GATT Article I on MFN
The World Trade Organization (WTO) was formed following the Marrakesh Agreement which basically converted the General Agreement on Tariffs and Trade (GATT) into the WTO. Most Favoured Nation Treatment (MFN) broadly covers the nondiscrimination in international trade and is one of the core rules that hold the World Trade Organization together.
The GATT came into force into force in 1948 and has various rules covering different areas of international trade and these rules are supposed to be adhered to by the contracting states.
Most Favoured Nation Treatment (MFN) is one of these rules and is covered under GATT 1994 Article 1.
Key Features of the Most Favoured Nation Treatment
Under the article a contracting party is supposed to treat other nations equally when dealing with exports and imports. This means a contracting party say Kenya, who is a WTO member, cannot treat Chinese imports less favourably that it would treat Japanese imports. If Kenya grants certain privileges to imports from and exports to China then it must unconditionally extend that privilege to other countries who are members of the WTO and which are trading with Kenya and are importing and exporting like products.
The treatment envisage above can be broken into several parts. The first part deals with customs duties and other charges imposed on importation, exportation of like products; the international transfer of payments for imports of exports.[3] This would mean that a WTO members must have a uniform taxation regime that applies to exports and imports and related international transfer payments and this regime must be applied without discrimination.
The Article gives obligations on a member state to apply method of levying the duties and the charges and rules and formalities applicable to importation and exportation in a manner that is not giving advantage to one contracting party over the other with regards to like products.
An important aspect in the above obligation is the use of “like products” Like products can mean products with similar characteristics. Likeness has been given further meaning using different tests as has been determined in several cases .The first test is the unsophisticated market test. In the case of Japan—Taxes on Alcoholic Beverageswhere Vodka was considered to be a like good to shochu. The Panel looked at such as taste, appearance, end us
The second test is the aims and effect test which was considered in the United States—Gas Guzzler Case which concerned the environmentally friendly us laws concerning cars. In this case the Panel determined that if a law does not aim at protectionism then it is GATT compatible.
Exceptions of National Treatment
Under GATT regional integration is an exception to the Most Favoured Nation Treatments. This means that when countries form an a free trade area or a customs union they may apply higher tariffs to non members that they do to member states which in essence means going contrary to the MFN principle[6] There are conditions attached to this; the tariffs and non-tariff measures within the trading bloc must be eliminated and secondly tariffs and other barriers applied outsiders must not be more restrictive than they were before the integration.
The other exception is the under the General System of Preferences where the developed countries can have unilateral agreements where benefits such as zero duty and quato free exports and are extended to the developing countries by the developed countries .Examples of these are Everything But Arms Initiative.
Opportunities under the MFN Principle
MFN gives smaller countries in the WTO access to the larger market. It lowers the cost of their exports and this is principally because that trade barriers are the lowest given. That makes their products more competitive.
Secondly when these smaller nations benefit under the MFN their smaller industries can to improve their products as they service this large market. As a result the firms based in these countries can grow to meet increased demand .This levels the playing field.
The ultimate benefit of the above scenario is that benefits of economies of scale which would in turn lead to increase in exports and as by thus economic growth is achieved.
It also cuts down on red tape. Different tariffs and customs don’t have to be calculated for each import since they are all the same. This leads certainty in trade among nations.
MFN treatment does eliminate the undesired consequences of trade protection. Normally when a domestic industry is over protected it tends to be complacent and refuses to innovate. Application of MFN and therefore elimination of discriminatory practices means that other firms can freely enter a country’s market leading completion. This can automatically force the domestic firms to be more competitive as they to lose their protected status. They are essential in the realm of international trade law and global economy.
The principal provides the consumers with variety of goods and services at competitive prices there will be monopolistic competition which does lead to n product differentiation and better prices for consumers. This in turns improves the consumers’ welfare.
Challenges facing MFN principle
The downside of Most Favored Nation status is the country must also grant the same to all other members of the agreement or the World Trade Organization the resultant effect is that a country cannot protect their country’s industries from cheaper goods produced by foreign countries.
Some firms can be completely pushed out of business simple because that compete. And this is one of the issues that normally arise in the realm free trade agreements.
In situations where there are not tariffs, countries do subsidize their domestic industries. That allows them to export them very cheaply prices. This unfair practice will put companies out of business in the trade partner’s country. As case in point is the subsidized agricultural sectors in the European Union Countries which has over the years led to cheap agricultural products from these countries as compared to other developing countries where farmers do not enjoy subsidies.
Another examples can be drawn from the US Market. Ideally the MFN principled countries ought to export goods cheaply to the U.S. market. The reality this is an arduous task as the US had to put in place subsidy measures when local agricultural industry was being lost and which led to many farmers had to move to the cities to find jobs leading to food riots.
Cases Law
In the case ofJapan — Taxes on Alcoholic Beverages Exporters of spirits to Japan complained that Japan’s liquor tax system discimininated against them .Basically Japan was levying a lower tax on a drink called “Shochu” that on whisky Cognac and white spirits. The Panel found for Japan, holding that the Japanese tax system was inconsistent with GATT Article III:
National Treatment under GATT Article III
Article III of GATT is to the effect that imports be treated no less favourably than the same products that are produced locally once they have passed customs.
One of the key issues in National Treatment is the aspects of “like domestic products”. The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale,purchase, transportation, distribution or use.
The above however does not preclude the application of differential internal charges such as transportation The National Treatment also prohibits application of internal quantitative regulations in a manner contrary to the principles set forth in GATT.
Exceptions to the National Treatment Principle
Whereas the above is the general obligation under GATT, there are exceptions i.e. circumstances under which a contracting party is permitted to depart from this requirement .A government is allowed to purchase domestic products through government procurement.
Opportunities of the National Treatment in international Trade
With the National Treatment there is a chance for the removal of nuanced protectionism that some states may be applying to hinder access of other goods and services in their markets.
National Treatment may help with the removal of tariff barriers which are a major problem in international trade.
It reduces that power of WTO member states to engage so much in nation’s trade affairs
National Treatment brings equality in international trade. Firms in a country who is a member of the WTO can produce products for export with the assurance that its products will not face discrimination when it exports them to another country. This leads to certainty in the international trade environment.
In terms of challenges this could lead to stagnation of domestic industries, slow growth of for some of the domestic industries.
Case Law on National Treatment
In the Us- Gasoline Case Brazil and Venezuela complained to the WTO regarding the “Gasoline Rule” under the US Clean Air Act that set out the rules for establishing baseline figures for gasoline sold on the US market (different methods for domestic and imported gasoline), with the purpose of regulating the composition and emission effects of gasoline to prevent air pollution.
It was held by the Panel found that the measure treated imported gasoline “less favourably” than domestic gasoline in violation of Art. III: as imported gasoline effectively experienced less favorable sales conditions than those afforded to domestic gasoline. That under the regulation, importers had to adapt to an average standard, i.e. “statutory baseline”, that had no connection to the particular gasoline imported, while refiners of domestic gasoline had only to meet a standard linked to their own product in 1990, i.e. individual refinery baseline.
Concluding Remarks/ Observations
The MFN and National Treatment principle are important as they are major guarantees to fair trade under the WTO.
WTO is rules based and to this end the above principles have gone along way in ensuring there is level playing field.
The exceptions also do play a major role in terms of providing safety nets when contracting Party needs take measures such as integration or when the developed nations want to engage in actions that will benefit poorer nations.
Overally these MFN and the National Treatment are essential in the international trade and I think WTO members should take advantage of them
Patrick's Trade Digest 