By

E.Shelley Anandhavalli

Most favoured nation (MFN) is a status or level treatment

accorded by one state to another in international trade.

The term means the country which is the recipient of this

treatment must, nominally, receive equal trade advantages as the

"most favored nation" by the country granting such treatment.

In effect, a country that has been accorded MFN status

may not be treated less advantageously than any other

country with MFN status by the promising country.

MFN is one of the substratum principles of WTO.

It requires Members to accord the most favorable tariff and

regulatory treatment given to the product of any one Member at the

time of import or export of "like products" of all other Members.

MFN helps in reduction of tariffs on other country goods and

thereby increase the consumer’s access to quality products at

relatively low prices and would serve to enhance a mutually

beneficial trade relationship with the two rapidly developing

economies.

Special consideration is given to countries that are classified as

"developing" by the World Trade Organization.

Countries achieving most favored nation status are given specific

trade advantages such as reduced tariffs on imported goods.

MFN is the first article of the General Agreement on Tariffs andTrade (GATT), which governs trade in goods.

MFN is also a priority in the General Agreement on Trade in Services(GATS) (Article 2)

The Agreement on Trade- Related Aspects of Intellectual PropertyRights (TRIPS)(Article 4).

MFN enables competitive international transactions.

Establishes equal trading opportunities among states by makingoriginally bilateral agreements multilateral.

Under the Most-Favoured-Nation rule, If WTO Member

state A agree in negotiations with state B, (though not a

member of WTO) to reduce the tariff on the same product

X, the same "tariff rate" must also apply to all other WTO

Members as well.

In other words, if a country gives favorable treatment to one

country regarding a particular issue, it must handle all

Members equally regarding the same issue.

Prior to the GATT, an MFN clause was often included in bilateraltrade agreements, and it contributed greatly to the liberalization oftrade.

In the early 17th century, several commercial treaties incorporatedmost-favoured-nation provisions. The Anglo-French treaty negotiatedin 1860 by Richard Coben and Michel Chevalier, which establishedinterlocking tariff concessions that extended most-favoured-nationtreatment worldwide, became the model for many later agreements.

MFN was generally bilateral. But in the late 19th and early 20thcentury unilateral most favoured nation clauses were imposed on Asiannations by the more powerful Western Countries.

After World War II, tariff and trade agreements were negotiatedsimultaneously by all interested parties through the GATT.

MFN treatment has always applied primarily to the duties charged on

imports, but specific provisions have extended the most-favoured-

nation principle to other areas of international economic contacts:

the establishment of enterprises of one country’s nationals in the

territory of the other;

navigation in territorial waters;

real and personal property rights

intangible property rights such as patents, industrial

designs, trademarks, copyrights, and literary property;

government purchases;

foreign-exchange allocations;

taxation.

There are two forms of most-favoured-nation treatment:

Conditional

unconditional.

The conditional form grants to the contracting party only those

concessions originally made to a third party and grants concessions

originally obtained as part of a bargain only under

equivalent conditions or in return for equivalent gains.

Under the unconditional form, any tariff concession granted to a

third party is granted to the contracting party, a principle that was

included in the 1948 General Agreement on Tariff and Trades

(GATT) and in 1995 in the agreement establishing the World

Trade Organisation (WTO).

Cont..

The unconditional Most-Favoured-Nation clause was then

included in the GATT, on a multilateral basis, and has

contributed to the stability of trade around the world.

The World Trade Organization requires members to grant

one another most favoured nation status.

A most favoured nation clause is also included in the

majority of the numerous bilateral investment treaties

concluded between capital exporting and capital importing

countries after the Second world war.

MFN treatment is stipulated in GATT Articles I, XIII, and XVII.

GATT Article I:1

- Provides for WTO Members to accord Most-Favoured-Nation treatment to

i) like products of other WTO Members regarding tariffs, regulations on exports and imports, internal taxes and charges, and internal regulations.

In other words, "like" products from all WTO Members must be given the same treatment as the most advantageous treatment accorded the products of any state.

Otherwise such action amounts to violation of the above said

article.

GATT Article XIII stipulates

- that quantitative restrictions or tariff quotas on anyproduct must be administered in a non-discriminatoryfashion regarding like products.

- in administering import restrictions and tariffquotas, the WTO Members shall aim to allocate shares closeto that which might be expected in their absence.

-Article XIII provides for most-favoured-nationtreatment in the administration of quantitativerestrictions, and supplements under Article I

GATT Article XXVII obliges WTO Members to act in

accordance with the rule of non-discrimination, including the

MFN.

- State Trading Enterprises are Enterprises

established or maintained by a WTO Member or private

enterprises granted exclusive or special privileges by WTO

Members, which make purchases or sales involving either

imports or exports.

- By making use of their monopolistic

status, such enterprises could operate against international

trade through discrimination on the part of importing country

and quantitative restrictions.

The trading system should be

without discrimination

freer

Predictable

more competitive

more beneficial for less developed countries

It suggests special treatment, but in the WTO it actually

means non-discrimination — treating virtually everyone

equally.

Most-favoured nation (MFN) status did not always mean

equal treatment.

The first bilateral MFN treaties set up exclusive clubs among

a country’s “most-favoured” trading partners.

Under GATT and now the WTO, the MFN club is no

longer exclusive. The MFN principle ensures that each

country treats its over—140 fellow-members equally.

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 may be allowed on satisfying the

following conditions:

First, tariffs and other barriers to trade must be eliminated with

respect to substantially all trade within the region.

Second, the tariffs and other barriers to trade applied to outside

countries must not be higher or more restrictive than they were

prior to establishment of regional integration.

The Generalized System of Preferences or "GSP" is a system thatgrants products originating in developing countries lower tariff ratesthan those normally enjoyed under Most-Favoured-Nation status as aspecial measure granted to developing countries in order to increasetheir export earnings and promote their development.

Characteristics of GSP:

Preferential tariffs may be applied not only to countries with specialhistorical and political relationships, (i.e. the BritishCommonwealth), but to developing countries more generally.

the beneficiaries are limited to developing countries.

it is a benefit unilaterally granted by developed countries to developingcountries.

Non-Application of Multilateral Trade Agreements between

Particular Member States (WTO Article XIII):

In the case of non-application, benefits enjoyed by other

Members are not provided to the country of non-

application, which leads to results that are contrary to the most-

favoured-nation principle.

Other exceptions peculiar to the Most-Favoured-Nation principle

include

Article XXIV:3 regarding frontier traffic with adjacent

countries, and

Article I:2 regarding historical preferences which were in force at

the signing of the GATT, such as the British Commonwealth.

General exceptions to the GATT that may be applied to the Most-

Favoured-Nation principle include

Article XX regarding General Exceptions for measures necessary

to protect public morals, life and health, etc., and

Article XXI regarding Security Exceptions.

It is also possible to obtain a waiver to constitute an exception to

the Most-Favoured-Nation principle.

Cntd..

Under WTO Article IX:3, countries may, with the agreement of

other contracting parties, waive their obligations under the

agreement.

New waivers, however, can only be obtained for exceptional

circumstances, and require the consent of three-quarters of the

contracting parties.

It is stipulated that the exceptional circumstances, the terms and

conditions governing the application of the waiver, and the date on

which the waiver will be terminated shall be clearly stated, and that

waivers are subject to annual review (Article IX:4).

Article II of the General Agreement on Trade in Services (GATS)

provides for most-favoured-nation treatment for services and

service providers;

Article 4 of the Agreement on Trade-Related Aspects of

Intellectual Property Rights does the same for the protection of

intellectual property rights.

The GATS allows for exceptions where Members may waive their

obligation to provide most-favoured-nation treatment for specific

measures in specific fields by listing the measure in the Annex on

Article II Exemptions.

The TRIPS Agreement also provides for exemptions regarding

measures based on existing treaties in the area of intellectual

property.

Increased Efficiency in the World Economy

Most-favoured-nation treatment makes it possible for countries to

import from the most efficient supplier, in accordance with the principle

of comparative advantage.

Stabilization of the Free Trading System

the most-favoured-nation rule requires that favourable treatment

granted to one country be immediately and unconditionally granted

to all other countries, while trade restrictions must also be applied

equally to all.

Reduction of the Cost of Maintaining the Free Trade System

MFN reduces the cost of maintaining the free trade system.

Any trade benefits that result from any negotiations will be

applied equally to all other WTO members, even though

they may be excluded from the negotiations.

This could create abuse of the MFN treatment.

Continual vigilance is required to ensure that the most-

favoured-nation rule is not abused and weaken the basic

importance of the dispute settlement process in the WTO.