shelley presentation on mfn
TRANSCRIPT
By
E.Shelley Anandhavalli
Most favoured nation (MFN) is a status or level treatment
accorded by one state to another in international trade.
The term means the country which is the recipient of this
treatment must, nominally, receive equal trade advantages as the
"most favored nation" by the country granting such treatment.
In effect, a country that has been accorded MFN status
may not be treated less advantageously than any other
country with MFN status by the promising country.
MFN is one of the substratum principles of WTO.
It requires Members to accord the most favorable tariff and
regulatory treatment given to the product of any one Member at the
time of import or export of "like products" of all other Members.
MFN helps in reduction of tariffs on other country goods and
thereby increase the consumer’s access to quality products at
relatively low prices and would serve to enhance a mutually
beneficial trade relationship with the two rapidly developing
economies.
Special consideration is given to countries that are classified as
"developing" by the World Trade Organization.
Countries achieving most favored nation status are given specific
trade advantages such as reduced tariffs on imported goods.
MFN is the first article of the General Agreement on Tariffs andTrade (GATT), which governs trade in goods.
MFN is also a priority in the General Agreement on Trade in Services(GATS) (Article 2)
The Agreement on Trade- Related Aspects of Intellectual PropertyRights (TRIPS)(Article 4).
MFN enables competitive international transactions.
Establishes equal trading opportunities among states by makingoriginally bilateral agreements multilateral.
Under the Most-Favoured-Nation rule, If WTO Member
state A agree in negotiations with state B, (though not a
member of WTO) to reduce the tariff on the same product
X, the same "tariff rate" must also apply to all other WTO
Members as well.
In other words, if a country gives favorable treatment to one
country regarding a particular issue, it must handle all
Members equally regarding the same issue.
Prior to the GATT, an MFN clause was often included in bilateraltrade agreements, and it contributed greatly to the liberalization oftrade.
In the early 17th century, several commercial treaties incorporatedmost-favoured-nation provisions. The Anglo-French treaty negotiatedin 1860 by Richard Coben and Michel Chevalier, which establishedinterlocking tariff concessions that extended most-favoured-nationtreatment worldwide, became the model for many later agreements.
MFN was generally bilateral. But in the late 19th and early 20thcentury unilateral most favoured nation clauses were imposed on Asiannations by the more powerful Western Countries.
After World War II, tariff and trade agreements were negotiatedsimultaneously by all interested parties through the GATT.
MFN treatment has always applied primarily to the duties charged on
imports, but specific provisions have extended the most-favoured-
nation principle to other areas of international economic contacts:
the establishment of enterprises of one country’s nationals in the
territory of the other;
navigation in territorial waters;
real and personal property rights
intangible property rights such as patents, industrial
designs, trademarks, copyrights, and literary property;
government purchases;
foreign-exchange allocations;
taxation.
There are two forms of most-favoured-nation treatment:
Conditional
unconditional.
The conditional form grants to the contracting party only those
concessions originally made to a third party and grants concessions
originally obtained as part of a bargain only under
equivalent conditions or in return for equivalent gains.
Under the unconditional form, any tariff concession granted to a
third party is granted to the contracting party, a principle that was
included in the 1948 General Agreement on Tariff and Trades
(GATT) and in 1995 in the agreement establishing the World
Trade Organisation (WTO).
Cont..
The unconditional Most-Favoured-Nation clause was then
included in the GATT, on a multilateral basis, and has
contributed to the stability of trade around the world.
The World Trade Organization requires members to grant
one another most favoured nation status.
A most favoured nation clause is also included in the
majority of the numerous bilateral investment treaties
concluded between capital exporting and capital importing
countries after the Second world war.
MFN treatment is stipulated in GATT Articles I, XIII, and XVII.
GATT Article I:1
- Provides for WTO Members to accord Most-Favoured-Nation treatment to
i) like products of other WTO Members regarding tariffs, regulations on exports and imports, internal taxes and charges, and internal regulations.
In other words, "like" products from all WTO Members must be given the same treatment as the most advantageous treatment accorded the products of any state.
Otherwise such action amounts to violation of the above said
article.
GATT Article XIII stipulates
- that quantitative restrictions or tariff quotas on anyproduct must be administered in a non-discriminatoryfashion regarding like products.
- in administering import restrictions and tariffquotas, the WTO Members shall aim to allocate shares closeto that which might be expected in their absence.
-Article XIII provides for most-favoured-nationtreatment in the administration of quantitativerestrictions, and supplements under Article I
GATT Article XXVII obliges WTO Members to act in
accordance with the rule of non-discrimination, including the
MFN.
- State Trading Enterprises are Enterprises
established or maintained by a WTO Member or private
enterprises granted exclusive or special privileges by WTO
Members, which make purchases or sales involving either
imports or exports.
- By making use of their monopolistic
status, such enterprises could operate against international
trade through discrimination on the part of importing country
and quantitative restrictions.
The trading system should be
without discrimination
freer
Predictable
more competitive
more beneficial for less developed countries
It suggests special treatment, but in the WTO it actually
means non-discrimination — treating virtually everyone
equally.
Most-favoured nation (MFN) status did not always mean
equal treatment.
The first bilateral MFN treaties set up exclusive clubs among
a country’s “most-favoured” trading partners.
Under GATT and now the WTO, the MFN club is no
longer exclusive. The MFN principle ensures that each
country treats its over—140 fellow-members equally.
Regional integration liberalizes trade among countries within
the region, while allowing trade barriers with countries
outside the region.
Regional integration therefore may lead to results that are
contrary to the Most-Favoured-Nation principle because
countries inside and outside the region are treated differently.
This may have a negative effect on countries outside the
region, and thus lead to results contrary to the liberalization
of trade.
Regional integration may be allowed on satisfying the
following conditions:
First, tariffs and other barriers to trade must be eliminated with
respect to substantially all trade within the region.
Second, the tariffs and other barriers to trade applied to outside
countries must not be higher or more restrictive than they were
prior to establishment of regional integration.
The Generalized System of Preferences or "GSP" is a system thatgrants products originating in developing countries lower tariff ratesthan those normally enjoyed under Most-Favoured-Nation status as aspecial measure granted to developing countries in order to increasetheir export earnings and promote their development.
Characteristics of GSP:
Preferential tariffs may be applied not only to countries with specialhistorical and political relationships, (i.e. the BritishCommonwealth), but to developing countries more generally.
the beneficiaries are limited to developing countries.
it is a benefit unilaterally granted by developed countries to developingcountries.
Non-Application of Multilateral Trade Agreements between
Particular Member States (WTO Article XIII):
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 most-
favoured-nation principle.
Other exceptions peculiar to the Most-Favoured-Nation principle
include
Article XXIV:3 regarding frontier traffic with adjacent
countries, and
Article I:2 regarding historical preferences which were in force at
the signing of the GATT, such as the British Commonwealth.
General exceptions to the GATT that may be applied to the Most-
Favoured-Nation principle include
Article XX regarding General Exceptions for measures necessary
to protect public morals, life and health, etc., and
Article XXI regarding Security Exceptions.
It is also possible to obtain a waiver to constitute an exception to
the Most-Favoured-Nation principle.
Cntd..
Under WTO Article IX:3, countries may, with the agreement of
other contracting parties, waive their obligations under the
agreement.
New waivers, however, can only be obtained for exceptional
circumstances, and require the consent of three-quarters of the
contracting parties.
It is stipulated that the 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, and that
waivers are subject to annual review (Article IX:4).
Article II of the General Agreement on Trade in Services (GATS)
provides for most-favoured-nation treatment for services and
service providers;
Article 4 of the Agreement on Trade-Related Aspects of
Intellectual Property Rights does the same for the protection of
intellectual property rights.
The GATS allows for exceptions where Members may waive their
obligation to provide most-favoured-nation treatment for specific
measures in specific fields by listing the measure in the Annex on
Article II Exemptions.
The TRIPS Agreement also provides for exemptions regarding
measures based on existing treaties in the area of intellectual
property.
Increased Efficiency in the World Economy
Most-favoured-nation treatment makes it possible for countries to
import from the most efficient supplier, in accordance with the principle
of comparative advantage.
Stabilization of the Free Trading System
the most-favoured-nation rule requires that favourable treatment
granted to one country be immediately and unconditionally granted
to all other countries, while trade restrictions must also be applied
equally to all.
Reduction of the Cost of Maintaining the Free Trade System
MFN reduces the cost of maintaining the free trade system.
Any trade benefits that result from any negotiations will be
applied equally to all other WTO members, even though
they may be excluded from the negotiations.
This could create abuse of the MFN treatment.
Continual vigilance is required to ensure that the most-
favoured-nation rule is not abused and weaken the basic
importance of the dispute settlement process in the WTO.