1 | P a g e

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

2 | P a g e

Contents

Introduction .....................................................................3

CONCEPT OF MFM….…………………………..…..4

Economic implications of mfn treatment……………………6

ARTICLE 1 PARA1 GATT…………………………8

Some cases……………………………………15

Other provisions…………………………….…20

Exceptions ……………………..21

Conclusion…………………………………………………27

Bibliography…………………………………………….. 28

3 | P a g e

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.

4 | P a g e

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 protectionist trade

policies pursued by many countries during the economic crisis of 1930s.

5 | P a g e

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.

6 | P a g e

ECONOMIC IMPLICATIONS OF MOST FAVOURED NATION TREATMENT

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

7 | P a g e

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 of determining an import’s 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.

8 | P a g e

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 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.

9 | P a g e

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;

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

10 | P a g e

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.

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

11 | P a g e

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

12 | P a g e

provision may apply”. The meaning 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,

13 | P a g e

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, non-decaffeinated coffee in

such a way that different types of coffee were 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 Tariff…should 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:

14 | P a g e

• 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 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.

15 | P a g e

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?

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

16 | P a g e

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 member’s 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 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

17 | P a g e

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-à-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

Government entered into negotiations. The result of the negotiation was the

1986 United States-Japan Arrangement Concerning Trade in Semi- Conductor

Products. Under the Arrangement, the Government of Japan engaged to impress

upon Japan producers and users of semiconductors the need to take advantage

18 | P a g e

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 anti-dumping 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 don’t 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 Policy” endorsed by Government of

19 | P a g e

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 EEC’s argument, finding that the 1986

Arrangement did not violate the Article I MFN principle. The Panel reached to the

conclusion that EEC’s 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 non-American 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 EEC’s

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.

20 | P a g e

OTHER PROVISIONS REFLECTING MFN PRINCIPLE

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.

21 | P a g e

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 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 WTO’s 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

22 | P a g e

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 WTO’s principle of equal treatment for all trading partners (“most-

favoured-nation”).

But GATT’s Article 24 allows regional trading arrangements to be set up as a

special exception, provided certain strict criteria are met (as mentioned 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.

23 | P a g e

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

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

24 | P a g e

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 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

25 | P a g e

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 conditions as to cause or threaten serious injury to

26 | P a g e

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

27 | P a g e

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

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

28 | P a g e

www.wikipedia.org ..

www.google.com On-line books.

INTERANTIONAL TRADE LAW BOOK BY SR MYNENI

Wwwwto.org