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Most Favoured Nation Treatment by Nidhi Chauhan

INTRODUCTION:

International rules on international trade in goods and services, i.e. international trade law, constitute the core of international economic law which covers all those international rules pertaining to economic transactions and relations, as well as, those pertaining to governmental regulation of economic matters.[i] International trade law consists of numerous bilateral or regional trade agreement and multilateral trade agreements. The most important of all multilateral trade agreement is the WTO Agreement[ii]. The law of WTO is a complex set of rules dealing with trade in goods and services and protection of intellectual property rights. It addresses issues relating to tariffs, import quotas, customs formalities, food safety regulations and national security measures.[iii] WTO is the centre of the multilateral trading system which is important tool of global economic management and development.[iv] There are certain basic rules and principles of the WTO law among which the principles of non-discrimination hold important position.

NON-DISCRIMINATION AND MFN TREATMENT

Non – Discrimination is the key concept in International Trade Law. It is one of the core principles of WTO Law. The two most important principles of non-discrimination in the WTO law are Most Favoured Nation (MFN) obligation[v] and National Treatment obligation[vi]. The MFN principle is one of the oldest legal obligations in the area of international trade law.[vii] It became common feature of many friendship, commerce and navigation treaties during the eighteenth and nineteenth centuries.[viii] The MFN principle means that a country must treat other countries at least as well as it treats the ‘most favoured’ country.[ix] Simply illustrated, if India imposes a 5 percent tariff on USA mobile imports, it cannot charge 10 per cent on mobile imports from China or other trading partners, but rather must give these others the 5 percent rate as well. The result of a nation being a beneficiary of an MFN clause is that that nation can comb all of the treaties and all of the actual treatment is more favorable than that granted to it- in which case, the beneficiary can argue that such better treatment is owed to it.[x]

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Article I of the General Agreement on Tariffs and Trade, 1994 (GATT) incorporates the Most Favoured Nation principle. The Most Favoured Nation (‘MFN’) principle is one of the oldest and most important legal obligations in the area of international economic law. The term itself may be somewhat confusing, as it has been mistakenly construed as indicating that there is a country or countries that are the ‘most favoured’.[xi] However, the principle is actually a straightforward non-discrimination requirement. It plays an important role in trade negotiations. In the earliest trade negotiations, when two countries exchanged mutual tariff concessions, there was some debate as to the circumstances under which other countries would also benefit from the lower tariff. There were two very different approaches taken to MFN when negotiating these tariff concessions. One view was that tariff concessions made to one country in a particular trade agreement would apply generally to all other countries as well. The competing view was that concessions in one agreement would only apply to other countries if these other countries offered their own concessions in return. The former was known as ‘unconditional’ in the sense that no conditions were placed on granting concessions to other countries. That is, recipient countries need not give anything in return. The latter was known as ‘conditional’ MFN. It was ‘conditional’ in the sense that tariff concessions were granted to other countries only on the condition that they offered compensation in the form of their own concessions. The United States pursued a “conditional MFN” policy prior to World War I, although by that time many major nations had moved to an unconditional approach. The United States, for its part, changed to an unconditional policy in 1923.[xii]

One question that has been debated is whether any sort of MFN or economic non-discrimination obligation independent of a treaty clause exists under customary international law. The prevailing view of scholars is that such an obligation exists only when a treaty clause creates it. Lacking a treaty, nations presumably have the sovereign right to discriminate against foreign nations in economic affairs as much as they wish.

 The Dispute Settlement Body of WTO has time and again held that the MFN principle set out in Article I of the GATT is a ‘cornerstone of the GATT’ and ‘one of the pillars of the WTO trading system’.[xiii] It is well recognised that MFN principle has been both central and essential to assuring the success of a global rules based system for trade in goods.[xiv] The principal purpose of the MFN principle under the GATT 1994 is to ensure equality of opportunity to import from, or to export to, all WTO Members.[xv] Article I of the GATT 1994 prohibits discrimination between like products originating in, or destined for, different countries.[xvi] The prohibition of discrimination serves as an incentive for concessions negotiated reciprocally to be extended to all other members of WTO on a MFN basis.[xvii] The hallmark of MFN obligation is reciprocity and non discrimination.[xviii]

With regard to the MFN Treatment required, the Article I of the GATT states: 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.

Thus, an ‘advantage, favour, privilege or immunity’ granted to products of one Member ‘shall be accorded immediately and unconditionally’ to the ‘like product’ imported from other Members or exported to other Members. That is, treatment offered to any country[xix] must be provided to Member as well. The essence of the MFN obligation is that like products should be treated equally, irrespective of their origin.[xx]

Main issues arising in relation to MFN treatment under Article I of the GATT are:

  1. Whether the products concerned are ‘like products’
  2. Whether any advantage, favour, privilege or immunity accorded to any country
  3. Whether the advantage is granted immediately and unconditionally to all other Members

Like Products

MFN treatment obligation under Article I of the GATT applies only between ‘like products’. The products that are not ‘like’ may be treated differently with respect to tariffs. The dictionary meaning of ‘like’ suggests that ‘like products’ are products that share a number of identical or similar characteristics.[xxi] The question of ‘like products’ generally arises in MFN cases when a government measure makes a distinction between two products, rather than between specific countries, under which one product receives better treatment, such as lower tariff rate.[xxii] The bulk of dispute settlement proceedings brought under Article I of the GATT have turned on the interpretation of ‘like products’.[xxiii] If imports from two countries are like products, then those imports are entitled to identical treatment regardless of their country of origin.[xxiv]

With regards to the concept of like products, there are three questions of interpretations which need to be resolved: (a) Which characteristics or qualities are important in assessing ‘likeness’; (b) To what degree or extent must products share qualities or characteristics in order to be ‘like products’; (c) From whose perspective ‘likeness’ should be judged.[xxv]

In Spain – Unroasted Coffee, while examining whether various types of unroasted coffee were ‘like products’ to which the MFN treatment obligation applies, the Panel considered the characteristics of the products, their end-use and tariff regimes of other Members.[xxvi] The panel found that the differences put forward regarding the different types of coffee- geographical factors, cultivation methods, processing and genetic factors- were sufficient to allow for different tariff treatment.[xxvii] It also said that coffee ‘in its end-use, was universally regarded as a well-defined and single product intended for drinking’. Apart from these, the consumers’ tastes and habits may be considered by the WTO Panel while examining whether products are ‘like’ within the meaning of Article I of the GATT.

  1. Advantage, Favour, Privilege or Immunity

 Any advantage, favour, privilege or immunity under the MFN treatment obligation is concerned with respect to:[xxviii] customs duties; charges of any kind imposed on importation or exportation[xxix]; charges of any kind in connection with importation or exportation[xxx]; charges imposed on the international transfer of payments for imports or exports; method of levying such duties and charges[xxxi]; all rules and formalities in connection with importation and exportation; internal taxes or other internal charges[xxxii]; and laws, regulations and requirements affecting internal sale, offering for sale, purchase, transportation, distribution or use of any product[xxxiii]. The MFN treatment under Article I of the GATT requires that any advantage granted by a Member to any product from or for another country be granted to all like products from or for all other Members.[xxxiv]

In EEC – Imports of Beef from Canada, the Panel examined the compatibility of EEC regulations implementing a levy free tariff quota for high quality grain-fed beef where the regulation made suspension of the import levy for such beef conditional on production of a certificate of authenticity. The Panel observed that the only certifying agency authorised to certify the meat was a United States agency which was mandated to certify only meat from the United States. The Panel concluded that the regulation is inconsistent with the MFN principle incorporated in GATT as it had the effect of preventing access to like products from other origin than the United States.[xxxv]

  1. Advantage is granted immediately and unconditionally

One of the other features of the MFN clause is that it provides for ‘unconditional’ MFN treatment. That is, when a member binds a tariff rate on a particular product as part of a negotiating round, that tariff rate applies to all Members.MFN treatment obligation requires that any advantage granted by a WTO Member to imports from any country must be granted ‘immediately and unconditionally’ to imports from all other WTO Members.[xxxvi] WTO Member, which has granted an advantage to a country, cannot make granting of that advantage to other WTO Members conditional upon those WTO Members ‘giving something in return’ or ‘paying’ for the advantage.[xxxvii] The term ‘unconditionally’ does not mean that all conditions are prohibited.[xxxviii] ‘Unconditionally’ refers to the obligation that MFN treatment towards another WTO Member shall not be conditional on reciprocal conduct by that other Member.[xxxix]

In EEC – Programme of Minimum Import Prices, Licences and Surety Deposits for Certain Processed Fruits and Vegetables, the Panel examined the provision for an exemption from the lodging of additional security associated with minimum import price for tomato concentrates in relation to the MFN obligations. The Panel observed that Article 10 of Council Regulation[xl] amounted to conditional most-favoured-nation treatment inconsistent with Article I:1 of the General Agreement, since it removed one of the requirements for certain countries while leaving a burden on other countries. The Panel concluded that the provision for an exemption from the lodging of additional security associated with the minimum import price for tomato concentrates was not inconsistent with the MFN obligations.[xli]

The various benefits of MFN principles are that: it eliminates distortions in production patterns allowing comparative advantage to work; it results in broader trade liberalisation; it makes for simple and transparent custom policies; and it reduces international tensions and thereby spreads peace and security along with trade liberalisation.[xlii] Also, it secures benefits of bargain along with ensuring equal access to the export markets;[xliii] and it engenders free and fair competition and protects against corruption.[xliv]

IMPACT OF MFN

According to the comparative advantage theory, MFN makes it possible for countries to import from most efficient supplier. If China can supply mobiles at a lower price than Japan, India can increase its economic efficiency by importing mobiles from China. However, if India applies higher tariff rates to mobiles from China than to mobiles from Japan, India may be forced to import mobiles from Japan, even though Japan is not as efficient a supplier. This distorts trade and reduces the welfare of India and economic efficiency of the entire world. However, if MFN is applied between the three countries, then India will levy its tariffs equally and therefore necessarily import mobiles from China because it is cheaper to do so. Thus, the most efficient result is attained. This has resulted in the improved efficiency in the World Economy. Further, MFN increases predictability in multilateral trading system by stabilizing the free trade system and thus increases trade and investment. The reduction in cost of maintaining the Multilateral Trading System is another implication of MFN.[xlv]

CONCLUSION

MFN has been a central pillar of trade policy for centuries. Article I of GATT has established the bench mark of a very broadly worded unconditional MFN obligation with respect to trade in goods. MFN principle plays an important role in other areas of WTO rules as well. Two important principles of “non-discrimination” are included in GATT and most international trade policies. The first is that of the MFN principle, expressed in Article I of GATT and in a number of bilateral and other treaties. Despite some confusion over the phrase “most favoured”-which seems to imply an especially favourable treatment- the concept is one of equal treatment, but to other party which is most favoured. In the GATT the MFN obligation calls for each contracting party to grant to every other contracting party the most favourable treatment that it grants to any country with respect to imports and exports of products.[xlvi] Both the GATS and the TRIPS Agreement, two of the major new areas of regulation developed during the Uruguay Round, contain an MFN provision.[xlvii] Also, MFN plays important role in many other agreements.[xlviii] Overall, it can be said that the MFN principle plays a significant role under the WTO Law.

It is important to note that the MFN treatment obligation under WTO law is not absolute and is subject to various exceptions. In spite of many exceptions and deviations from MFN treatment obligation, the MFN treatment obligation is one of the most important rules in WTO law.[xlix] Without this rule the multilateral trading system could and would not exist.[l]

Reference

[i]Peter Van Den Bossche, The Law and Policy of the WTO, 2009, 2nd Edition, Cambridge University Press, Cambridge, p.36

[ii]Marrakesh Agreement Establishing the World Trade Organization

[iii]Peter Van Den Bossche, The Law and Policy of the WTO, 2009, 2nd Edition, Cambridge University Press, Cambridge, p. 37

[iv]P.Sutherland et al, Challenges Facing the WTO and Policies to Address Global Governance, United Nations University Press, 2001, p. 81

[v]Prohibits a country from discriminating between other countries

[vi]Prohibits a country from discriminating against other countries

[vii] MFN treatment clauses can be traced back to the twelfth century

[viii] United Nations Conference On Trade And Development: Most-Favoured-Nation Treatment, UNCTAD/DIAE/IA/2010/1

[ix] Simon Lester et al, World Trade Law, 2010, 1st Indian Reprint, Universal Law Publishing Co., Delhi, p. 322

[x]See, John H. Jackson, World Trade and the Law of GATT, p. 225

[xi]In US domestic law, the term has now been officially replaced by ‘normal trade relations’ in order to clarify the policy behind it. See, eg, US Bill, S. 747, ‘To amend trade laws and related provisions to clarify the designation of normal trade relations’

[xii]See The Most Favoured Nation Provision, Executive Branch GATT study, No. 9, 93rd Cong., 2nd Sess. 1974, I

[xiii] Appellate Body Report, EC – Tariff Preferences, para. 101

[xiv]Id.

[xv]Peter Van Den Bossche, The Law and Policy of the WTO, 2009, 2nd Edition, Cambridge University Press, Cambridge, p. 324

[xvi]Appellate Body Report, Canada – Autos, para. 84

[xvii]Id.

[xviii]Kevin C. Kennedy, International Trade Regulation, 2009, Wolters Kluwer Law & Business, Aspen Publishers, New York, p. 89

[xix]Irrespective of the fact that the country is Member of WTO

[xx]Appellate Body Report, EC – Bananas, para. 190

[xxi]Appellate Body Report, EC – Asbestos, para. 91

[xxii]The issue of ‘like’ product is merely a formality in cases where the products are agreed to be the same in various Members, and the real issue is whether the advantage, etc had been ‘accorded’ to all members.

[xxiii]Kevin C. Kennedy, International Trade Regulation, 2009, Wolters Kluwer Law & Business, Aspen Publishers, New York, p. 91

[xxiv]Id.

[xxv]Id., para. 92

[xxvi]GATT Panel Report, Spain – Unroasted Coffee, para. 4

[xxvii]Id.

[xxviii]Article I of the GATT

[xxix]eg., import surcharges or consular taxes

[xxx]eg., customs fee or quality inspection fees

[xxxi]eg., method of assessing base value on which the duty or charge is levied

[xxxii]Referred to in Article III:2 of the GATT

[xxxiii]Referred to in Article III:4 of the GATT

[xxxiv]Appellate Body Report, Canada – Autos, para.79

[xxxv] GATT Panel Report, EEC – Imports of Beef from Canada, para.4

[xxxvi]Also, any advantage granted by a WTO Member to exports to any country must be accorded ‘immediately and unconditionally to exports to all other WTO Members.

[xxxvii]Working Party Report on the Accession of Hungary, L/3889, adopted on 30 July 1973, BISD 20S/34, para. 12

[xxxviii]Panel Report, Canada – Autos, para. 10

[xxxix]Id.

[xl] Council Regulation (EEC) No. 516/77: Article 10 – ‘lodging of such additional security shall not be required for products originating in non-member countries which undertake, and are in a position, to guarantee that the price on import into the Community shall be not less than the minimum price for the product in question, and that all deflection of trade will be avoided.’

[xli]GATT Panel Report, EEC – Programme of Minimum Import Prices, Licences and Surety Deposits for Certain Processed Fruits and Vegetables, para. 4

[xlii] Simon Lester et al, World Trade Law, 2010, 1st Indian Reprint, Universal Law Publishing Co., Delhi, p. 324

[xliii]Raj Bhala, International Trade Law: Theory and Practice, 2001, 2nd Edition, Lexis Publishing

[xliv]A.K.Koul, Guide to the WTO and GATT, 2012, 3rd Edition, Satyam Law International, Delhi, p. 83

[xlv]MFN enables WTO Members to reduce their monitoring and negotiation cost for disadvantageous treatment. Also, it reduces cost of determining an import’s origin, thereby increasing economic efficiency.

[xlvi]John H. Jackson, The World Trading System- Law and policy of International Economic Relations, 2nd Edn.,Satyam Books, New Delhi, 2012, p. 156

[xlvii] Simon Lester et al, World Trade Law, 2010, 1st Indian Reprint, Universal Law Publishing Co., Delhi, p. 338

[xlviii]Id.

[xlix]Peter Van Den Bossche, The Law and Policy of the WTO, 2009, 2nd Edition, Cambridge University Press, Cambridge, p. 38

[l]Id.

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