Most Favored Nation

History
• In the town of Mantua in Italy obtained in its charter from the Holy Roman
Emperor, Henry III, the guarantee that it would benefit from all privileges granted
to “whatsoever other town.”
• The term “most-favored-nation” first appears at the end of the 17th century.
• Thereafter, MFN clauses became more common features of commercial treaties.
Initially, as the term suggests, MFN treatment was very much a form of
discrimination as only a few nations benefited from a given MFN clause.
• Over time, the generalization of MFN obligations, particularly as a result of GATT,
has made the MFN concept into a principle of non-discrimination and equal
treatment.
Introduction
• Major demand of US while GATT negotiations
• Colonial preferences
• non-discrimination in the WTO treaty has two faces:
• one internal, the obligation to offer national treatment to imports;
• the other external, the obligation to offer MFN treatment to imports.
• In both of these fields of non-discrimination, similar issues arise,
especially the question of “like products.”
Article I
• 1. With respect to customs duties and charges of any kind imposed on
or in connection with importation or exportation or imposed on the
international transfer of payments for imports or exports, and with
respect to the method of levying such duties and charges, and with
respect to all 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 contracting party to any product originating in or
destined for any other country shall be accorded immediately and
unconditionally to the like product originating in or destined for the
territories of all other contracting parties.
Impact of MFN
• First, whenever WTO Members negotiate and grant trade concessions to other countries,
such concessions must, according to the MFN principle, be automatically extended to all
other WTO Members.
• This is one of the major attractions for countries to join the WTO.
• This aspect of the MFN principle means that negotiators do not need to strike bilateral deals
with all WTO Members separately, because MFN automatically multilateralizes trade
concessions.
• Thus, if Country A and Country B negotiate to lower trade restrictions, the new, more
favorable restrictions must also apply to Country C, Country D, and so on, even though they
were not parties to the negotiations.
• In this way, MFN benefits smaller countries, because they get the advantages of any deals
that are struck, even if the larger nations are not interested in negotiating directly with them.
• On the other hand, this same provision raises the possibility that some states may choose to
“free ride,” meaning that they will refrain from offering any concessions on their own and
simply rely on the benefits they get from the agreements reached by others.
• MFN also reduces animosity between countries, directs trade flows based on efficient
production and, perhaps most important of all, offers a guarantee against “concession
erosion” as it prevents countries from frustrating the expectations associated with trade
negotiations by prohibiting subsequent, more favorable concessions to other trading partners
unless those concessions are extended to everyone.
• Second, even outside of trade negotiations, whenever a WTO Member
enacts legislation or certain trade-restrictive rules or requirements, it
cannot, according to the MFN principle, discriminate between
products from one WTO Member and like products from any other
country.
• This aspect of the MFN principle corresponds to the national
treatment principle:
• whereas national treatment prohibits, discrimination between imports
and similar domestic products, MFN prohibits discrimination between
like imports from different trading partners.
Types
• There are two variants of the MFN concept, each of which has been common
at different points in time.
• The first variant — the unconditional MFN concept — is as described above.
• If State A has an MFN obligation in favor of State B, then any advantage of the
type covered by the obligation that State A grants to State C must also be
afforded by State A to State B.
• This obligation is unconditional.
• State B benefits from the advantage whether or not it grants a similar
advantage to State A.
• The second variant — the conditional MFN concept — is different.
• Where States A and B have entered into an agreement with a conditional
MFN obligation, if State A grants an advantage of the type covered by the
agreement to State C, then State A must offer the same advantage to State B.
• However, it is obligated to grant the advantage only if State B fulfills the
conditions of the agreement, which would typically require State B to offer to
State A a benefit similar to that offered by State C to State A.
• Thus, State B's MFN rights are conditional; it obtains the advantage only if it is
willing to “pay” for it by conceding an advantage to State A.
• The unconditional form of the MFN obligation was used exclusively until the
late 18th century.
• Then in 1778, the United States entered into a treaty with France in which
MFN treatment was made conditional on providing the same compensation
as had been provided by the third party that obtained the advantage.
• The use of conditional MFN clauses became more widespread in the early
19th century, but the unconditional form regained its dominance in the
second half of the 19th century.
• However, the United States only began to pursue unconditional MFN
agreements in the 1920's.
• GATT generally enshrines the unconditional MFN concept, although there are
significant general exceptions to the MFN requirement.
Pros of Unconditional MFN
1. Imports by the most efficient supplier
2. Protects bilateral concessions and generalizes them as the basis for the
multilateral trading system. In this sense, the MFN principle serves as
a positive force for liberalization in the system and, in particular, protects the
interests of the small trading countries: the benefits of free trade are
multilateralized to all countries, whether rich or poor, weak or strong.
Moreover, small trading countries can benefit from concessions without
necessarily making concessions themselves.
3. promotes better international relations since it avoids the bitterness and
tensions that may result from discriminatory policies.
4. produces domestic benefits in that it simplifies the administration of tariffs
and other forms of protection (no origin rules are needed) and it promotes
more transparent policies.
5. it serves as a constraint on the ability of special interests to obtain
discriminatory trade measures.
Cons of MFN
• In the first place, while it may be true that the MFN principle is generally in the
interest of most countries most of the time, it is not clear that it is always in their
interest.
• For example, it may be possible for some major trading nations to use their economic
power in general or in respect of a specific product to gain more in not adhering to
unconditional MFN generally, but rather following a conditional-MFN approach.
• While overall world welfare may not be maximized, these countries may be able to
maximize their own welfare in certain circumstances.
• Second, while it may be true that the application of the MFN rule promotes
multilateralism in some respects, it is also true that the application of the MFN rule
results in the “free-rider” problem.
• There are two aspects of this problem.
• On the one hand, countries benefit automatically from the liberalization measures of
others, whether or not they undertake such measures on their own.
• This enables smaller trading nations, in particular, to free-ride on the concessions
made by others.
• Thus, they may make fewer concessions themselves
• On the other hand, fear of what they view as excessive free-riding may cause
major trading nations to agree to less liberalization than they would if
reciprocity were required.
• Again, the result may be fewer concessions if unconditional MFN treatment is
required.
• It is not clear that this fear of free-riding has significantly slowed down the
process of multilateral trade liberalization, but it is clear that it is a factor in
negotiations.
• Unless a “critical mass” is willing to make liberalization commitments, some
major trading nations may not make commitments.
• In this respect, it could be argued that it would be better to make progress
towards freer trade with smaller groups of countries willing to do so on a
reciprocal basis, rather than to wait for the critical mass to emerge.
• Against this one could argue that these days more trade barriers exist between
non-like-minded countries so that this approach would not significantly
liberalize trade anyway.
• Third, the concept of reciprocity is one that is typically used to
convince domestic interests that trade liberalization is in their interest.
• The unconditional MFN principle is, of course, the antithesis of
reciprocity, and the perceived lack of reciprocity may sometimes make
it more difficult for governments to commit to trade liberalization.
• This concern is closely related to the foregoing issue and the problem
of critical mass
SPF Lumber – Canada
• The case involved a quite well documented claim by Canada that certain types of
softwood lumber were competitively equivalent regardless of the particular species of
evergreen tree from which they were made.
• The background to the claim appears to have been a typical case of reciprocity
discrimination — the classification of lumber by species of tree, resulting in more
favorable treatment of United States origin lumber, in response to a tariff concession
granted by Japan to the United States in a trade agreement bargain in which Canada did
not participate.
• The panel's reason for rejecting of the Canadian claim was clouded to some extent by the
peculiar type of ruling Canada had sought.
• But in the course of its general analysis, the panel report states that the General
Agreement leaves members wide discretion in tariff classification, even after HTS.
• The panel goes on to state that tariff differentiation is a legitimate tool to serve a party's
trade policy interests, “comprising both its protection needs and its requirements for the
purposes of tariff- and trade-negotiations.”
• The fact that the panel limited itself to these rather opaque references to the needs of
tariff negotiations is not surprising, for it was no doubt awkward for the panel to
acknowledge, in the face of all the fanfare proclaiming the MFN obligation to be a
“cornerstone” of GATT policy, that governments do need a bit of freedom to discriminate
in tariff negotiations.
Coffee Case - Brazil v Spain
• The Coffee case [also a GATT 1947 case, adopted in 1981], decided eight years before the SPF
Lumber case, comes to a quite different conclusion.
• The case involved a tariff classification that distinguished between five different types of
unroasted coffee beans.
• The different types were recognized as distinct types of coffee by coffee merchants, and by
processors who made the final product for consumers.
• The basis of the commercial distinction between these types of coffee seems to have been a
difference in taste, due partly to botanical differences and partly to cultivation and processing.
• The final product sold to consumers was a blend of the various types, each blend assembled in
order to achieve the desired taste.
• Viewed objectively, the product distinctions involved in the Coffee case appeared to have a far
stronger commercial foundation than the product distinctions in the SPF Lumber case.
• The panel ruled all five types of coffee to be “like products.”
• The Coffee panel relied on the fact that the coffee was always sold to consumers in blended
form, where it was impossible to distinguish between the various types of coffee in the blend.
• This was a non sequitur, however, because the views of consumers had nothing to do with the
market for this product.
• The market was the coffee merchants and processors to whom the unroasted beans were sold.
• Indeed, once the proper market was identified, the practice of blending tended
to prove quite the contrary conclusion.
• The practice of blending meant that each component of the blend was regarded
as a commercially separate product, one that could not be substituted for by
other types of coffee.
• The other main argument advanced by the panel was that the product
distinctions made by Spain did not appear in the coffee tariffs of other countries.
• In the face of this evidence of commercial non-substitutability, however, the fact
that this product distinction did not appear in the tariffs of other countries hardly
seems weighty enough to call for a classification of “like product.”
• Nor, indeed, is it supported by GATT's general practice with regard to this issue.
• GATT tariff practice in general, there should be a large number of cases in which
nations have made unique product distinctions to deal with unique negotiating
needs, and have never been challenged on them despite the fact that they are
not made in other national tariffs.
Why disparity?
• 1. discriminatory purpose behind the Spanish tariff classification in this case.
• It was believed that Spain had been pursuing a policy of favoring the coffee exports of
certain developing countries, originally through the purchasing policy of a state coffee
monopoly, and that the differential tariff classification had been adopted to preserve
the favored market position of those countries when the state monopoly had been
abolished.
• This was not, in short, discrimination incident to the reciprocity demands of tariff
negotiation.
• The suggestion is that less desirable types of tariff discrimination elicit different types of
legal response on the issue of “like product.”
• 2. Brazil conducted a rather vigorous campaign to enlist developing country support for
its complaint, apparently persuading many developing countries that Spain's effort to
distinguish between developing country coffee producers was a kind of discrimination
offensive to developing countries.
• Judging by the response when the panel report was adopted, the campaign was
successful.
• Twenty-two other developing countries rose to speak in favor of the report, most of
whom usually have nothing to say about panel reports.
EC – Bananas
• During the colonial era, the European colonies were an important source of
bananas for Europe, although some bananas were, and continue to be, produced
within Europe itself.
• After decolonization, this trade flow of bananas from certain African, Caribbean,
and Pacific (ACP) countries was maintained through a complicated system of
trade preferences.
• Those trade preferences were generally limited to ACP countries and not
extended to other major producers of bananas, including those in Latin America.
• Ecuador, Guatemala, Honduras, Mexico, and the United States complained of an
MFN violation.
• Many banana plantations in Latin America were run by American firms (e.g.,
Chiquita and Dole), and thus the United States became increasingly frustrated
with the EC's discrimination in favor of ACP bananas.
• The EC — Bananas dispute is often portrayed as a US-EC dispute.
• Yet, what makes it particularly unusual is that it pits one group of developing countries
(ACP countries) against another group of developing countries (in Latin America).
• For many ACP countries, such as Saint Lucia and Ivory Coast, income from banana sales
in Europe was and remains absolutely crucial.
• Indeed, European trade preferences have largely contributed to making these
countries dangerously dependent on one crop, rather than diversified in other sectors.
• On the other hand, other poor countries such as Honduras and Guatemala saw their
economic development obstructed by these same preferences, as Europe excluded
their bananas from the lucrative European market.
• The EC — Bananas dispute is incredibly complicated.
• Yet, it offers a good example of the impact of the MFN principle.
• The panel found that the EC's tariff preferences for ACP bananas violated GATT Article
I:1 (MFN) but were justified by a GATT waiver (the “Lomé Waiver”), which permitted
the EC to deviate from Article I to the extent necessary for the EC to comply with an
earlier EC-ACP agreement (the “Lomé Convention”).
• This panel finding was not appealed. Besides tariff preferences, however, the EC also
granted preferential tariff rate quotas for ACP bananas.
Article XIII
• 1. No prohibition or restriction shall be applied by any contracting
party on the importation of any product of the territory of any other
contracting party or on the exportation of any product destined for
the territory of any other contracting party, unless the importation of
the like product of all third countries or the exportation of the like
product to all third countries is similarly prohibited or restricted.
Issues
• The first is whether the allocation by the European Communities of
tariff quota shares, by agreement and by assignment, to some
Members not having a substantial interest in supplying bananas to
the European Communities (including Nicaragua, Venezuela, and
certain ACP countries in respect of traditional and non-traditional
exports), but not to other such Members (including Guatemala), is
consistent with Article XIII:1.
• The second is whether the tariff quota reallocation rules of the BFA
[Framework Agreement on Bananas, under which the EC granted
quota shares to certain Latin American countries such as Costa Rica
and Colombia, but not to others] are consistent with the
requirements of Article XIII:1 of the GATT 1994.
• In administering quantitative import restrictions or tariff quotas, Members
must also observe the rules in Article XIII:2. The chapeau of Article XIII:2
provides that Members shall:
• … aim at a distribution of trade in such product approaching as closely as
possible the shares which the various Members might be expected to obtain
in the absence of such restrictions.…
• Article XIII:2(d) provides specific rules for the allocation of tariff quotas among
supplying countries, but these rules pertain only to the allocation of tariff
quota shares to Members “having a substantial interest in supplying the
product concerned.”
• Article XIII:2(d) does not provide any specific rules for the allocation of tariff
quota shares to Members not having a substantial interest.
• Nevertheless, allocation to Members not having a substantial interest must be
subject to the basic principle of non-discrimination.
• When this principle of non-discrimination is applied to the allocation of tariff
quota shares to Members not having a substantial interest, it is clear that a
Member cannot, whether by agreement or by assignment, allocate tariff quota
shares to some Members not having a substantial interest while not allocating
shares to other Members who likewise do not have a substantial interest.
• To do so is clearly inconsistent with the requirement in Article XIII:1 that a
Member cannot restrict the importation of any product from another Member
unless the importation of the like product from all third countries is “similarly”
restricted.
• on the first issue raised by the European Communities, that the allocation of
tariff quota shares, whether by agreement or by assignment, to some, but not
to other, Members not having a substantial interest in supplying bananas to the
European Communities is inconsistent with the requirements of Article XIII:1
2 nd Issue
• The second issue relates to the consistency of the tariff quota reallocation rules of the
BFA with Article XIII:1 of the GATT 1994.
• Pursuant to these reallocation rules, a portion of a tariff quota share not used by the
BFA country to which that share is allocated may, at the joint request of the BFA
countries, be reallocated to the other BFA countries.
• These reallocation rules allow the exclusion of banana-supplying countries, other than
BFA countries, from sharing in the unused portions of a tariff quota share.
• Thus, imports from BFA countries and imports from other Members are not “similarly”
restricted.
• We conclude, therefore, that the Panel found correctly that the tariff quota
reallocation rules of the BFA are inconsistent with the requirements of Article XIII:1 of
the GATT 1994
• Moreover, the reallocation of unused portions of a tariff quota share exclusively to
other BFA countries, and not to other non-BFA banana-supplying Members, does not
result in an allocation of tariff quota shares which approaches “as closely as possible
the shares which the various Members might be expected to obtain in the absence of
the restrictions.”
• Therefore, the tariff quota reallocation rules of the BFA are also inconsistent with the
chapeau of Article XIII:2 of the GATT 1994.
• market access concessions for agricultural products that were made in the Uruguay
Round of multilateral trade negotiations are set out in Members' Schedules
annexed to the Marrakesh Protocol, and are an integral part of the GATT 1994.
• By the terms of the Marrakesh Protocol, the Schedules are “Schedules to the GATT
1994,” and Article II:7 of the GATT 1994 provides that “Schedules annexed to this
Agreement are hereby made an integral part of Part I of this Agreem
• The question remains whether the provisions of the Agreement on Agriculture
allow market access concessions on agricultural products to deviate from Article XIII
of the GATT 1994.
• The preamble of the Agreement on Agriculture states that it establishes “a basis for
initiating a process of reform of trade in agriculture” and that this reform process
“should be initiated through the negotiation of commitments on support and
protection and through the establishment of strengthened and more operationally
effective GATT rules and disciplines.”
• The relationship between the provisions of the GATT 1994 and of the Agreement on
Agriculture is set out in Article 21.1 of the Agreement on Agriculture:
• The provisions of GATT 1994 and of other Multilateral Trade Agreements in Annex
1A to the WTO Agreement shall apply subject to the provisions of this Agreement.
• Article 4.1 of the Agreement on Agriculture provides as follows:
• Market access concessions contained in Schedules relate to bindings and reductions of
tariffs, and to other market access commitments as specified therein.
• Article 4.1 does more than merely indicate where market access concessions and
commitments for agricultural products are to be found. Article 4.1 acknowledges that
significant, new market access concessions, in the form of new bindings and reductions
of tariffs as well as other market access commitments (i.e. those made as a result of the
tariffication process), were made as a result of the Uruguay Round negotiations on
agriculture and included in Members' GATT 1994 Schedules.
• These concessions are fundamental to the agricultural reform process that is a
fundamental objective of the Agreement on Agriculture.
• That said, we do not see anything in Article 4.1 to suggest that market access
concessions and commitments made as a result of the Uruguay Round negotiations on
agriculture can be inconsistent with the provisions of Article XIII of the GATT 1994.
• There is nothing in Articles 4.1 or 4.2, or in any other article of the Agreement on
Agriculture, that deals specifically with the allocation of tariff quotas on agricultural
products.
• Agreement on Agriculture does not permit the European Communities to act
inconsistently with the requirements of Article XIII of the GATT 1994
• The appeal by the European Communities raises two legal issues relating to the
interpretation of Article I:1 of the GATT 1994.
• The first issue is whether the activity function rules of the EC import licensing procedures
are consistent with Article I:1 of the GATT 1994, in the absence of the application of such
rules to imports of traditional ACP bananas.…
• On the first issue, the Panel found that the procedural and administrative requirements of
the activity function rules for importing third-country and non-traditional ACP bananas
differ from, and go significantly beyond, those required for importing traditional ACP
bananas.
• This is a factual finding. Also, a broad definition has been given to the term “advantage” in
Article I:1 of the GATT 1994 by the panel in United States — Non-Rubber Footwear.
• It may well be that there are considerations of EC competition policy at the basis of the
activity function rules.
• This, however, does not legitimize the activity function rules to the extent that these rules
discriminate among like products originating from different Members.
• For these reasons, we agree with the Panel that the activity function rules are an
“advantage” granted to bananas imported from traditional ACP States, and not to bananas
imported from other Members, within the meaning of Article I:1.
• Therefore, we uphold the Panel's finding that the activity function rules are inconsistent
with Article I:1 of the GATT 1994
Summary of Conditions for Violation of MFN Article I:1

• The action in question is a trade policy or measure listed in Article I:1

(covers both imports and exports).
• One country is accorded an “advantage” compared to others.
• This “advantage” is not accorded “immediately and unconditionally”
to all WTO Members.
• The advantage relates to “like products.”