1 | Page

SCHOOL OF LAW JUSTICE AND GOVERNANACE

PROJECT ON:- INTERNATIONAL TRADE LAW
TOPIC:- UNCITRAL MODEL ON INTERNATIONAL
COMMERCIAL ARBITRATION

SUBMITTED TO:SUBMITTED BY:APOORV MAAVI SIR

MANAS DWIVEDI
12/ILB/022
Contents

Introduction .....................................................................3
CONCEPT OF MFM.....4
Economic implications of mfn treatment6
ARTICLE 1 PARA1 GATT8
Some cases15
Other provisions.20
Exceptions ..21
Conclusion27
Bibliography.. 28

2 | Page

INTODUCTION
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.

3 | Page

CONCEPT OF MFN
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 post-World 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

4 | Page

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.

ECONOMIC IMPLICATIONS OF MOST FAVOURED NATION TREATMENT

5 | Page

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

6 | Page

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

7 | Page

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 to
1) 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;

8 | Page

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.
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.

9 | Page

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 Canada-Aircraft 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

10 | P a g e

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, nondecaffeinated coffee in such a way that different types of coffee were

11 | P a g e

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

12 | P a g e

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 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?

13 | P a g e

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

14 | P a g e

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.
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

15 | P a g e

Government entered into negotiations. The result of the negotiation was the
1986 United States-Japan Arrangement Concerning Trade in SemiConductor 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 antidumping 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

16 | P a g e

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 nonAmerican 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.

OTHER PROVISIONS REFLECTING MFN PRINCIPLE

17 | P a g e

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

18 | P a g e

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

19 | P a g e

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

20 | P a g e

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

21 | P a g e

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 non-discrimination 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

22 | P a g e

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

23 | P a g e

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.

BIBLIOGRAPHY

www.wikipedia.org ..

www.google.com On-line books.

INTERANTIONAL TRADE LAW BOOK BY SR MYNENI

Wwwwto.org