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MFN or most favoured nation is one of the main topin in the field of International Trade Law.... it is a part of WTO.... this document has been made to provide its full knowledge
Citation preview
1 | P a g e
SCHOOL OF LAW JUSTICE AND GOVERNANACE
PROJECT ON:- INTERNATIONAL TRADE LAW
TOPIC:- UNCITRAL MODEL ON INTERNATIONAL COMMERCIAL ARBITRATION
SUBMITTED TO:- SUBMITTED BY:-
APOORV MAAVI SIR MANAS DWIVEDI
12/ILB/022
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Contents
Introduction .....................................................................3
CONCEPT OF MFM….…………………………..…..4
Economic implications of mfn treatment……………………6
ARTICLE 1 PARA1 GATT…………………………8
Some cases……………………………………15
Other provisions…………………………….…20
Exceptions ……………………..21
Conclusion…………………………………………………27
Bibliography…………………………………………….. 28
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INTODUCTION
Most Favoured Nation principle is one of the most fundamental principles of the
WTO. It requires member states to accord the most favourable tariff and
regulatory treatment given to the product of any one member and/or non
member at the time of export or import of “like products” to all other WTO
members. Under the Most Favoured Nation rule, should WTO member state A
agree in negotiation with state B, which needs not to be a WTO member, to
reduce the tariff on the same product X to five percent, this same tariff rate must
apply to all other WTO members as well. In other words, if a country gives
favourable treatment to one country regarding a particular issue, it must handle
all members equally regarding the same issue. The idea of Most Favoured Nation
treatment has a long history. An embryonic version of an MFN clause has been
traced as far back as 1417, but the origins of the Most Favoured Nation
commitment in international commercial matters are generally considered to
stem mainly from the seventeenth and eighteenth centuries. Prior to the GATT, a
Most Favoured Nation clause was often included in bilateral trade agreements,
and as such it contributed greatly to the liberalisation of trade.
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CONCEPT OF MFN
The League of Nations Covenant likewise mentioned the goal of “equitable
treatment for the commerce of all members” and the 1919 peace treaties
contained Most Favoured Nation clauses. However despite MFN, various trade
restrictions and discriminations did exist. At the end of the Second World War,
one of the prime post-World War II objectives of the United States was the
dismantling of trade preferences, especially the commonwealth system.
The United States’ preoccupation with Commonwealth preferences was so
intense that a United States representative in London in 1946 included Most
Favoured Nation as one of its five basic principles for the development of an
International Trade Organization and it is generally said that failure to achieve this
result was one of the causes for the failure of the United States to accept the
Havana Charter, thus causing the International Trade Organization to fail to
materialize. However learning form their mistakes, the major powers of the world
decided to include Most Favoured Nation clauses in the General Agreement on
Trade and Tariff (GATT) and the incorporation of this clause in GATT has
contributed to the stability of the world trade and hence, against this background,
MFN principle must be observed as a fundamental principle for sustaining the
multilateral free trade system.
The concept of MFN embodies the principle of non discrimination which is a basic
and key concept of World Trade Organization. Discrimination between, as well as
against, other countries was an important characteristic of the protectionist trade
policies pursued by many countries during the economic crisis of 1930s.
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Historians now regard these discriminatory policies as an important contributing
cause of the economic and political crises that resulted in the Second World War.
Discrimination in trade matters breeds resentment among the countries,
manufacturers, traders and workers. Such resentment poisons international
relations and may lead to economic and political confrontation and conflict. In
addition, discrimination makes scant economic sense, generally speaking, since it
distorts the market in favour of products and services that are more expensive
and/ or lesser quality. Eventually, it is the citizens of the discriminating country
that ends up paying the bill for the discriminatory trade policies pursued. Not only
this principle is justified by history and its potential for reducing trade frictions
among countries, but also by its utility as a tool for building peace and security.
Without it, countries might retreat into trading blocks, and those blocks might
become armed fortress. Thus, unconditional MFN treatment was and remains a
legitimate economic means to a noble political end. It reduces trade friction
among countries, provides their people with the opportunity to generate jobs and
income through trade, giving them a stake in the multilateral economic order, and
thereby contributing to peace and stability. With unconditionally, the benefits of
open trade would spread multilaterally. Each country would come to realise its
stake in nurturing the global economy, given the production and consumption
benefits from free trade.
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ECONOMIC IMPLICATIONS OF MOST FAVOURED NATION TREATMENT
The most favoured nation has several positive economic implications, which are
discussed below:
Increased Efficiency In The World Trade:
Firstly, most favoured nation treatment makes it possible for countries to import
from the most efficient supplier, in accordance with the principle of comparative
advantage. For example, if country A does not produce product X, and if country B
can supply product X at a lower price than country C, country A can increase its
economic efficiency by importing it from country B. If however, country A applies
higher tariff rates to product X from country B than product X from country C,
country A may end up importing product X from country C, even though country C
is not as efficient a supplier. This distorts trade and, as a result, reduces the
welfare of country A and the economic efficiency of the entire world. If, however,
the most favoured nation principle is applied between the three countries, then
country A will apply its tariffs equally to all exporting countries and will therefore
necessarily import product X from country B because it is cheaper to do so. The
most efficient result is thus attained.
Reduction Of The Cost Of Maintaining The Free Trade System:
Thirdly, MFN reduces the cost of maintaining the free trade system. The equal
treatment demanded by the most favoured nation principle tends to act as a
force for unifying treatment at the most advantageous level (which in trade
means the most liberal). The establishment and maintenance of the most
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favoured nation rule enables WTO Members to reduce their monitoring and
negotiating costs- the cost of watching and comparing treatment received with
that given to third countries. In short, the most favoured nation rule has the
effect of reducing the cost of maintaining the free trade system. Finally, as long as
the most favoured nation rule is honoured, imports from all WTO Members are
treated equally, which reduces the cost of determining an import’s origin and
therefore improves economic efficiency.
Advantages For Smaller Countries:
MFN allows smaller countries, in particular, to participate in the advantages that
larger countries often grant to each other, whereas on their own, smaller
countries would often be not powerful enough to negotiate such advantages by
themselves. Apart from that, Granting MFN has domestic benefits: having one set
of tariffs for all countries simplifies the rules and makes them more transparent. It
also lessens the frustrating problem of having to establish rules of origin to
determine which country a product (that may contain parts from all over the
world) must be attributed to for customs purposes. MFN restrains domestic
special interests from obtaining protectionist measures. E.g., butter producers in
country A may not be able to lobby for high tariffs on butter to prevent cheap
imports from developing country B, because, as the higher tariffs would apply to
every country, the interests of A's principal ally C might get impaired.
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ARTICLE 1 PARA 1 OF GATT
Article 1 of the GATT 1994, entitled ‘General Most Favoured Nation Treatment’,
states in paragraph 1:
With respect to custom duties and charges of any kind imposed on or in
connection with importation or exportation or imposed on the international
transfer of payments for import or exports, and with respect to the method of
levying such duties and charges, and with respect to all rules and formalities in
connection with importation and exportation, and with respect to all matters
referred to in paragraphs 2 and 4 of Article III, any advantage, favour, privilege, or
immunity granted by any 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 Members.
Essential Requirements Of Article I: 1
Under Article I:1 there are three questions that must be answered to determine
whether there is a violation of the MFN treatment obligation of Article I:1,
namely:
• Whether the measure at issue confers a trade ‘advantage’ of the kind covered
by ArticleI:1;
• Whether the products concerned are ‘ like products’; and
• Whether the advantage at issue is granted ‘immediately and unconditionally’ to
all like products concerned.
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Any Advantage… The MFN treatment obligation concerns ‘any advantage,
favour, privilege or immunity’ granted by any member to any product originating
in, or destined for, any other country with respect to
1) custom duties;
2) charges of any kind imposed on exportation or importation (e.g. import,
surcharges or consular taxes);
3) charges of any kind imposed in connection with importation or exportation
(e.g. customs fees or quality inspection fees);
4) charges imposed on the international transfer of payments for imports or
exports;
5) the method of levying such duties or charges, such as the method of assessing
the base value on which the duty or charge is levied;
6) all rules and formalities in connection with importation and exportation;
7) internal taxes or other internal charges; and
8) laws, regulations and requirements affecting internal sale, offering for sale,
purchase, transportation, distribution or use of any product.
Under Article I:1, if advantages are granted to all other countries, including non-
WTO members, then the member has to grant that advantages also to all WTO
members. In other words, the MFN treatment obligation requires that any
advantage granted by a member to any product from or for another country be
10 | P a g e
granted to all like products from or for all other members. The Article I:1 casts a
very wide net and it is of very wide applicability. Some case examples are:
• In US-MFN Footwear case, also referred to as US-Non Rubber Footwear case,
the Panel found: “the rules and formalities applicable to countervailing duties,
including those applicable to the revocation of countervailing duty orders, are
rules and formalities imposed in connection with importation, within the meaning
of Article I:1”.
• In Canada-Autos case , the Appellate Body usefully clarified the scope of Article
I:1 by ruling: “Article I:1 requires that “ any advantage, favour, privilege or
immunity granted by any 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 members”. The
words of Article I:1 refer not to some advantages granted “with respect to” the
subjects that fall within the defined scope of the Article, but to “ any advantage”;
not to some products, but to “any product”; and not to like products from some
other Members, but to like products originating in or destined for “ all other”
Members.”
• Similarly, in EEC-Imports of Beef case, the panel applied Article I:1 to European
Communities regulations making the suspension of an import levy conditional on
the production of a certificate of authenticity.
Like Products...
ArticleI:1 concerns any product originating in or destined for any other country
and requires that an advantage granted to such products shall be accorded to ‘like
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products’ originating in or destined for the territories of all other members. It
must be noted that it is only when the products are like, the MFN treatment
obligation applies and that discrimination is prohibited. Products that are not like
may be treated differently. The concept of like products is used in various Articles
of GATT but it is no where defined in the GATT 1994. The dictionary meaning of
‘like products’ suggests that like products are products that share a number of
identical or similar characteristics. However, the Appellate Body noted in Canada-
Aircraft case that the dictionary meanings leave many interpretative questions
open. With regard to the concept of ‘like products’, there are three questions of
interpretation that need to be resolved:
1. which characteristics or qualities are important in assessing ‘likeness’;
2. to what degree or extent must products share qualities or characteristics in
order to be ‘like products’;
3. from whose perspective should ‘likeness’ be judged?
The Panel and Appellate Body has accepted that the concept of ‘like products’ has
different meaning in the different contexts in which it is used.
In Japan-Alcoholic Beverages II case, the Appellate Body illustrated the possible
differences in the scope of the concept of ‘like products’ between different
provisions of the WTO Agreement by evoking the image of an accordion. The
Appellate Body said: The accordion of “likeness” stretches and squeezes in
different places as different provisions of the WTO Agreement are applied. The
width of the accordion in any one of those places must be determined by the
particular provision in which the term ‘ like’ is encountered as well as by the
context and the circumstances that prevail in any given case to which that
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provision may apply”. The meaning of the phrase ‘like products’ in Article I: 1 was
addressed in a number of GATT working party and panel reports. In Spain-
Unroasted Coffee case , the Panel has to decide whether various types of
unroasted coffee ( ‘Colombian mild’, ‘other mild’, ‘unwashed Arabica’, ‘Robusta’
and ‘other’) were ‘like products’ within the meaning of Article I:1. Spain did not
apply custom duties on ‘Columbia mild’ and ‘other mild’, while it imposed a seven
percent customs duty on the other three types of unroasted coffee. Brazil, which
exported mainly ‘unwashed Arabica’, claimed that the Spanish tariff regime was
inconsistent with Article I:1. In examining whether the various types of unroasted
coffee were ‘like products’ to which the MFN treatment obligation applied, the
Panel considered:
• the characteristics of the products;
• their end-use and
• tariff regime of other members.
The panel stated as follows: “The Panel examined all arguments that had been
advanced during the proceedings for the justification of a different tariff
treatment for various groups and types of unroasted coffee. It noted that these
arguments mainly related to organoleptic differences resulting from geographical
factors, cultivation methods, the processing of the bean, and the generic factor.
The Panel did not consider that such differences were sufficient reason to allow
for a different tariff treatment. It pointed out that it was not unusual in the case
of agricultural products that the taste and aroma of the end product would differ
because of one or several of the above mentioned factors. The Panel furthermore
found relevant to its examination of the matter that unroasted coffee was mainly,
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if not exclusively, sold in the form of blends, combining various types of coffee,
and that coffee in its end use, was universally regarded as a well defined and
single product intended for drinking. The Panel noted that no other contracting
party applied its tariff regime in respect of unroasted, non-decaffeinated coffee in
such a way that different types of coffee were subject to different tariff rates. In
the light of the foregoing, the Panel concluded that unroasted, non-decaffeinated
coffee beans listed in the Spanish Customs Tariff…should be considered as “ like
products” within the meaning of Article I:1”.
In addition to the three criteria used by the Panel in Spain-Unroasted coffee case,
there is one more criteria that has assumed importance and that is consumers’
tastes and habits.
Advantage Granted Immediately And Unconditionally……
Article I: 1 requires that any advantage granted by a WTO members to imports
from any country must be granted ‘immediately’ and ‘unconditionally’ to imports
form all other WTO Members. Once a WTO Member has granted an advantage to
imports from a country, it cannot make the granting of that advantage to imports
of other WTO members conditional upon those other WTO Members. In a legal
opinion of 1973 in the context of the accession of Hungary to the GATT, the GATT
Secretariat noted that: “ the prerequisite of having a cooperation contract in
order to benefit from certain tariff treatment appeared to imply conditional most
favoured –nation treatment and would, therefore, not appear to be compatible
with the General Agreement”. Some case examples are:
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• In Indonesia-Autos case , the Panel found with respect to the requirement
under Article I:1 that advantages are granted ‘unconditionally and immediately’,
as follows: “ under the February 1996 car programme the granting of customs
duty benefits to parts and components is conditional to their being used in the
assembly in Indonesia of a National Car. The granting of tax benefits is conditional
and limited to the only Pioneer company producing National Cars. And there is
also a third condition for these benefits: the meaning of certain local content
targets. Indeed under all these car programmes, custom duty and tax benefits are
conditional on achieving a certain local content value for the finished car. The
existence of these conditions is inconsistent with the provisions of Article I:1
which provides that tax and custom duty advantages accorded to products of one
Member ( here on Korean products) be accorded to imported like products from
other Members ‘immediately and unconditionally’ ”.
• In the Belgian –Family Allowances case, a dispute of 1952 concerning a Belgian
Law providing for an exemption from a levy on products purchased form
countries which had a system of family allowances similar to that of Belgium, the
Panel held that the Belgian law at issue introduced a discrimination between
countries having a given system of family allowances and those which had a
different system or no system at all, and made the granting of the exemption
dependent on certain conditions. The panel concluded that the advantage- the
exemption from a levy-was not granted ‘unconditionally’ and that the Belgian law
was, therefore, inconsistent with the MFN treatment obligation of Article I: 1.
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SOME CASE EXAMPLES ON THE CONCEPT OF MFN IN DETAIL
1998 Indonesia Car Case
In February and June, 1996, in an effort to develop “National Car”, the
Government of Indonesia introduced differences between imports of car
components in allocation of tax and custom duty benefits to these imports. The
benefits took the form of duty and sales exemptions. The Indonesia Car panel
held that the National Car programme blatantly violated Article I: 1.The Car Panel
held identified four analytical questions:
I) whether there is an advantage created by a measure?
II) Whether the products affected by the measure are “like”?
III) Whether disputed matter is a type regulated by the MFN provision?
IV) Whether the advantage is offered to all like products unconditionally?
Only if the answer to all four questions is “yes”, there is a violation of Article I: 1.
The Panel answered the first two questions in the affirmative without any
difficulty. The Panel found that National Cars and their parts and components
imported from Korea are “like” any motor vehicle and parts and components
imported from other WTO members. As to the third question, the Indonesia Car
Panel queried whether the custom and tax benefits of the February and June
1996 car programme are advantages of the types covered by Article I. It replied,
“The Custom duty benefits of the various Indonesia car programmes are explicitly
covered by the wording of Article I. As to the tax benefits of these programmes,
we note that Article I: 1 refers explicitly to all matters referred to in paragraphs 2
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and 4 of Article III. We have already decided that the tax discrimination aspects of
the National Car programme were matters covered by Article III: 2 of GATT.
Therefore the custom duty and tax advantages of the February and June 1996 car
programmes are of the type covered by Article I of GATT”.
On the fourth question, Panel found that Indonesia did not confer unconditionally
to all like products the advantages from its custom duty and tax treatment
measures. The panel held that GATT case law is clear to the effect that any such
advantages (here tax and custom duty benefits) cannot be made conditional on
any criteria that is not related to the imported product itself. The court held that
it appears that the design and structure of the June 1996 car programme is such
as to allow situations where another member’s like product is subject to much
higher duties and sales taxes than those imposed on products imported from
Korea. The Panel found that custom duties as high as 200% can be imposed on
finished motor vehicles while an imported National Car benefits from a 0%
customs duty. Further, no taxes are imposed on a National Car while an imported
like motor vehicle from another member would be subjected to a 35% sales tax.
The Panel further found that distinction as to whether one product is subject to a
0% duty and the other one is subject to 200% duty or whether one product is
subject to 0% sales tax and the other is subject to a 35% sales tax, depend on
whether or not Indonesia has made a deal with that exporting company to
produce that National Car, and is covered by the authorization of June 1996 with
specifications that correspond to those of the Kia car produced by the Korea. The
Panel held that, in WTO/ GATT, the right of Members cannot be made dependent
upon, conditional or even affected by, any private contractual obligations in
17 | P a g e
place . The Panel held that existence of these conditions is inconsistent with the
provisions of the Article I: 1 which provides that tax and customs duty benefits
accorded to products of one Member (here on Korean products) be accorded to
imported like products from other Members “immediately and unconditionally”.
Therefore, the Panel held that February and June 1996 car programme which
introduced discrimination between imports in the allocation of tax and customs
duty benefits based on various conditions and other criteria not related to the
import them, are inconsistent with the provisions of Article 1 of GATT.
1988 Japan Semiconductor Case; This is a case which illustrates unsuccessful
effort to invoke the MFN obligations of Article I: 1. At the time of the facts of the
case, Japan and U.S were largest producers and exporters of semiconductor chips
in the world. Beginning in 1983, the American semiconductor industries began
complaining that non-Japanese companies did not have good access to the
Japanese semiconductor market. The semiconductor industries of U.S also
complained that Government of Japan engaged in unfair trade practices vis-à-vis
American companies, and Japanese companies were resorting to anti-dumping
practices. In 1986, U.S Semiconductor Industry Association filed a petition with
the United States Trade Representatives (USTR) asking for unilateral action under
Section 301 of the Trade Act of 1974. The USTR accepted the petition and carried
out an investigation. Owing to the investigation, the Japanese and American
Government entered into negotiations. The result of the negotiation was the
1986 United States-Japan Arrangement Concerning Trade in Semi- Conductor
Products. Under the Arrangement, the Government of Japan engaged to impress
upon Japan producers and users of semiconductors the need to take advantage
18 | P a g e
aggressively of increased market opportunities in Japan for foreign based firms
seeking to improve their sales performance and position. Further, under the
Arrangement, the Government of Japan agreed to provide support in the form of
establishment of organization to provide sales assistance, quality assessment,
research fellowship programmes and exhibition for foreign semiconductor
products.
The Government also agreed to promote long-term relationship between
Japanese semiconductor buyers and foreign producers, including joint
development programmes. In exchange, the U.S Government asked American
semiconductor producers to exploit the opportunity of increased market access in
Japan. The U.S Government also agreed to suspend anti-dumping cases against
Japanese chip manufacturers, after the Japanese Government agreed to monitor
the cost and prices of semiconductor products exported to U.S. Further, both of
them also agreed to monitor third country markets, saying that dumping should
not occur in third country markets because American semiconductor producers
used to compete with Japanese firms in the third country markets, and after the
Arrangement, the American firms don’t have to compete with dumped products
in these markets.
One issue which arose in 1988 Semi-conductor case was whether 1986
Arrangement violated the MFN principle embodied in Article I: 1 by preferring
American semiconductor producers and exporters over all other non-Japanese
producers and exporters. The European Economic Communities (EEC), which
brought the case, alleged the violation of MFN principle and argued that the
Arrangement amounted to “Buy American Policy” endorsed by Government of
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Japan in order to give preferential treatment to the American semiconductor
producers. As for evidence in support of its argument, the EEC said the American
semiconductor industry expected the market share of its sales in Japan would
show a steady increase and rise to 20 percent by 1991, and that Japan recognised
this expectation.
The GATT Panel ruled against the EEC’s argument, finding that the 1986
Arrangement did not violate the Article I MFN principle. The Panel reached to the
conclusion that EEC’s evidence does not support its argument.
The panel held that there was nothing in the Arrangement to show that Japan
promised to reserve 20 percent of the Japanese semiconductor market for
American firms. The Panel gave four reasons for the finding: First, sales of non-
American foreign semiconductors in Japan had been expanding steadily, just like
sales of American semiconductors. Indeed, the growth of sales of semiconductors
in Japan from non-American sources has been higher than that of sales of
American semiconductors. Secondly, the Panel found that 1986 Arrangement
uniformly applies to all foreign based semiconductor companies. Although the
Panel found that there was only one such company not of American origin, there
was nothing to prevent a non-American company from establishing itself in Japan
on the same terms an American company. Thirdly, the Government of Japan
implemented the Arrangement in an impartial manner. Fourth, the EEC’s
argument that Japanese users and importers of semiconductor product would
perceive the Arrangement as according preference to the U.S was a sheer
speculation. Thus, Panel rejected the contention of EEC.
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OTHER PROVISIONS REFLECTING MFN PRINCIPLE
Apart from Article 1 Para1, there are other provisions in GATT 1994 that requires
MFN or MFN-like treatment. These are:
• Article III Para 7: It provides for granting MFN status regarding internal
quantitative regulations.
• Article V: It provides for granting MFN status regarding freedom of transit.
• Article IX Para 1: It provides for granting MFN status regarding marking
requirements.
• Article XIII: It provides for non-discriminatory administration of quantitative
restrictions.
• Article XVII Para 1: It provides for granting MFN status regarding state trading
enterprises.
• Article XVIII Para 20: It concerns governmental assistance to economic
development.
• Article XX (j): It concerns goods in short supply.
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EXCEPTIONS TO THE MOST FAVOURED NATION PRINCIPLE
The GATT provides for certain exceptions to the Most-Favoured-Nation rule.
Regional Trading Agreements (Gatt Article XXIV)
Regional Trade Agreements (RTAs) have become in recent years a very prominent
feature of the Multilateral Trading System (MTS). The surge in RTA has continued
unabated since the early 1990s. Some 380 RTAs have been notified to the
GATT/WTO up to July, 2007. Regional integration liberalizes trade among
countries within the region, while allowing trade barriers with countries outside
the region. Regional integration therefore may lead to results that are contrary to
the Most-Favoured-Nation principle because countries inside and outside the
region are treated differently. This may have a negative effect on countries
outside the region, and thus lead to results contrary to the liberalization of trade.
Regional integration, thus, has a great impact on the world economy today and is
the subject of frequent debate in a variety of forums, including the WTO
Committee on Regional Trade Agreements. One of the most frequently asked
question is whether these regional groups help or hinder the WTO’s multilateral
trading system. The WTO Committee on Regional Trade Agreements is keeping an
eye on the development. The regional trading groups such as the European Union
(EU), the North America Free Trade Agreement (NAFTA), the Association of
Southeast Asian Nations (ASEANS), the South Asian Association for Regional
Cooperation (SAARC), the Southern Common Market ( MERCOSUR), the Common
Market of Eastern and Southern Africa ( COMESA),etc have posed a great
challenge to the Most Favoured Nation principle which have lowered or
22 | P a g e
eliminated tariffs among the members while maintaining tariff walls between
member nations and the rest of the world. The groupings that are important for
the WTO are those that abolish or reduce barriers on trade within the group. The
WTO agreements recognize that regional arrangements and closer economic
integration can benefit countries. It also recognizes that under some
circumstances regional trading arrangements could hurt the trade interests of
other countries. Normally, setting up a customs union or free trade area would
violate the WTO’s principle of equal treatment for all trading partners (“most-
favoured-nation”).
But GATT’s Article 24 allows regional trading arrangements to be set up as a
special exception, provided certain strict criteria are met (as mentioned above). In
particular, the arrangements should help trade flow more freely among the
countries in the group without barriers being raised on trade with the outside
world. In other words, regional integration should complement the multilateral
trading system and not threaten it. Article 24 of the GATT says that if a free trade
area or customs union is created, duties and other trade barriers should be
reduced or removed on substantially all sectors of trade in the group. Non-
members should not find trade with the group any more restrictive than before
the group was set up. On 6 February 1996, the WTO General Council created the
Regional Trade Agreements Committee. Its purpose is to examine regional groups
and to assess whether they are consistent with WTO rules. The committee is also
examining how regional arrangements might affect the multilateral trading
system, and what the relationship between regional and multilateral
arrangements might be.
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Waiver Of MFN Principle In Favour Of Developing Countries:
GATT provides for exception to the Most Favoured Nation principle in favour of
the developing countries. Historically, developing countries were critical of the
GATT because the trade of the developing countries were not growing as fast as
developed countries within the framework of the GATT. Such dissatisfaction led to
a study called the Haberler Report , which supported the perception that the
export earnings of developing countries were not satisfactory. Later, the
formation of United Nation Conference on Trade and Development (UNCTAD)
spurred several initiatives within the GATT. First, in 1965, the GATT contracting
parties adopted Part IV of the GATT to demonstrate a new concern for the
interests of the developing countries. Second, in 1971, the GATT adopted two
waivers for two types of preferences to favour developing countries: 1) a set aside
of the MFN obligation to permit a “generalised system of preferences” ; and 2)
permission for developing countries to exchange tariff preferences among
themselves. In 1979, both waivers were made permanent through the so-called
Enabling Clause. The Enabling Clause continues to guide WTO policy. The Enabling
Clause settled a debate within the GATT and established the policy of special and
preferential treatment for developing countries. At the same time, the Enabling
Clause contains a so-called graduation clause (Para 7) which is the policy that
eventually preferential treatment should end. Article XXXVI, which is incorporated
in Part IV of the GATT, is a hortatory provision of “ Principles and Objectives”
stating the need to raise standards of living in developing countries, the need for
rapid and sustained expansion of their export earnings and increased access to
world market for their products. Article XXXVI sets out the principle that
24 | P a g e
developed countries do not expect reciprocity for their commitments to remove
or reduce tariffs and other trade barriers.
To take an hypothetical example, assume that the United States grants duty free
treatment to rice from Laos, which is not yet a WTO member. The United States
does so because Laos is a less developed country in need of help. The United
Sates makes the same decision, for the same reason, for rice imported by the
United Sates from Cambodia, which is a WTO member. The normal MFN rate of
15 percent continues to apply to rice imported by the United States from Japan,
which is also a WTO member. Would Japan have an MFN grievance against the
American decision? The answer is “no”. The United States can grant duty-free
treatment to developing countries under its Generalised System of Preferences
program, whether they are WTO members or not by virtue of Paragraph 1 of
Enabling Clause which provides for the general MFN waiver.
Other Exceptions
Apart from the above mentioned exceptions, there are other provisions in the
GATT which can be construed as exceptions to the Most Favoured Nation rule.
Article I: 2 provides for exception to the Most-Favoured-Nation principle
regarding historical preferences which were in force at the time of the signing of
the GATT, such as the British Commonwealth. Article XX, which provides for
General Exceptions to the GATT, says that nothing in this Agreement shall be
construed to prevent the adoption or enforcement by any contracting parties of
measures:- necessary to protect public morals; necessary to protect human,
animal or plant life or health; relating to the importations or exportations of gold
or silver; necessary to secure compliance with laws or regulations which are not
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inconsistent with the provisions of the GATT; relating to the products of prison
labour; relating to the conservation of exhaustible natural resources, etc. Article
XXI, which provides for Security Exceptions to the GATT, says that nothing in this
Agreement shall be construed :
a) to require any contracting party to furnish any information the disclosure of
which it considers contrary to its essential security interests;
b) to prevent any contracting party from taking any action which it considers
necessary for the protection of its essential security interests- relating to
fissionable materials or the materials from the materials from which they are
derived; relating to traffic in arms, ammunition and implements of war and to
such traffic in other goods and materials as is carried on directly or indirectly for
the purpose of supplying a material establishment; taken in time of war or other
emergency in international relations;
c) to prevent any contracting party from taking any action in pursuance of its
obligations under the United Nations Charter for the maintenance of international
peace and security. Article XIV provides for exceptions to the rule of non-
discrimination in order to enable the member countries to deal with the balance
of payment difficulties. Article XIX, which deals with Emergency Action on Imports
of Particular Products ( Safeguard Measures), provides that if, as a result of
unforeseen developments and of the effect of the obligations incurred by a
contracting party under this Agreement, including tariff concessions, any product
is being imported into the territory of that contracting party in such increased
quantities and under such conditions as to cause or threaten serious injury to
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domestic producers in that territory of like or directly competitive products, the
contracting party shall be free, in respect of such product, and to the extent and
for such time as may be necessary to prevent or remedy such injury, to suspend
the obligation in whole or in part or to withdraw or modify the concession.
CONCLUSION
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The Most Favoured Nation (MFN) principle is a cornerstone of the multilateral
trading system conceived after World War II. It seeks to replace the frictions and
distortions of power-based (bilateral) policies with the guarantees of a rules-
based framework where trading rights do not depend on the individual
participants’ economic or political clout. Rather, the best access conditions that
have been conceded to one country must automatically be extended to all other
participants in the system. This allows everybody to benefit, without additional
negotiating effort, from concessions that may have been agreed between large
trading partners with much negotiating leverage. Although the formation of
Regional Trading Blocks has eroded the fundamental importance of the concept
to some extent, it is still the most fundamental obligation on which the entire
foundation of GATT and WTO rests. The MFN principle must be observed as a
fundamental principle for sustaining the multilateral free trade system. Regional
integration and related exceptions need to be carefully administered so as not to
undermine the Most Favoured Nation principle as a fundamental principle of the
WTO.
BIBLIOGRAPHY
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www.wikipedia.org ..
www.google.com On-line books.
INTERANTIONAL TRADE LAW BOOK BY SR MYNENI
Wwwwto.org