is fundamental to all the multilateral trade agreements annexed to the WTO Agreements. Quite contrary to its name, this provision does not mean any special favor to any country; in fact, it prohibits special favors even to the friendliest country. What this principle actually means is that any benefit in connection with exporting or importing given to a product of a most favored nation (whether a member or not) has to be given to the like product of all Members without discrimination. According to Article I of both GATT1947 and GATT1994, the famous “most-favored-nation” clause, members (or the Contracting Parties to the GATT 1947) are bound to grant to the products of other members (Contracting Parties) treatment no less favorable than that accorded to the products of any other country. Besides, members of the WTO have entered into this commitment under the GATS (Article II) in relation to treatment of service suppliers and trade in services, and under the TRIPs (Article 4) in regard to the protection of intellectual property. No reason whatsoever is sufficient to justify any deviation from MFN treatment. Thus, no country is to give special trading advantages to another or to discriminate against it. All are on an equal basis and all share the benefits of any moves towards lower trade barriers.
The principle of MFN treatment applies to both imports and exports, i.e., when a Member:
· imports like products originating in the territories of other Members, and
· exports like products destined for the territories of other Members.
For example, if Member country A has been imposing a customs duty of 10% on steel bars, and if it now starts charging only 6% duty on the steel bars of any particular country (whether a Member or not), it has to reduce the duty to 6% for the steel bars of all Member countries. Similarly, if a Member had earlier banned the export of coal, and now allows its export to a particular country (whether a Member or not), it has to allow export to all Member countries.
Of course, a Member is not bound to give MFN treatment to a country which is not a Member of the WTO. The treatment given to non-Member countries depends on the Member’s bilateral agreements with each one of them. However, if a Member gives a certain trade benefit to a non-Member, then that benefit has to be extended to all Members in accordance with the principle of MFN treatment.
The benefits covered by MFN treatment may be in the form of advantages, favors, privileges or immunities granted by a Member in respect of a product. For example, an advantage may be in the form of a reduced tariff level; a favor may be extended by allowing the export of a raw material which was not allowed earlier; a privilege may be in the form of exemption from a tax; and immunity may be given by exemption from a health hazard test. The obligation on a Member is to give these benefits immediately and unconditionally to the like products of all Members once these have been given to a product of any country.
The benefits which have to be extended to all Members may be with respect to the following items:
· Customs duties, i.e., the tariff imposed at the time of importation;
· Charges of any kind imposed on importation or exportation, e.g., import surcharge, variable levy, excise duty or export tax;
· Charges of any kind imposed in connection with importation or exportation, e.g., customs fee, consular fee, quality inspection fee;
· Charges imposed on the international transfer of payments for imports or exports, e.g., some tax or fee charged by governments at the time of these transfers;
· The method of levying such duties and charges, e.g., the method of assessing the base value on which the duty or charge is calculated, or the type of forms seeking information which will help in calculating the amount to be charged;
· All rules and formalities in connection with importation and exportation, e.g., requirement of giving specific information or declarations at the time of import or export;
· Internal taxes or other internal charges, e.g., sales tax, charges imposed by local bodies;
· Laws, regulations and requirements affection internal sale, offering for sale, purchase, transportation, distribution or use of any product, e.g., requirement of quality certificates, restrictions relating to movement, transport, storage or retailing channels, need for particular type of packaging, restriction on use.
The simplest implication of MFN treatment is that a Member cannot apply different rates of customs duty on a product imported from different Member countries. Similarly, in any of the matters mentioned above, a Member cannot give different treatment to different Member countries, nor can it give better treatment to a non-Member country.
For example, if a Member charges a 10% import duty on a product, say textile machinery, imported from Member countries, it will not be permissible to charge only a 5% duty on the textile machinery coming from a Member country which has allowed aid to buy this product. Similarly, if a Member charges a 3% customs duty on a product coming from Member countries in general and now wishes to raise it to 5% for an unfriendly Member, it is not permitted to do so. Similar discipline applies to the other matters listed above.
Two important concepts have emerged in defining the scope of obligation of MFN treatment. As described above, the obligation of a Member is to give this treatment to the “like product” of all Members ‘unconditionally’. It is important to understand the implication of these terms.
Like Product: This phrase has not been specifically defined, thus has different meanings in different contexts. On several occasions, serious consideration has been given to this phrase as it has presented problems of interpretation. Some of the broad points which have been considered while determining whether two products are like products are:
· listing of products in the tariff schedule
· duties applied to the products
· process of production
· composition and content
· chemical and synthetic origin.
For example, Spain had divided unroasted coffee into five tariff classifications: Colombian mild, other mild, unwashed Arabica, Robusta and other. The first two were duty-free and the other three were subject to a 7% duty. Brazil claimed that all these were like products and that different rates of duty were inconsistent with Article I. The Panel on Spain’s Tariff Treatment of Unroasted Coffee (June 1981) noted that the arguments given for differentiation were based on geographical factors, cultivation methods, the processing of the beans and genetic factors. The Panel did not consider such grounds as sufficient for differentiation and noted that no other Member made such a classification. It concluded that these should be considered like products within the meaning of Article I.
Unconditional Application of Benefits: MFN treatment has to be extended to Members immediately and unconditionally. If a Member formulates an improved set of rules on the trade of goods within the framework of GATT 1994, it cannot limit the application of these rules to only those Members that fulfill some conditions. For example, it cannot say that the improved rules will be applicable only to those that undertake to adopt similar rules. Such a limited application will be treated as a conditional application, and will not be allowed.
For example, the Working Party on the accession of Hungary examined in 1973 the practice of providing certain benefits of tariff treatment only to countries which had a cooperation contract with Hungary. During the course of examination of this matter, the GATT Secretariat gave, on request, a legal opinion that the prerequisite of having a cooperative contract in order to get beneficial tariff treatment appeared to imply conditional MFN treatment and would not appear to be compatible with Article I.
Another example is the US. Before China’s accession to the WTO, the US Congress reviewed annually the MFN treatment to China. This treatment was always connected with non-business issues such as the Taiwan Question, the Tibetan minority nationality, the Tiananmen Square Incident, and human rights. After China’s WTO accession, these practices are not allowed any longer.
Coverage of unbound duty. If a Member is committed not to raise the customs duty on a product beyond a particular level, the duty is said to be bound, otherwise, the duty is unbound. The MFN treatment obligation applies equally to bound and unbound customs duties.
Balancing of treatment not permissible. Each relevant measure or step has to satisfy the condition of MFN treatment by itself. A Member is not allowed to give less favorable treatment in one case to balance more favorable treatment in another case.
Goods transited through several countries. The benefits apply to products “originating in” the territories of Members. This phrase signifies that even if the product might have passed through some other countries on the way, it has to be given the particular benefit in the importing Member country based on its country of origin.
Possibility of circumvention. There may be cases where the rules and procedures appear non-discriminatory and yet the application of these rules and procedures causes discrimination in actual practice. For example, the Panel report on EEC’ Imports of Beef from Canada (March 1981) examined an EEC regulation imposing a levy-free tariff quota on high-quality grain-fed beef. The suspension of import levy was conditional on the production of a certificate of authenticity. The Panel found that the only authorized certifying agency was a US agency authorized to certify only meat from the US. The Panel concluded that the regulation had the effect of preventing access of like products from other countries and was thus inconsistent with Article I.
Some provisions of GATT 1994 and some decisions of Members have provided for exceptions to MFN treatment.
Enabling clause: A measure agreed at the end of the Tokyo Round in 1979 and normally referred to as the «enabling clause», provides a permanent legal basis for the market access concession made by developed to developing countries under the generalized system of preferences (GSP). GSP is a system of tariff preferences accorded by developed countries to developing countries. It allows developed Members to accord differential and more favorable treatment to developing countries without according such treatment to other Members and, to that extent, it is a relaxation of the MFN clause.
The treatment covered by this exception is specified as follows: Differential and more favorable treatment in respect of non-tariff measures governed by the provisions of instruments multilaterally negotiated earlier under the auspices of the GATT and now within the framework of the WTO. Through this exception, special treatment was given to developing countries in various Codes which emerged after the Tokyo Round and in various agreements resulting from the Uruguay Round. Arrangements among developing countries as a whole or among a few of them on tariff preferences. Special treatment of the least developed countries in the context of general or special measures in favor of developing countries.
Free-Trade Area, Customs Union: A group of Members may constitute themselves into a customs union or a free-trade area, and have totally free trade or reduced levels of duties and of other trade-restrictive regulations among themselves without the obligation of extending such treatment to other Members.
A free-trade area is a group of two or more countries in which duties and other trade-restrictive regulations are eliminated on substantially all the trade between these countries. A customs union is a group of countries forming themselves into one customs territory in which duties and other trade-restrictive regulations are eliminated with respect to substantially all the trade between the countries or, at least, with respect to substantially all the trade in products originating in these countries. Further, the Members constituting the customs union should apply substantially the same duties and other trade regulations to the products of countries outside the union.
Disciplines followed while forming a free-trade area or a customs union:
1) At the time of the formation of a customs union, the duties and other trade regulations applied to Members outside the union must not be, on the whole, higher or more restrictive than what were applicable in these countries prior to the formation of the union.
2) In respect of a free-trade area, the duties and other trade regulations in the countries forming the area should not be higher or more restrictive at the time of formation of the area than what they were in these countries prior to the formation of the area.
Frontier Trade: Advantages accorded by a Member to adjacent countries in order to facilitate frontier traffic are permitted (Article XXIV.3 of GATT 1994).
Government Procurement: The MFN obligation of Article I does not apply to the import of products for immediate or ultimate consumption in government use and not otherwise for resale or use in the production of goods for sale. There is a special plurilateral agreement governing such purchases.
General Exceptions: Article XX of GATT1994 allows Members to restrict imports or export from/to specific sources. Such measures can be taken for some specified purposes, for example, for the protection of public morals, protection of human, animal or plant life or health, etc.
Security Exception: Restrictions on imports and exports from/to specific countries can be imposed for security reasons in accordance with Article XXI of GATT1994.
The basic objective of the MFN treatment principle is to strengthen the multilateral process in international trade policy. When two countries exchanging tariff concessions between themselves extend these new tariff levels to all Members, the principle that gets emphasized is that all Members have an expectation of sharing the benefits of the system. In the same way, when a Member gets into some difficulty, for example, because of a balance-of-payments problem or increased imports, all Members get prepared to share the burden of reduced export opportunities into the territory of that Member.
The multilateral process is further eroded by the formation of large regional trading blocs. If the world is divided into a few very large trading blocs, the relevance of the multilateral system will be very much reduced. Another risk to the multilateral process comes from unilateral action or the threat of such action from economically strong Members of the system. It reduces the confidence of the weaker Members in the efficacy and effectiveness of the system.
National treatment is also an important basic principle in the WTO agreements. MFN essentially means non-discrimination as among Members, while NT means non-discrimination as between domestic products or services and imported products or services. Basically, the principle of NT prescribes the obligation that an imported product, after entering the country of import, should be treated as a national product. The national treatment principle condemns discrimination between foreign and national goods or services and service suppliers or between foreign and national holders of intellectual property rights. Imported goods, once duties have been paid, must be given the same treatment as like domestic products in relation to any charges, taxes, or administrative or other regulations. With regard to the protection of intellectual property rights, and subject to exceptions in existing international conventions, Members of WTO are committed to grant to nationals or other Members treatment no less favorable than that accorded to their own nationals. GATS, however, due to the special nature of trade in services, deals with national treatment under its Part III, Specific Commitments, where national treatment becomes a negotiated concession and may be subject to conditions or qualifications that Members have inscribed in their schedules on specific commitments in trade in services.
The main objective of this principle is to ensure that the effects of tariff concessions are not frustrated by providing indirect protection to domestic products. These disciplines aim at establishing competitive conditions for imported products in relation to domestic products and at providing equal opportunities to imported products and domestic products in the domestic market.
Imported products must not be subject to internal taxes or other internal charges in excess of those applied to like domestic products. For example, an exercise tax which is applicable to a domestic product cannot be applied to an imported product at a rate higher than that applicable to the domestic product. Similarly, an imported product cannot be subject to a charge which, for example, is in the nature of a contribution to a fund meant for facilitating imports, if such a charge is not levied on the like domestic product.