MOST FAVOURED NATION 1.

This is referred to as the cornerstone of the multilateral trading system which demands that members accord the most favourable tariff and regulatory treatment given to the product of any one member at the time of import or export of like products to all other members. The principal purpose of the MFN treatment obligation is to ensure equality of opportunity to import from, or export to, all WTO members. Canada-Autos (para 69) The AB acknowledged the MFN principle as a cornerstone of GATT: On appeal, the issue before us is whether the import duty exemption accorded by this measure is inconsistent with Canadas obligations under Article I:1 of the GATT 1994. We are confronted with the daunting task of interpreting certain aspects of the most-favoured-nation (MFN) principle that has long been a cornerstone of the GATT and is one of the pillars of the WTO trading system. EC-Tariff Preferences The AB stated that it is well settled that the MFN treatment obligation set out in Article I:1 of the GATT 1994 is a cornerstone of the GATT and one of the pillars of the WTO trading system. US-Section 211 Appropriations Act The AB ruled that for more than fifty years, the obligation to provide most-favoured-nation treatment in Article I of the GATT 1994 has been both central and essential to assuring the success of a global rulesbased system for trade in goods. 2. GATT Articles I:1; III; XIII Article I:1: (General Most-Favoured-Nation Treatment) 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 matters referred to in paragraphs 2 and 4 of Article III, any advantage, favour, privilege or immunity granted by any contracting party 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. Article III: (National Treatment on Internal Taxation and Regulation 1. The contracting parties recognize that internal taxes and other internal charges, and laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products, and internal quantitative regulations requiring

the mixture, processing or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as to afford protection to domestic production. 2. The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Moreover, no contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph 1. 3. With respect to any existing internal tax which is inconsistent with the provisions of paragraph 2, but which is specifically authorized under a trade agreement, in force on April 10, l947, in which the import duty on the taxed product is bound against increase, the contracting party imposing the tax shall be free to postpone the application of the provisions of paragraph 2 to such tax until such time as it can obtain release from the obligations of such trade agreement in order to permit the increase of such duty to the extent necessary to compensate for the elimination of the protective element of the tax. 4. The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use. The provisions of this paragraph shall not prevent the application of differential internal transportation charges which are based exclusively on the economic operation of the means of transport and not on the nationality of the product. 5. No contracting party shall establish or maintain any internal quantitative regulation relating to the mixture, processing or use of products in specified amounts or proportions which requires, directly or indirectly, that any specified amount or proportion of any product which is the subject of the regulation must be supplied from domestic sources. Moreover, no contracting party shall otherwise apply internal quantitative regulations in a manner contrary to the principles set forth in paragraph 1. 6. The provisions of paragraph 5 shall not apply to any internal quantitative regulation in force in the territory of any contracting party on July 1, 1939, April 10, 1947, or March 24, l948, at the option of that contracting party; Provided that any such regulation which is contrary to the provisions of paragraph 5 shall not be modified to the detriment of imports and shall be treated as a customs duty for the purpose of negotiation. 7. No internal quantitative regulation relating to the mixture, processing or use of products in specified amounts or proportions shall be applied in such a manner as to allocate any such amount or proportion among external sources of supply.

8.

(a) The provisions of this Article shall not apply to laws, regulations or requirements governing the procurement by governmental agencies of products purchased for governmental purposes and not with a view to commercial resale or with a view to use in the production of goods for commercial sale. (b) The provisions of this Article shall not prevent the payment of subsidies exclusively to domestic producers, including payments to domestic producers derived from the proceeds of internal taxes or charges applied consistently with the provisions of this Article and subsidies effected through governmental purchases of domestic products.

9. The contracting parties recognize that internal maximum price control measures, even though conforming to the other provisions of this Article, can have effects prejudicial to the interests of contracting parties supplying imported products. Accordingly, contracting parties applying such measures shall take account of the interests of exporting contracting parties with a view to avoiding to the fullest practicable extent such prejudicial effects. 10. The provisions of this Article shall not prevent any contracting party from establishing or maintaining internal quantitative regulations relating to exposed cinematograph films and meeting the requirements of Article IV.

Article XIII: (Non-discriminatory Administration of Quantitative Restrictions) 1. No prohibition or restriction shall be applied by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation of any product destined for the territory of any other contracting party, unless the importation of the like product of all third countries or the exportation of the like product to all third countries is similarly prohibited or restricted. 2. In applying import restrictions to any product, contracting parties shall aim at a distribution of trade in such product approaching as closely as possible the shares which the various contracting parties might be expected to obtain in the absence of such restrictions and to this end shall observe the following provisions: a) Wherever practicable, quotas representing the total amount of permitted imports (whether allocated among supplying countries or not) shall be fixed, and notice given of their amount in accordance with paragraph 3 (b) of this Article; b) In cases in which quotas are not practicable, the restrictions may be applied by means of import licences or permits without a quota;

c) Contracting parties shall not, except for purposes of operating quotas allocated in accordance with sub-paragraph (d) of this paragraph, require that import licences or permits be utilized for the importation of the product concerned from a particular country or source;

d)

In cases in which a quota is allocated among supplying countries the contracting party applying the restrictions may seek agreement with respect to the allocation of shares in the quota with all other contracting parties having a substantial interest in supplying the product concerned. In cases in which this method is not reasonably practicable, the contracting party concerned shall allot to contracting parties having a substantial interest in supplying the product shares based upon the proportions, supplied by such contracting parties during a previous representative period, of the total quantity or value of imports of the product, due account being taken of any special factors which may have affected or may be affecting the trade in the product. No conditions or formalities shall be imposed which would prevent any contracting party from utilizing fully the share of any such total quantity or value which has been allotted to it, subject to importation being made within any prescribed period to which the quota may relate.

3. (a) In cases in which import licences are issued in connection with import restrictions, the contracting party applying the restrictions shall provide, upon the request of any contracting party having an interest in the trade in the product concerned, all relevant information concerning the administration of the restrictions, the import licences granted over a recent period and the distribution of such licences among supplying countries; Provided that there shall be no obligation to supply information as to the names of importing or supplying enterprises. (b) In the case of import restrictions involving the fixing of quotas, the contracting party applying the restrictions shall give public notice of the total quantity or value of the product or products which will be permitted to be imported during a specified future period and of any change in such quantity or value. Any supplies of the product in question which were en route at the time at which public notice was given shall not be excluded from entry; Provided that they may be counted so far as practicable, against the quantity permitted to be imported in the period in question, and also, where necessary, against the quantities permitted to be imported in the next following period or periods; and Provided further that if any contracting party customarily exempts from such restrictions products entered for consumption or withdrawn from warehouse for consumption during a period of thirty days after the day of such public notice, such practice shall be considered full compliance with this sub-paragraph. (c) In the case of quotas allocated among supplying countries, the contracting party applying the restrictions shall promptly inform all other contracting parties having an interest in supplying the product concerned of the shares in the quota currently allocated, by quantity or value, to the various supplying countries and shall give public notice thereof. 4. With regard to restrictions applied in accordance with paragraph 2 (d) of this Article or under paragraph 2 (c) of Article XI, the selection of a representative period for any product and the appraisal of any special factors affecting the trade in the product shall be made initially by the contracting party applying the restriction; Provided that such contracting party shall, upon the request of any other contracting party having a substantial interest in supplying that product or upon the request of the CONTRACTING PARTIES, consult promptly with the other contracting party or the CONTRACTING PARTIES regarding the need for an adjustment of the proportion determined or of the base period selected, or for the reappraisal of the special factors involved, or for the elimination of conditions, formalities or any other provisions established unilaterally relating to the allocation of an adequate quota or its unrestricted utilization.

5. The provisions of this Article shall apply to any tariff quota instituted or maintained by any contracting party, and, in so far as applicable, the principles of this Article shall also extend to export restrictions. Requirements of Article I:1: This Article sets out a three-tier test of consistency. Three questions must be answered to determine whether there is violation of the MFN obligation, namely: Whether the measure at issue confers a trade advantage of the kind covered by Article I:1; Whether the products concerned are like products; and Whether the advantage at issue is granted immediately and unconditionally to all like products concerned.

Indonesia-Autos The AB in Bananas III confirmed that to establish a violation of Article I there must be an advantage of the type covered by Article 1 and which is not accorded unconditionally to all like products of all WTO members. Following this analysis, we shall first examine whether the tax and customs duty benefits are advantages of the type covered by Article 1. Second, we shall decide whether the advantages are offered (i) to all like products and (ii) unconditionally.

Advantage, favour, privilege or immunity EC-Bananas III The panel considered that advantages in the sense of Article I:1 are those that create more favourable import opportunities or affect the commercial relationship between products of different origins. Canada-Autos 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. Like products It is only between like products that the MFN obligation applies and discrimination within the meaning of Article I:1 may occur. Products that are not like may be treated differently. The concept of like products is used in several Articles of GATT 1994: II:2(a), III:2, III:4, VI:1(a), IX:1, XI:2(c), XIII:1, XVI:4 and XIX:1, but is not defined.

With regard to the concept of like products, three questions of interpretation must be resolved. EC-Asbestos 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; and 3. From whose perspective should likeness be judged.

It is generally accepted that the concept of like products has a different meaning in the different contexts in which it is used. Japan-Alcoholic Beverages II The AB illustrated the possible differences in the scope of the concept of like products in different provisions of the WTO Agreement by evoking the image of an accordion: 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 th e circumstances that prevail in any given case to which that provision may apply.

Spain- Unroasted Coffee The panel had 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 customs duties on Colombian mild and other mild while it imposed a seven per cent 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 type 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 regimes 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 relate to organoleptic differences resulting from geographical factors, cultivation methods, the processing of the bean, and the genetic 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, 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 single product intended for drinking. The panel noted that no other contracting party applied its tariff regime in respect of unroasted, nondecaffeinated 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.

Canada/Japan SPF Lumber This case involved a claim by Canada that certain types of softwood lumber were competitively equivalent regardless of the particular species of evergreen tree from which they were made in the face of Japans discrimination between types of lumber on the basis of species. Japan imposed a ten per c ent duty (temporarily eight) on spruce, pine, fir (SPF) and larch, while granting duty-free treatment to cedar, hemlock, Douglas fir and other coniferous species. Canada argued that dimension lumber (lumber of standard sizes used in construction) made from SPF an dimension lumber made from other species were like products within the meaning of Article I:1. Canada therefore asserted that the eight per cent duty applied by Japan to imports of SPF dimension lumber, as opposed to duty-free treatment for dimension lumber of other species violated Article I:1. Japan in response argued that dimension lumber was not a separate finished product irrespective of its species, dimension lumber was not a universal, clearly defined product and that no country had established it as a separate line in its tariff classification, pointing out that no independent tariff line existed for dimension lumber under the HS. Japan also asserted that classification according to species was justified because different lumber species were marketed separately from each other and not in mixtures. Japan further claimed that the quality of SPF lumber was lower than that of other species. Owing to its lower quality, its profitability was low and it therefore required protection. On the other hand, the higher quality of the other species lead to higher profitability and higher demand, which in turn meant that they had to be imported.

The Panel concluded that Japans tariff treatment of dimension lumber imports from Canada was not inconsistent with its obligations under Article I:1 of the GATT. This ruling was based on the fact that dimension lumber did not belong to internationally accepted customs classification. The fact that it was a standard applied by the Canadian industry, and to some extent also in the US and Japan, was not sufficient reason considering it is a separate category for tariff classifications purposes.

**The Japan-SPF Panel, like the Spain-Coffee Panel examined the issues from the viewpoint of any internationally accepted customs classification. Unlike the Coffee panel, however, the Japan-SPF Panel did not determine the likeness of the products in question by analyzing their physical properties or end use, but based its findings solely on the consideration that dimension lumber was basically a standard applied by the Canadian industry which did not belong to any internationally accepted customs classification. The Panel did not take into account Canadas specific arguments on classification of the products. It could have undertaken a more thorough analysis of likeness, including factors going beyond tariff classification, but instead reached a narrowly-based conclusion which is less persuasive than the comparable deliberations on coffee.

Immediately and unconditionally Article I:1 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. 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 giving something in return or paying for the advantage. The granting of an advantage may not be conditional on whether a member has certain characteristics, legislation or undertakes certain action.

Belgium-Family Allowances This case involved a dispute of 1952 concerning a Belgian law providing for an exemption from a levy on products purchased from countries which had a system of family allowances similar to that of Belgium. The panel held that the Belgian law at issue introduced 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 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.

De jure and de facto discrimination Article I:1 covers both de jure and de facto discrimination. De facto discrimination occurs when a measure, although non-discriminatory on its face, applied results in discrimination. Canada-Autos The measure at issue was an import duty exemption accorded by Canada to imports of motor vehicles by certain manufacturers. There were no restrictions on the origin of the motor vehicles that were eligible for the exemption. In practice however, the manufacturers imported only their own make of vehicles and those of related companies. As a result, only motor vehicles originating in a small number of countries benefited de facto from the exemption. Canada argued that Article I:1 does not apply to measures which appear on their face to be origin-neutral. Both the Panel and the AB rejected this argument as measures which appear on their face to be origin-neutral can give certain countries more opportunity to trade than others and can therefore be in violation of the non-discrimination obligation of Article I:1.

MFN under GATS Article II:1 of the GATS prohibits discrimination between like services and service suppliers from different countries: With respect to any measure covered by this Agreement, each member shall accord immediately and unconditionally to services and service suppliers of any other member treatment no less favourable than that it accords to like services and service suppliers of any other country. The main purpose of the MFN treatment obligation is to ensure equality of opportunity, in casu for services and service suppliers from all WTO members. Like MFN treatment under GATT, MFN treatment under GATS applies to both de facto and de jure discrimination. EC-Bananas III The AB disagreed with the EC, which had argued that if the negotiators of GATS wanted Article II:1 to cover de facto discrimination, it would have explicitly said so. The AB ruled that the obligation imposed by Article II:1 is unqualified. The ordinary meaning of the provision does not exclude de facto discrimination. Moreover, if the provision did not apply to de fact discrimination, it would not be difficult-and, indeed, it would be a good deal easier in the case of trade in services, than in the case of trade in goods- to devise discriminatory measures aimed at circumventing the basic purpose of that provision. In this case, various rules for the allocation of import licenses for bananas were at issue.

According to the complainants, these rules, which on their face were origin neutral, discriminated against distributors of Latin American and non-traditional ACP bananas in favour of distributors of EC and traditional ACP bananas. Requirements Article II:1 sets out a three-tier test of consistency: Whether the measure is a measure covered by the GATS; Whether the services or service suppliers concerned are like services or service suppliers; Whether less favourable treatment is accorded to the services or service suppliers of a member. Measures covered For a measure to be covered by GATS, it must be: A measure by a member; and, A measure affecting trade in services. Article I:3(a) of the GATS states a measure by a member is not limited to measures taken by the central government or central government authorities. Measures taken by a regional or local governments and authorities are also measures by members within the meaning of the Article. Measures taken by NGO bodies are measures taken by members when these measures are taken in exercise of powers delegated by governments or authorities. A measure can be a law, regulation, rule, procedure, decision or administrative action, but can also take any other form. A measure can thus be a national parliamentary law as well as municipal decrees or rules adopted by professional bodies. Canada-Autos The measure at issue in this case was an import duty exemption accorded by Canada to imports of motor vehicles by certain manufacturers. The EC and Japan argued that this measure was inconsistent with Article II:1 of GATS as it accorded less favourable treatment to certain members services and service suppliers than those of other members. The panel found that the import duty exemption was indeed inconsistent with Article II:1 of GATS. Canada appealed this finding of inconsistency and, in addition, as a threshold matter, appealed the panels finding that the measure at issue within the scope of Article II:1 of GATS. According to Canada, the measure at issue was not a measure affecting trade in services. According to the AB, two key issues must be examined to determine whether a measure is one affecting trade in services: Whether there is trade in services in the sense of Article I:2; and, Whether the measure in issue affects such trade in services within the meaning of Article I:1. GATS does not define what a service is. Article I:3(b) states that the term service includes any service in any sector except services supplied in the exercise of governmental authority. Services supplied in the exercise of governmental authority are defined as any service which is supplied neither on a commercial basis nor in competition with one or more service suppliers.

Article I:2 defines trade in services as the supply of a service within one of four defined modes of supply The four modes of supply: Cross border- from the territory of one member into the territory of any other member Consumption abroad- in the territory of one member to the service consumer of any other member Commercial presence- by a service supplier of one member through commercial presence in the territory of any other member Presence of natural persons- by a service supplier of one member, through the presence of natural persons of a member in the territory of any other member. The AB clarified the term affecting in: EC Bananas III In our view, the use of the term affecting reflects the intent of the drafter to give a broad reach to the GATS. The ordinary meaning of the word affecting implies a measure that has an effect on, which indicates a broad scope of application. This interpretation is further reinforced by the conclusions of previous panels that the term affecting in the context of Article III of the GATT is wider in scope than such terms as regulating or governing. ** A measure therefore may affect trade in services even though the measure may regulate other matters. A measure affects trade in services when the measure bears upon the conditions of competition in supply of a service. (EC-Bananas III) Article XVII provides a non-exhaustive list of examples of measures affecting trade in services: Measure in respect of the purchase, payment or use of a service; Measure in respect of the access to and use of- in connection with the supply of a serviceservices which are required by those members to be offered to the public generally; and, Measure in respect of the presence, including commercial presence, of persons of a member for the supply of a service in the territory of another member. Like services or service suppliers It is only between like services or service suppliers that the MFN treatment obligation applies and that discrimination is prohibited. The concepts of like services and like service suppliers are not defined in the GATS. There is almost no case law on the subject. In Canada-Autos, the panel stated that to the extent that the service suppliers concerned supply the same services, they should be considered like for the purposes of this case. A determination of the likeness of services and service suppliers, according to Van den Bossche, should be based, among other relevant factors, on: The characteristics of the service or the service supplier; The classification and description of the service in the UN Central Product Classification system; and, Consumer habits and preferences regarding the service or the service supplier.

**two service suppliers that supply a like service are not necessarily like service suppliers. Factors such as the size of the companies, their assets, their use of technology and the nature and extent of their expertise must all be taken into account. Treatment no less favourable Members must accord, immediately and unconditionally, to services or service suppliers of members treatment no less favourable than the treatment accorded to like services or like service suppliers of any other country. Article II provides no guidance but Article XVII on national treatment obligation contains guidance on the meaning of concept of treatment no less favourable. Article XVII:3 states: Formally identical or formally different treatment shall be considered to be less favourable if it modifies the conditions of competition in favour of services or service suppliers of the member compared to the like services or service suppliers of any other member. EC Bananas III The AB ruled that in interpreting Article II:1, and, in particular, the concept of treatment no less favourable, it should not be assumed that the guidance of Article XVII equally applies to Article II. The AB however concluded that the concept of treatment no less favourable in Article II:1 and Article XVII of GATS should both be interpreted to include de facto as well as de jure discrimination although only Article XVII states so explicitly. Exemptions Article II:2 provides that a member may maintain a measure inconsistent with paragraph 1 provided that such a measure is listed in, and meets the conditions of, the Annex on Article II Exemptions. Members were allowed to list exemptions until the entry into force of the WTO Agreement (1st January, 1995). The notification of an exemption had to contain: A description of the sectors in which the exemption applies; A description of the measure, indicating why it is inconsistent with Article II; The country or countries to which the measure applies; The intended duration of the exemption; and The conditions creating the need for the exemption. Exemptions were not allowed to exceed ten years. It therefore follows that all exemptions would have expired in January 2005.