Most Favoured Nation Treatment and its Exception
The article ‘Most Favoured Nation Treatment and its Exception’ explores the nuances and ramifications of the MFN concept. The WTO’s non-discriminatory multilateral trade relations system is built around the concept of a most-favourable nation. The MFN norm had become a cornerstone of GATT by 1947, but as time went on, a number of exceptions appeared that diminished the importance of this principle. Through this article, the author explores the key components, exceptions, and historical development of the concepts before providing analysis and conclusion.
In recorded human history, the Second World War resulted in enormous loss of life and property. To get off to a new start, the wounded global community considered the creation of international alliances in various spheres. One such new beginning in the area of international trade was the GATT in 1994. It created a contemporary multilateral trading system. It was implemented proviso without the contracting parties’ legislative consent. The World Trade Organization (WTO) was established on 1st January 1995, marking the biggest change to international trade since the end of World War II, about fifty years later. It was the result of decades of international work to create a truly international trade organisation that would meet the expanding demands of the global economic community.
The GATT 1947 was corrected, revised, and modified as GATT 1994, which is legally distinct from GATT 1947 and is a component of the WTO jurisdiction, with the foundation of the WTO in January 1995. As a result, the GATT 1994 (hereafter referred to as the GATT), which is a part of the WTO Agreement, continues to be governed by the GATT 1947 regulations that were included in it. To say GATT 1947 is an annexed Agreement and hereby incorporated by reference is to understate its contemporary importance.
It remains the central substantive legal document, even the constitution of international trade. The WTO and its agreements also encompass, among other things, trade in services under the General Agreement on Trade in Services, whereas the GATT primarily dealt with trade in products (hereinafter referred to as GATS). The fundamental tenets of equality and non-discrimination form the foundation of the GATT system. The WTO global trading system is built on the most-favoured-nation principle. The GATS has also adopted this idea, albeit with certain variations.
A. Scope of the Principle under GATT
The MFN treatment principle is enshrined in Article I of the GATT, which also strives to forbid discrimination between comparable products with different origins or destinations. According to the MFN principle, WTO members must accord like products of other WTO members preferential treatment with regard to tariffs, export and import regulations, internal taxes and fees on imported goods, and internal rules. To fully comprehend the breadth of the principle, Article I:1 of the GATT can be separated into the following segments:
“With respect to customs duties and charges of any kind imposed on or in connection with importation or exportation or imposed on the international transfer of payments for imports 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.”
The following criteria must be taken into account to prove that a Member has violated the MFN principle, according to a comprehensive reading of the aforementioned article:
I. Like Products
The requirement for MFN treatment only applies to similar products. A benefit provided to a product coming from or going to another nation must be extended to similar items coming from or going to the territory of all other WTO Members. The term “like product” has been subject to various and conflicting interpretations, and the GATT Panels have not used a consistent set of standards to determine what qualifies as a “similar product.”.
In Spain–Unroasted Coffee, the Panel had to decide whether several varieties of unroasted coffee qualified as “like” under GATT Article I:1. When determining the matter, the Panel used the attributes of the items, their intended use, and the tariff policies of other Members as criteria. The Panel found that the four coffee bean varieties were similar products because they were frequently sold as blends, consumers viewed them as a single product meant for drinking, and many GATT contracting parties did not apply different tariff rates to the four varieties under their respective tariff regimes. It came to the conclusion that the MFN treatment mandate was broken by setting different tariff rates for specific varieties of unroasted coffee beans.
However, in the SPF (spruce, pine, fir) dimension lumber, the Butte Panel acknowledged that each WTO Member could exercise considerable discretion as to tariff classifications and relied on each importing country’s standards in determining like products. It was alleged that the tariff regime’s establishment of different tariff rates on SPF accorded discriminatory treatment to lumber from certain countries and lumber from other countries.
II. Any advantage, favour, privilege or immunity
Any benefit given by a Member to a product coming from or going to another nation through a variety of means is covered by the MFN treatment obligation. The requirement to give MFN treatment extends beyond tariffs. The measures include internal taxes and charges on imported goods, internal laws, regulations, and requirements affecting sales, as well as any tariffs or charges of any kind imposed in connection with importation and exportation, the method of levying such tariffs and charges, rules and formalities in connection with importation and exportation. It is crucial to stress that the MFN treatment duty takes into account benefits awarded to “any other country” as well as benefits given to products coming from or going to WTO Members. As a result, if a WTO Member gives a benefit to goods coming from or going to a non-Member, they must also give that benefit to all other WTO Members.
In the EC-Bananas-III, only if imports of bananas from certain countries met standards that were different from those imposed on importers of bananas from other countries did those imports qualify for distribution of the tariff quota. While accepting the Panel’s findings that the activity function rules for importing third-country and non-traditional ACP bananas differ from and go above those required for importing from traditional ACP bananas, the Appellate Body of the WTO held that the method is discriminatory as the rules discriminate between like products coming from different Members.
III. Immediately and Unconditionally
Once a WTO Member has given a country an advantage, it is not permitted to place restrictions on other WTO Members in order for them to enjoy the same advantage. The WTO Member must immediately and unconditionally transfer the advantage to all WTO Members. In Indonesia – Autos, the Panel discovered that under the Indonesian car programmes, tax and customs duty breaks were dependent on meeting a minimum level of local content for the finished vehicle. The Panel came to the conclusion that these conditions were in conflict with Article I:1’s provisions, which state that tax and duty advantages granted to products of one Member (in this case, products from the Republic of Korea) must be granted to imported goods of a similar nature from other Members “immediately and unconditionally.”
A 1992 panel report considered the United States-Denial of MFN treatment as to non-rubber footwear from Brazil and ruled that balancing more favourable treatment under some procedures against a less favourable treatment under others is not permitted under Article I:1.
De jure and de facto discrimination are both possible. It would be obvious that Article I:1 was broken if different tariff rates were set for “similar items” of one country as opposed to another. De facto discrimination, on the other hand, is characterised as discrimination that is less obvious yet constitutes a violation. One such instance concerned Canada’s automotive safety standards. In this situation, the system in Canada, which under certain circumstances reduced tariffs on imported autos from the United States, was in question. Companies from other nations were welcome to use the system as long as they complied with specific requirements.
However, after the US-Canada Free Trade Agreement was signed, the acceptance of new applications was suspended, thereby leaving US corporations the only ones who could use it. Both the Panel and the Appellate Body came to the conclusion that the actions violated Article I:1 because they were de facto discriminatory.
In Canada- Autos, the Appellate Body found the prohibition of discrimination under Article I:1 to include both de jure and de facto discrimination- “The words of Article I:1 do not restrict its scope only to cases in which the failure to accord an ‘advantage’ to like products of all other Members appears on the face of the measure, or can be demonstrated on the basis of the words of the measure. Article I:1 does not cover only ‘in law’, or de jure, discrimination.
As several GATT panel reports confirmed, Article I:1 covers also ‘in fact’, or de facto, discrimination. Like the Panel, we cannot accept Canada’s argument that Article I:1 does not apply to measures which, on their face, are ‘origin-neutral’.” Hence, discrimination that is either in the form of explicit provisions of laws or regulations or by means of conduct is prohibited. The Belgian Family Allowances dispute comprehensively elucidates the scope of discrimination, and the phrase “any advantage, favour, privilege or immunity” for the purpose of understanding the nature and scope of discrimination prohibited by the MFN principle.
B. Scope of the Principle under GATS
The MFN provision, which is outlined in Article II of the GATS, is directly analogous to the very important Article I of the GATT. It requires that members “accord immediately and unconditionally to services and service suppliers of any other member, treatment no less favourable than it accords to like services and services suppliers of any other country”. Both de facto and de jure discrimination are subject to the GATS’s MFN treatment obligation. The MFN obligation under GATS resembles but differs slightly from, the MFN obligation under GATT. Service providers and services themselves are both subject to the GATS MFN mandate. The right to MFN treatment for services and service providers must be granted right away and without conditions. But the immediate and unconditional nature of Article II:2 is a significant exception.
If the exempting action is included in the Schedule of Concessions (for Services and Service Providers) and complies with the standards of the Annex on Article II Exemptions, a WTO member may deviate from the MFN commitment. Schedules for MFN obligation exemptions are provided in the Annex on Article II Exemptions. Two of the Annex instructions deal with timing and limit the amount of departure from instant, unconditional MFN treatment that is permissible. First off, in theory, the MFN treatment exceptions under Article II:1 shouldn’t last more than ten years. Second, the exemption had to be used as of the Uruguay Round’s conclusion and be included in the pertinent schedule.
After the WTO Agreements went into effect, Members were able to request additional exemptions under the GATS. However, three-fourths of the Members must agree to approve certain exemptions. It might be argued that GATS’s MFN requirement is intrinsically weaker than that of GATT because members are allowed to establish exceptions to the MFN commitments. Because governments were unwilling to commit to comprehensive trade in services deregulation at the Uruguay Round negotiations, the exemption clause was necessary for the services agreement. Thus, the MFN exclusions under GATS allow for a compromise rather than ending the negotiation process altogether.
Exceptions to the General Principle of MFN treatment
A general set of exceptions (Article XX) and security exceptions apply to the GATT requirements (Article XXI). Additionally, there are several unique exceptions to the MFN rule.
a) General Exceptions: Nothing in the Agreement shall be interpreted to prevent any contracting party from adopting or enforcing the measures or exceptions listed in paragraphs (a) through (j) of the Article, subject to the restriction that these exceptions or measures should not be applied arbitrarily or unjustifiably between the nations where the same conditions exist. Furthermore, these exemptions or actions shouldn’t be construed as covert limits on global trade. The measures relating to public morals, life and health, conservation of exhaustible natural resources, etc. are included under this Article’s exceptions. In order to use an Article XX defence and enact a trade-restrictive measure, an importing WTO member must first demonstrate that the action falls under one of the Article’s ten paragraphs. If it does, the proposal must satisfy the criteria outlined in the Chapeau to Article XX.
b) Security exceptions: The most contentious GATT exclusions are those related to security because Article XXI’s phrasing implies that each country is the only arbiter of issues pertaining to its own security. Although it is admirable that Article XXI respects the political and economic sovereignty of nations, in circumstances involving security exceptions, political reasons ultimately outweigh economic considerations.
c) Specific exceptions:
i. Customs Union/Free Trade Areas (Article XXIV)– A customs union or free trade agreement is a permitted exemption to the MFN principle under Article XXIV because it is widely acknowledged that such arrangements and agreements are beneficial for promoting economic integration without hurting the economic interests of other nations. If the following requirements are met, regional integration may be permitted as an exception to the MFN principle: tariffs and other trade barriers must be eliminated with respect to nearly all trade within the region, and the tariffs and other trade barriers applied to outside countries may not be higher or more restrictive than they were prior to regional integration.
ii. Preferential treatment to developing countries (Enabling clause)– Certain items with origins in qualifying developing nations are given preferential tariff treatment under the Generalized System of Preferences (GSP) programme as opposed to those that are typically given MFN status. It is essential for fostering commerce as a way to promote economic development and growth. The GSP preference may be granted under the 1979 GATT Decision on Differential and More Favourable Treatment, Reciprocity, and Fuller Participation of Developing Countries, sometimes known as the “Enabling Clause.” Only when the requirements outlined in the Enabling Clause are met is the divergence from the MFN mandate permitted.
One of the two primary means of advancing the goals of the WTO is the abolition of discriminatory treatment in international commercial relations, according to the Preamble to the WTO Agreement. The ideas of MFN obligation and NT obligation represent the fundamental principle of non-discrimination. The former forbids discrimination among nations, while the latter forbids discrimination against other nations.
Discrimination on the basis of “nationality” or the “national origin or destination” of a good, service, or service supplier is prohibited by the MFN obligations of the GATT and the GATS, with few exceptions. Because of the exceptions contained therein, trade liberalisation can be reconciled with other economic and non-economic values and interests, most commonly national ones.
A member country must apply both the most-favourable treatment and trade restrictions equally under the MFN rule. The MFN rule’s applicability encourages free trade because it reduces the risk that extensive trade restrictions will render a country’s market expensive and expensively isolated from the rest of the world. Additionally, it aids in the reduction of establishment and ongoing expenses for member nations while negotiating favourable or equal trade treatment and monitoring unequal treatment.
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