The Most-Favored-Nation Principle: GATT, WTO, and Trade Agreements

This essay delves into the Most-Favored-Nation (MFN) treatment principle, a cornerstone of the World Trade Organization (WTO) and its predecessor, the General Agreement on Tariffs and Trade (GATT). It traces the historical evolution of MFN clauses from medieval trading practices to their modern form within the WTO framework, highlighting key agreements like Article I of GATT, Article II of GATS, and Article 4 of TRIPS. The essay explains how MFN treatment ensures that any advantage granted to one WTO member is extended to all others, promoting non-discrimination in trade relations. It also discusses the exceptions to this principle, such as free trade agreements, customs unions, and preferential treatment for developing countries, outlining the conditions under which these exceptions are permitted. The analysis covers both border measures (e.g., customs duties, anti-dumping duties) and internal measures (e.g., tax exemptions) that fall under the purview of Article I, drawing on case law to clarify its scope and application. The essay concludes by acknowledging the complexities and challenges in universally applying the MFN principle while underscoring its critical role in fostering global trade liberalization and cooperation.

The most-favored-nation treatment principle
Since the middle Ages, rulers from modern nation states to medieval trading cities have made
efforts to bargain superior conditions for trade regarding their goods and services. The same
efforts are however also made by their competitors. This situation can be explained with the help
of a hypothetical scenario. For example the rulers of medieval city-state Florence had managed
to bargain a deal according to which the commodities from Florence have been given special
access to the Republic of Pisa and the tariff on Florence goods has been set at half as compared
to the normal rate. As the Florentines are celebrating their accomplishment, the diplomats from
the Venetian city state also contacted the rulers of Pisa. Being a powerful Republica, they also
insist on having tariff negotiations with the rate that was offered to the Florentines and was
successfully negotiating an even better rate for the Venetian goods product. The result is that the
Florentines are back to their original place.
The resolution to this crisis has been historically as stylish as it was efficient. The trading cities
began to talk agreements according to which their merchandise will be granted as a minimum the
similar treatment as being offered to their opponents. Regarding the above-mentioned scenario
but does this cause means for Florence? This means that if Pisa agreed to such a clause, it would
be at once required to present similar conditions to Florentine goods has been offered to the
goods from Venice. This results in solving the problem.

Originally, terms like this were used infrequently. At times these clauses referred to particular
opponents (for example, it could be mentioned, "granted the same treatment as France") and
these clauses were granted unilaterally by a ruler and may be subject to certain conditions.
However by the 19th century, these clauses evolved and took the shape of present day most-
favored-nation causes as known today.1 The one of the most significant treaties of the 19th
century is the 1860 Cobden-Chevalier treaty that took place among the United Kingdom and
France and in which, both parties promised to create each other in has the most favorite foreign
nation. This treaty resulted in the conclusion of several alike bilateral treaties among states.
Most-favored-nation principle in the WTO: in the modern times, when people talk about most-
favored-nation treatment, generally they turn to the most-favored-nation clauses that are present
in the accords that shape the law of the WTO. In this regard it needs to be mentioned that most-
favored-nation treatment is the foundation stone of the association having 164 members and due
to reason that the WTO covers a large fields of trade, with the help of various agreements, it
contains not only one but a number of clauses which guarantee most-favored-nation treatment.
The most significant among these are: Article I GATT which covers trade in goods and goes to
1947; Article II GATS which covers trade in services; and Art 4, TRIPS (Agreement on Trade
Related Aspects of Intellectual Property) and covers intellectual property.
In the present work, the clause which refers to trade in goods has been discussed in detail. If this
provision is simplified it mentions that the respect of all the rules that are significant for trade,
any advantage that has been granted to a member of the WTO to any product that has originated
in any other state shall be offered unconditionally and immediately, to same goods that originates
1 Gas Natural v. Argentina (Gas Natural SDG, SA v. Argentine Republic), ICSID Case ARB/03/10

from any of the other members states. The meaning of this provision can be explained as
follows.2 If state A has granted by the conditions to the products originating in state B, it is
required to immediately and unconditionally provide the same or more preferable treatment to
the same product coming from all WTO members. It has to be "Multi-lateralized"
unconditionally.
Exceptions: However if this would have been true, the European Union would be required to
provide tariff free trade and free movement of goods to all the members of the WTO had in the
same way the US put the required to treat all members of WTO in the same way as Canada and
Mexico and it would not be possible to offer any benefit to the least-developed nations without
offering the same benefits to all the other members of the WTO. This is of course not correct.
The most-favored-nation treatment stops the nations from offering better treatment related with
free-trade accords. The nations are required to multi-lateralize this treatment. At the same time
this principle also prevents the nations from granting better treatment and poor countries. That
too needs to be multi-lateralized. At the same time, the original of most-favored-nation also
prevents from sanctioning a country. However, it was not the intention of the leaders of world
trade order to stop these policies.3 As a result they created certain exceptions to Article I GATT.
These exceptions include the exceptions related in particular policy objectives and concerning
essential security interests to the exceptions that have been introduced for preferential treatment
for developing and least developed countries. The exceptions also cover the free trade in the
custom unions and interim agreements resulting in their formation. (In case of GATT, these are
Article XX, XXI or the supposed "enabling clause" and Article XXIV).
2 Plama v. Bulgaria (Plama Consortium Ltd v. Republic of Bulgaria), ICSID Case ARB/03/24
3 Salini v. Jordan (Salini Costruttori SpA and Italstrade SpA v. The Hashemite Kingdom of Jordan), ICSID Case
ARB/02/13

It needs to be mentioned that all these exceptions have certain conditions attached to them. One
example, a free trade zone can be permitted only if, along with other things, it has eliminated the
duties and other restrictive trade regulations on "to a large extent all the trade that takes place
between the member states in products that have originated in these territories Article XXIV:8(b)
GATT.
In this way, it can be stated that according to the WTO agreements the meaning cough and most-
favored-nation principle is that the countries cannot generally distinguish among their trading
partners. In case a nation has decided to grant a special favor to do some nation (for example a
lower rate of custom duty for one of its goods), saturation is bound to do the same for all the
other members of the WTO. The significance of this provision can be jacked from the fact that it
is the 1st Article of GATT that governs the trade in merchandise.4 The most-favored-nation
treatment is also a priority in Gen. agreement on trade in services (Art 2) and the agreement on
trade related aspects of intellectual property rights (Art 4) even if the principle has been handled
slightly differently in each agreement. Jointly, all these accords include the three major fields of
trade that have governed by the WTO. Even if the present work is restricted to discussing the
most-favored-nation treatment with respect to GATT, the concept of most-favored-nation in
itself is nothing new and is commonly found in bilateral trade agents even before the GATT as
can be seen from the presence of large number of writings related with the subject of its history
and evolution.5 Around 1930s there were several forces that resulted in choking the most-
favored-nation principle. The result was that the world was divided into trade blocs and the
ultimate result was the World War II
4 Siemens v. Argentina (Siemens AG v. Argentine Republic), ICSID Case ARB/02/8
5 Ambatielos Case (Greece v. United Kingdom), Preliminary Objection, Judgement of July 1, 1952, ICJ Reports
1952

After signing the GATT it is no more available to the countries to impose different tariffs of
their choice. The reason is that it is a voluntary contract according to which such right has been
surrendered and not to be involved in acts that either result in violating the terms or are not in
conformity, although they do not infringe, with the expectation of mutual gains that are going to
be received by each party as a result of the behavior of others.6
Even with the lack of conformity, the act of one party to the contract has to be considered as
discriminating only if such act is 'injurious or unfavorable' in the way that it reduces the benefits
of one or more parties to the contract. In order to be meaningful, any such contract needs to
contain a description of the adverse discriminating act and it should also state corrective action.
The decision regarding adverseness or otherwise of an action from the perspective of the accord
will obviously rely on the recognition of their interest that the parties consider to be supported by
the agreement.
MFN Principle: it has been provided by Article I that "custom duties and charges of any nature
that are levied on or in relation to the import/export are levied on worldwide transfer of payments
for imports/exports and regarding a technique of levying such charges and duties and a regarding
all rules and procedures concerning the importation and exploration and regarding all topic that
are referred to in paragraph 2 to 4 of Article III, any favor, advantage, privilege or immunity that
has been granted by one contracting party to any product that has originated or destined for any
other country shall be provided, immediately and unconditionally, to the like product, originating
in or destined for the territories of all the other contracting parties".
6 Anglo-Iranian Oil Co. Case (United Kingdom v. Iran), Preliminary Objection, Judgement of July 22, 1952, ICJ
Reports 1952

It can be easily inferred in this case that the principle of non-discriminatory treatment is
applicable only in case of "like products" and only if the products have been imported from
another contracting parties, which are the WTO members. In this regard, it has been stated that
the principle of most-favored-nation generally results in generalization of liberalizing trade
policies and as a result overall more trade liberalization takes place.7
But at the same time there are certain difficulties present in making a general argument in favor
of most-favored-nation principle. For example, this type of analysis inherently involves the
comparison of distorted equilibria. Secondly there is a lack of discernible measure of the degree
to which assets and fulfills the most-favored-nation principle. At the same that there is no one-to-
one relationship present between most-favored-nation principle and the context in which it has
been agreed upon (bilateral or multilateral).
It is also worth mentioning that there is no exhaustive list of policies present in Article I that
should come within its purview. It merely mentions the standards that will provide legislative
guidance to the parties interested, regarding its scope.8 Therefore one needs to extensively rely
on case law for seeking clarifications. The policies that are covered by Article I can be divided
into following two categories:
Border measures: this type of measures can be of fiscal character. For example it can be the
customs and duties of any type that are imposed in case of importation or exportation. These also
include omissions, anti-dumping duties, methods of levying and counter-veiling measures. At the
same time, these pages can also been of non-fiscal character. They may include their rules and
formalities related with importation or exportation. For example the use of less complicated
7 AAPL v. Government of Sri Lanka (Award), ICSID Case No. ARB/87/3
8 Emilio Agustin Maffezini v. Kingdom of Spain (Decision of the Tribunal on Objections to Jurisdiction), ICSID
Case No. ARB 97/7

licensing process has been considered to be an advantage falling within the purview of Article
I.1.
Internal measures: As Article III.2 and III.4 have been referred to explicitly, it becomes
significantly clear that the most-favored-nation clause extends to cover internal measures also.
An example in this regard can be given of tax exemptions that have been given regarding
products that are raised by public bodies.9
In this regard, it needs to be noted that there is no burden on the complainant for establishing
actual take effects for the purpose of establishing the violation of article I. it has been made
amply clear in the Bananas case that if failover charities have been created only for certain
members of the WTO, it will result in the violation of the obligations imposed on WTO members
by Article I. it is also not required to establish an intention to discriminate if the differential
treatment is afforded to two imported like products.
Conclusion: in the end the point that is generally ignored is that the very reason you to reach
most-favored-nation clauses came about was the need to avoid troublesome and repetitive
procedures by applying the same conditions in case of all the trade partners. On the other hand,
the early most-favored-nation clauses acted as the instruments to generalize concessions. On the
other hand the present day MFN clauses act as a means for realizing non-discrimination.10
The success of World Trade Organization lies in rejuvenating its original objectives by
harmonizing the interests of the developing and developed nations. For this purpose, several
decisions have been taken by the WTO, that are considered to be controversial by the developing
nations. One such significant decision is the issue of competition policy. The controversial nature
of non-discrimination and reciprocity is partly the result of the fact that take policy has always
9 Tecnicas Mediorarubientales Tecmed SA v The United Mexican States, ICSID case NO. ARB(AF)/00/2
10 Case Concerning East Timor (Portugal v. Austria), ICJ Reports 1995, Judgement of June 30 1995

been in favor of pursuing national interests. Due to this reason it has become problematic to
follow the principle of most-favored-nation and trade liberalization through the reciprocal
bargaining at the same time.11 In the end it pays to be mentioned that if multilateralism remains
they selected road, strong reasons are present for reinforcing the belief that the principle of most-
favored-nation encourages non-discrimination although it is required that it is not completely
subverted by the body of PTAs.
Promoting fair competition: sometimes WTO is also known as the free-trade institution even if it
is not completely true. However the system does allow tariffs and in some cases, other forms of
protection. Therefore it can be described as a system of rules that are related with fair, open and
undistorted competition. The rules related with non-discrimination, including the most-favored-
nation principle have been designed with a view to provide fair conditions of trade. However
there are complex issues present in this regard and an effort is made by these rules to establish
what is fair or unfair and how the government needs to respond, particularly by charging
additional import duties that are calculated for the purposes of compensating the damage that has
been caused by unfair trade. There are a number of other WTO agreements that also try to
support fair competition, for example fields of intellectual property, agriculture etc.
Encouraging Development and Economic Reform: It can be said that the system of WTO plays a
role in development. At the same time, the developing nations require flexibility in time that is
required for implementing the agreements concluded under the system. The agreements in
themselves inherit the provisions of earlier GATT where special assistance and trade concessions
are permitted in case of developing nations.
11 Phoenix Action, LTD. V. The Czech Republic; ICSID Case No. ARB/06/5

More than three quarters of the members of the WTO are developing nations and the nations that
are in transition to market economy. In the seven and a half years of Uruguay Round, more than
60 of these nations had implemented trade liberalization programs on their own. Similarly,
developing nations and transition economies had been more influential and active during the
Uruguay Round negotiations as compared to earlier rounds and even more in case of Doha
Development Agenda.
At the end of the Uruguay Round, the developing nations were ready to accept most of the
obligations that were needed in case of the developed nations. However, the agreement did
provide transition period to these nations for adjusting to the more unfamiliar and probably more
difficult provisions of the WTO, especially in case of the poorest and the least developed nations.
According to a ministerial decision that was adopted at the end of the round, it was stated that the
developed nations need to accelerate the implementation of market access commitments
regarding the goods that were exported by least developed nations.
Therefore, it can be stated that the WTO and its member nations are still undergoing a process of
learning. The Doha Development Agenda included the concerns of the developing nations
regarding the problems faced by them in the implementation of the provisions of the Uruguay
Round Agreement.
Sometimes, making a promise not to raise trade barrier can be as significant as lowering the
barrier. The reason is that such a promise provides a clearer view of the future opportunities that
may be available to businesses. Therefore, predictability and stability help in encouraging
investment and it also creates jobs and the consumers can also enjoy complete benefits of
competition.

In this way, under the WTO agreements, nations are not generally allowed to discriminate
between their trading partners. Therefore if a nation has decided to grant a special favor to
someone (for example, a lower rate of custom duty for the products of one nation) such nation is
required to do the same for the other members of the WTO also. The explanation of the principle
of most-favored-nation given in this work may prove to be helpful in dealing with the issues
related with MFN. For example MFN tariffs are the lowest that may be offered by a WTO
member to another member of the WTO. Accordingly the member is required to multi-lateralize
and make the offer available to all the members of the WTO. Even if it appears to be a sound
principle but there are exceptions present to the application of most-favored-nation clause which
allows the states to offer better tariffs to developing countries and an example in this regard can
be given of free trade agreements.12 Hence, trading with a WTO member in accordance with the
MFN rules means less advantageous trade as compared to the case where it takes place under a
free trade agreement.
At the same time, the principle of most-favored-nation also educates us that it would not be
practicable for the United Kingdom to quit of the European Union without an accord and then
unilaterally consider the European Union goods better in the hope that the same will be done by
the European Union in case of UK goods. If there is no free trade agreement concluded between
the UK and the European Union, the UK will be required by the WTO law to consider EU goods
in the same way as the goods from other members of the WTO. The same obligation will
represent on part of the European Union to consider UK goods as the same as the goods from
other members of the WTO. In case any party decides that it is not going to impose tariffs on the
goods originating from the other, such party will be compelled to take the goods from other
12 Vladimir Berschader and Moise Berschader v. Russian Federation, SCC Case No. 080/200

individual members in the same way and all tariff protection will be removed from the domestic
industry and as a result the leverage in trade negotiations.

Bibliography
AAPL v. Government of Sri Lanka (Award), ICSID Case No. ARB/87/3
Ambatielos Case (Greece v. United Kingdom), Preliminary Objection, Judgement of July 1,
1952, ICJ Reports 1952
Anglo-Iranian Oil Co. Case (United Kingdom v. Iran), Preliminary Objection, Judgement of July
22, 1952, ICJ Reports 1952
Case Concerning East Timor (Portugal v. Austria), ICJ Reports 1995, Judgement of June 30
1995
Emilio Agustin Maffezini v. Kingdom of Spain (Decision of the Tribunal on Objections to
Jurisdiction), ICSID Case No. ARB 97/7
Gas Natural v. Argentina (Gas Natural SDG, SA v. Argentine Republic), ICSID Case
ARB/03/10
Phoenix Action, LTD. V. The Czech Republic; ICSID Case No. ARB/06/5
Plama v. Bulgaria (Plama Consortium Ltd v. Republic of Bulgaria), ICSID Case ARB/03/24
Salini v. Jordan (Salini Costruttori SpA and Italstrade SpA v. The Hashemite Kingdom of
Jordan), ICSID Case ARB/02/13
Siemens v. Argentina (Siemens AG v. Argentine Republic), ICSID Case ARB/02/8
Tecnicas Mediorarubientales Tecmed SA v The United Mexican States, ICSID case NO.
ARB(AF)/00/2