Concept Of Most Favoured Nation Treatment Under General

Agreement On Tariffs And Trade

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. One of
the President Woodrow Wilsons Fourteen points in 1918 urged the establishment
of an equality of trade conditions among all the nations consenting to the peace
which was explained to mean whatever tariff any nation might deem necessary for
its own economic service, be that tariff high or low , it should apply equally to all
foreign nations.
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 postWorld 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. 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.
The end consequence of this realisation would be heightened aversion to military
conflict, which obviously would destroy the economic gains from trade. The peace
and security logic in favour of unconditional MFN treatment is the most
sophisticated of all rationales. Generally speaking, the more significant the stake a
country has in the international economic order (i.e. the more prosperity its citizens
derive from cross-border trade and investment relationships, and financial flows),
the less likely it is to unsettle that order through violent conflict with other
countries.

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 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 imports 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.

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.

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 to1) 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 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.
The Panel in US-Customer User Fee case stated: The merchandise processing fee
was a charge imposed on or in connection with importation within the meaning of
Article I:1. Exemptions from the fee fell within the category of advantage, favour,
privilege or immunity which Article I:1 required to be extended unconditionally to
all other contracting parties.
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 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 CanadaAircraft 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 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, 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 Tariffshould 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:

 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 Canada-Autos case, the Appellate Body also discussed the concepts of
immediately and unconditionally, and found: The measures maintained by
Canada accords the import duty exemption to certain motor vehicles entering
Canada from certain countries. These privileged motor vehicles are imported by a
limited number of designated manufacturers who are required to meet certain
performance conditions. In practice, this measure does not accord the same import
duty exemption immediately and unconditionally to like motor vehicles of all other
Members, as required under Article I: 1 of the GATT 1994. The advantage of the
import duty exemption is accorded to like motor vehicles from all other Members.
Accordingly, we find that this measure is not consistent with Canadas obligations
under Article I: 1 of the GATT 1994.
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.

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 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 members 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 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.

Canada Auto Pact Case 2000: One of the few disputes in which MFN was
a central issue for the Appellate Body to adjudicate is the Canada Auto Pact case . In
January 1965, President Lyndon Johnson and Canadian Prime Minister Lester Pearson
signed an agreement to liberalise trade in autos and autos part between two
countries. Under the Auto Pact, Canada agreed to grant duty free treatment to
vehicles and original equipment manufacturing parts (other than tires and tubes),
but only if the importer of the cars or parts met the definition of a motor vehicles
manufacturer set forth in the Auto Pact. There were three tests to be met before a
person can be qualified as a manufacturer. First, the importer must have
produced in Canada during the base year 1963-64 motor vehicles of the category it
is importing. In other words, the importer had to have been established and made
cars in Canada since before the Auto Pact entered into force. In effect, these
importers were also foreign direct investors, such as General Motors of Canada, Ltd,
Ford Motor Company of Canada Ltd, and Chrysler Canada Ltd- American Companies
that imported cars into Canada that they made in the United States ( or elsewhere),
and that also made cars in Canada. Secondly, the importer must comply with the
ratio of (1) the sale value of its locally (Canadian) produced vehicles of that class of
vehicle to (2) the sales it makes in Canada of that type of vehicle. The ratio is called
production-to-sales ratio, because item (1) is the value of the importers local
production, and item (2) is the value of its local sales. The production-to-sales ratio
is expressed as follows:
The production is measured on annual basis. Under the Auto Pact, to receive dutyfree treatment, an importer had to keep the ratio above a certain minimum
threshold because the ratio is a gauge of the extent to which the importer is selling
the cars it makes in Canada to Canadian consumers, i.e. selling its local production
locally, and possibly also selling the cars it makes locally to foreign countries. Put
succinctly, the ratio is a measure of an importers commitment to domestic
countries. The production-to-sales ratio ensures that the importer does not get the
entire vehicle it sells in Canada from abroad. Rather, the importer uses its local
factories to source a sizeable percentage, if not all, of the local sales, and perhaps
also to source exports from those factories. In sum, the production-to-sales ration is
simply to design to ensure some production occurs locally. The Pact specifies the
production-to-sales ratio by calling for comparison between the production-to-sales
ratio in the current year with the production-to-sales ratio in a base year. The ratio
in the current year must be equal to or greater than the ratio in the base year.
Moreover, the Auto Pact specified that the ratio must never be less than 75-100
percent. Thirdly, the importer must achieve a minimum amount of Canadian value
added (CVA) in its local production of vehicles. That is, the importers Canadian
production facilities must not be mere assembly operations. There must be
significant economic activity going on. Thus, included in the CVA are the costs of

parts and materials that are of Canadian origin, Canadian labour costs, the
manufacturing overhead costs, general and administrative expenses that occurred
in Canada that are attributable to the production of vehicles, depreciation of
machinery and permanent plant equipment located in Canada that is directly
attributable to the production of vehicles and capital costs for land and buildings
used in the production of motor vehicles. The specific CVA requirement was stated
in terms of comparison: how much CVA exists in vehicle produced in the current
year in comparison with the CVA that existed in the vehicles produced in a defined
base year. The requirement was that CVA in current year had to be equal to or
greater than the CVA in the base year.
Under the Pact, Canada agreed to abolish its tariffs on imports from the United
States of certain finished vehicles, and on imports of certain parts for use as original
equipment in vehicles to be produced in Canada. Canada agreed that auto parts
could be imported duty free not only from the United States, but also from third
countries. However, not everyone could benefit from the duty-free treatment for
autos and auto parts-only qualifying person could and the qualifying persons were
non other than the major American manufacturers, namely Ford, General Motors
and Chrysler and/or their Canadian subsidiaries.
The principal legal issue that was raised in Canada Auto Pact case was the MFN
treatment. In January, 1998, the European Union and Japan challenged the Auto
Pact in the WTO, and in February 2000, a WTO Panel issued its final report, finding in
favour of the complainants. Canada appealed and the issue before the Appellate
Body was whether Canada violated MFN obligation by giving duty free treatment to
motor vehicles imported from certain WTO Members, but not extending the
advantages immediately and unconditionally to like products from all other
Members. The Panel answered in the affirmative and so too did the Appellate Body.
The EU and Japan argued successfully that the 1965 Auto Pact run afoul of the
obligation laid down in article I: 1 of the GATT. The Complainants argued that Pact
discriminates in favour of American car companies, and against all other car
companies. Only the American companies can import cars and components duty
free. In contrast, the Canadian customs authorities impose a duty on these imports
by a Japanese or European car company. Thus, for example, Ford and General
Motors need not pay any duty on imports, whereas Honda Canada, Inc and Toyota
Canada, Inc must pay a duty on their imports. The Appellate Body agreeing with the
Panels reasoning said that Article I: 1 applies to de facto as well as de jure
discrimination. The Appellate Body said that it is true that Pact did not create de
jure discrimination against import of auto and autos parts but that is not the only
way to run afoul of the law. As long as there was de facto discrimination, that is
enough for the violation of MFN obligation under the GATT. The Appellate Body
found that Canada has granted an advantage in the form of duty- free treatment.
This advantage accrues to some products (autos and auto parts) from some WTO
Members (principally the United States). Canada has not accorded this advantage

immediately and unconditionally to the like products that originate in all other
Members. Quite the contrary, Canada has imposed a three- part test that effectively
prevents the extension of advantage to all other Members.

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-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 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 dont 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 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 EECs argument, finding that the 1986
Arrangement did not violate the Article I MFN principle. The Panel reached to the
conclusion that EECs 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 EECs 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.

Further Illustration Of The Concept

As a further example of the broad type of measures covered by the MFN obligation,
let us consider the following hypothetical illustration. Assume India imposes an MFN
rate on turmeric spice of 5 percent. But, for turmeric from Thailand, India generally
imposes a 10 percent rate. No Indian law or regulation sets out this 10 percent duty.
Rather, the custom official at various Indian ports impose the 10 percent duty. Does
Thailand can claim that India violate MFN principle. The answer is in the affirmative.
Thailand can argue that Indian practice violates the MFN obligation of Article I:
1.This provision does not distinguish between laws and regulations, on the one
hand, and practices on the other hand. Indeed, it speaks of the method of levying
duties and charges.
As another hypothetical example, consider an agency and distribution law in Kuwait
that mandates exclusivity. That is, any foreign company seeking to export its
product to Kuwait must do so through a single Kuwait agent, and that agent has the
sole right to distribute the product in Kuwait. Obviously, this law protects Kuwaiti
holders of exclusive agreements from competing with one another, and with other
foreigners, for agency and distribution rights. Would the Kuwait law violate Article I;
1? The fact that this law is a non-tariff measure is immaterial. The MFN obligation
embraces all measures affecting imports, exports or payments.

The jurisprudence of Article I: 1 extends not only to de jure discrimination but also
to de facto even if it is not manifest. In other words, any de facto discrimination,
even if it is not manifest (i.e., potential or actual) is enough for concern. Thus,
suppose the product at issue is flat screen TV sets between 35 and 40 inches, and
that Kuwait imports these from Japanese manufacturers like Sony, and Korean
producers like LG. If the Kuwaiti law somehow favours the Japanese exporters at the
expense of the Korean exporters ( or vice versa), then that law violates Article I:1.
Among the scenarios that could give rise to the violation would be the differences in
the administration of the law by Kuwaiti officials. Suppose they permit subagreements with respect to Japanese imports, but not Korean imports. Therefore,
manufacturers like Sony can obtain the services of various Kuwaitis in marketing the
TVs, by calling on its exclusive representative to enlist sub-agents and subdistributors. Through, sub-representation, Sonys TVs are brought to the attention of
Kuwaiti consumers more pervasively than LGs TVs, which are marketed only by a
central representative. This simply is a violation of MFN obligation. Thus, Article I:1
strikes not only at post-border, non-tariff measures, but also at de facto
discrimination that is not yet manifest.

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.

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 WTOs 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 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 WTOs principle of equal treatment for all trading
partners (most-favoured-nation).
But GATTs 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.

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 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 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 nondiscrimination 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 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
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.