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Chapter 1
MOST-FAVOURED-NATION
TREATMENT PRINCIPLE
1. OVERVIEW OF RULES
1) Background of the Rules
“Most-Favoured-Nation” (“MFN”) treatment requires Members to 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. This is a
founding principle of the WTO.
Under the MFN rule, if WTO Member A agrees in negotiations with country B,
which need not be a WTO Member, to reduce the tariff on product X to five percent,
this same “tariff rate” must also be extended to all other WTO Members. In other
words, if a country provides favourable treatment to one country, it must provide the
same favourable treatment to all Member countries. Therefore, the essence of MFN
treatment is non-discriminatory treatment by providing the same conditions given to one
Member to other Members. In the context of trade, it is a principle that prohibits
different treatment given to the same products depending on the country of origin.
The concept of MFN has a long history. Prior to the GATT, an MFN clause was
often included in bilateral trade agreements and, as such, contributed greatly to trade
liberalization. However, in the 1930s, countries around the world took protectionist
measures because of the impact of the world depression. Various systems to limit MFN
treatment, including trade-restrictive measures by the British Commonwealth of Nations
(commonly known as the sterling bloc) and the French franc bloc, etc. were introduced.
It is generally believed that these limits divided the world economy into trade blocs and
eventually led to World War II. Lessons were learned from this mistake and, in the
wake of World War II, an unconditional MFN clause was included in the GATT on a
multilateral basis, contributing to global trade stability. It was then succeeded by the
WTO.
Considering this background, MFN treatment in particular must be recognized as
a fundamental principle for sustaining the multilateral trading system. Regional
integration and related exceptions must be uniformly administered so as not to
undermine the MFN principle.
2) Legal Framework
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1
Rudiger Wolfrum, Peter-Tobias Stoll, Holger P. Hestermeyer (ed.) “WTO - Trade in Goods” (Max
Planck Commentaries on World Trade Law), describing the above-mentioned two cases; Peter Van den
Bossche and Werner Zdouc “The Law and Policy of the World Trade Organization: Text, Cases and
Materials”, describing only the Spain-Unroasted Coffee case.
2
Panel Report, Spain — Unroasted Coffee (1981) (BISD 28S/102), Para 4.6.
3
Ibid., Paras 4.7-8.
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to be like products.
This is often defined as de facto discrimination. One such case involved
Canada’s automobile measures (DS139). In this case, Canada’s system, which
eliminated tariffs on imported automobiles from the United States under certain
conditions, was at issue. The system was open to companies of other countries and
could be used by meeting certain conditions. In actuality, however, the acceptance of
new applications was suspended after the conclusion of the US-Canada FTA, making it
practically available only to the US companies. The Panel and the Appellate Body both
determined that the measures were de facto discrimination and concluded that they were
in violation of GATT Article I:1.
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attention. That is, beyond the application of import restrictions and tariff rate quotas,
applying formally equal ratios for permitted import volumes may constitute a violation
of GATT Article XIII. For example, the Panel on “United States — Definitive
Safeguard Measures on Imports of Circular Welded Carbon Quality Line Pipe from
Korea” (DS202) determined that the imposition by the United States of import
restrictions of 9,000 tons uniformly on line pipes from various exporting countries
without taking into consideration the principle of the above-mentioned shares by
country when implementing safeguard measures was in violation of GATT Article XIII.
In this respect, this provision differs, for instance, from the MFN treatment obligation,
which requires in essence the application of the same tariff rates/laws.
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Enabling Clause
The Generalized System of Preferences (GSP) program is a system that grants
certain products originating in eligible developing countries preferential tariff treatment
over those normally granted under MFN status. GSP is a special measure designed to
help developing countries increase their export earnings and promote development.
GSP is defined in the GATT decision on “Generalized System of Preferences” of
June 1971. Granting GSP preferences is allowed in GATT 1947 as a measure based on
the 1979 GATT decision on “Differential and More Favourable Treatment, Reciprocity,
and Fuller Participation of Developing Countries” or the so-called “Enabling Clause”.
GSP must have the following characteristics: (1) preferential tariffs may be
applied not only to countries with special historical and political relationships (see
“Other Exceptions”), but also to developing countries more generally (thus the system is
described as “generalized”); (2) the beneficiaries are limited to developing countries;
and (3) it is a benefit unilaterally granted by developed countries to developing
countries. In addition, of GSP beneficiaries, the least developed countries (47 countries)
are provided with further preferential treatment such as duty-free, etc. for items subject
to special preferential treatment.
Regional trade agreements concluded between developing countries need not
meet the requirements provided for in GATT Article XXIV because of the preferential
treatment based on the Enabling Clause, and, regardless of the provisions of GATT
Article I, contracting countries can provide developing countries with different and
favourable treatment without providing the same to other contracting countries4.
4
Examples of regional trade agreements based on the Enabling Clause are described in WTO Analytical
Index, Volume 1, PP383-388.
5
GATT Article XXXV initially applied to Japan, but Japan officially joined the international trade system
in the 1970s when the European countries abolished the measure invoking Article XXXV.
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Agreement shall prevail to the extent of the conflict”.In the case of non-application, benefits
enjoyed by other Members are not provided to the country of non-application, which
leads to results that are contrary to the MFN principle.
The WTO Agreement Article XIII provisions were created to deal with accession-
related issues. Ideally, the MFN rule would be strictly applied so that when country B
newly accedes to the Agreement, it is required to confer MFN status on all other
Members, and they, in turn, are required to confer MFN status on country B. However,
country A, which is already a Member of the WTO, may have reasons for not conferring
all rights and obligations of the WTO on new Member B. Because the WTO only
requires the consent of two-thirds of the existing membership for accession, it is
conceivable that country A may, against its will, be forced to grant MFN status to
country B. WTO Article XIII is a way to respect country A’s concerns by preventing a
WTO relationship from taking effect between countries A and B. Conversely, WTO
Article XIII also provides a means for accession of country B, even when more than
one-third of the membership, like country A, has reasons for not wanting a WTO
relationship with country B (in which case they will object to the accession itself) by
allowing for so-called non-application.
See the following table for examples of notifications of the non-application of the
Agreements.
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Other Exceptions
Other exceptions particular to MFN include GATT Article XXIV:3 regarding
frontier traffic with adjacent countries, and Article I:2 regarding historical preferences
that were in force at the signing of the GATT,67. General exceptions to the GATT that
may be applied to the MFN treatment obligation include GATT Article XX regarding
general exceptions for measures necessary to protect public morals, life and health, etc.,
and GATT Article XXI regarding security exceptions.
It is also possible to obtain a waiver from the MFN principle. Under WTO
Article IX:3, countries may, with the agreement of other Members, waive their
obligations under the agreement. Article IX:3 stipulates that exceptional circumstances,
the terms and conditions governing the application of the waiver, and the date on which
the waiver will be terminated shall be clearly stated. These waivers are also subject to
annual review under Article IX:48.
6
See the WTO Secretariat Note (MTN.TNC/LD/W/1) issued in December 1992.
7
These exceptions are not particular to the MFN treatment obligation, but there are exception provisions
that can only be invoked under certain conditions. The provisions regarding anti-dumping and
countervailing duties (GATT Article VI), exceptions to balances of international payments (GATT Article
XVIII) (these are not exceptions to GATT Article I but to GATT Article XIII as described in (1)),
governmental assistance to economic development (GATT Article XVIII:20), and suspension of the
application based on nullification or impairment (GATT Article XXIII:2), etc. fall under such exception
provisions.
8
As of the end of September 2011, waivers applied in 31 cases (WTO Analytical Index, Volume 1, PP47).
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political issue, i.e., it raises the costs and consequences of doing so, and therefore tends
to support the liberalized status quo. By stabilizing the free trade system in this manner,
MFN increases predictability and therefore increases trade and investment.
2. MAJOR CASES
The MFN principle is often invoked in GATT disputes as a basic principle of the
GATT together with the national treatment principle. However, it is rare for MFN to be
invoked on its own, and provisions regarding national treatment, quantitative
restrictions, TRIMs, rules of origin, and technical barriers to trade are often cited in
conjunction. Therefore, the number of precedents is small. In the following section, we
discuss Canada’s measures regarding automobiles, the EU’s measures regarding
bananas, the EC’s generalized tariff preferences scheme, and the EU’s measures
prohibiting the importation and marketing of seal products, where MFN was a major
issue.
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November of that year, and in February 1999 a panel was established to review the
Japanese complaint in conjunction with a similar EU complaint. The panel issued its
report in February 2000, and the Appellate Body issued its report in May. Both reports
upheld virtually all of Japan’s arguments, finding that the measure: (1) violated GATT
Article I:1 (MFN treatment); (2) violated GATT Article III:4 (national treatment); (3)
violated the SCM Agreement; and (4) violated Article XVII of the GATS (national
treatment). (However, the Appellate Body overturned the finding of the panel that the
duty waiver violated Article II of the GATS (MFN treatment) and Article XVII (national
treatment) of the GATS, stating that the panel based its ruling on a lack of sufficient
evidence.)
(1) Allocating a portion of the quota regarding third-country and non-traditional ACP
bananas to only operators who deal in the EU and traditional ACP bananas is
inconsistent with Article I:1 (MFN) and Article III:4 (national treatment) of the
GATT. The Lomé waiver does not waive the EU’s obligations under Article I:1 with
respect to licensing procedures applied to third-country and non-traditional ACP
imports. The obligation under GATT Article I:1 was therefore still in force.
(2) The above preferential allocation of the quota to operators who deal in traditional
ACP bananas creates less favourable conditions of competition for like service
suppliers from third countries, and is therefore inconsistent with the requirements of
Article II (MFN treatment) and Article XVII (national treatment) of GATS.
(3) Regarding the “BFA”, although it was not unreasonable for the EU to conclude at
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the time the BFA was negotiated that Colombia and Costa Rica were the only
Members that had a substantial interest in supplying the EU market, the EU’s
allocation of tariff quota shares is inconsistent with Article XIII:1 (non-
discriminatory administration of quantitative restrictions). Regarding the
relationship between the inclusion of the BFA tariff quota shares in the EU’s tariff
schedule and GATT Article XIII, the GATT Article XIII prevails over the EU’s tariff
schedule.
(For a broader discussion concerning the Lomé Conventions, see Chapter 16 “Regional
Integration”. For details on the dispute between the United States and the EU over the
implementation of the recommendation by DSB, see Chapter 15 “Unilateral
Measures”.)
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and the Enabling Clause, the Enabling Clause does not necessarily prohibit the granting
of different special treatment to different GSP (Generalized System of Preferences)
beneficiaries. However, the Appellate Body also found that identical treatment should
be granted to all GSP beneficiaries who are at the same level of “development, financial
and trade needs” that the treatment is expected to solve. The Appellate Body upheld for
different reasons the panel’s findings that the EU violated its WTO obligations because
the drug arrangement did not establish any criteria of grounds to differentiate the
beneficiaries under the drug arrangement from other GSP beneficiaries and that,
therefore, all similarly-situated GSP beneficiaries did not benefit from the drug
arrangement.
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