Most-favoured-nation (MFN) Principle

“Most-Favoured-Nation” (“MFN”) treatment — mandates that all members offer each

other the same tariff and regulatory treatment that is accorded to the product of any one
member at the time of import or export of “similar products,” regardless of which member
initially provides such benefits. If nation A (a WTO member) agrees with country B (which
need not be a WTO member) to lower the tariff on product X to five percent through talks,
this “tariff rate” must also apply to all other WTO members under the MFN rule. To rephrase,
if a member state favours one member nation on a given subject, it must treat all members
equally on that same topic. The concept of MFN care has been around for quite some time.
An MFN clause was commonly included in bilateral trade agreements prior to the GATT, and
this helped considerably liberalise trade. However, restrictions were imposed in the 1930s
that made it harder for the MFN principle to be put into practice. These actions allegedly
contributed to the fragmentation of the global trading system into blocs. As a result of the
lessons learnt from this blunder, an unconditional MFN clause was incorporated into the
GATT after World War II. This was done on a multilateral basis, and it has helped maintain
international trade stability. In this context, the MFN principle is especially important to
uphold as a cornerstone of the multilateral trade system. The MFN principle must be
protected by using exceptions to regional integration consistently.

Legal Framework
When it comes to tariffs, export and import rules, domestic taxes and fees, and other domestic
regulations, GATT Article 1.1 requires WTO Members to offer MFN treatment to products
of other WTO Members. What this means is that the most favourable treatment offered to the
products of any state must be applied to the “like” products of all WTO Members. If an
importing country openly applies different tariff rates to “similar items” from an exporting
country, they are breaking GATT Article 1.1. When an importing country gives differing
treatment to products that are considered to be “similar products,” this constitutes a violation
of Article 1.1 even if there is no discrimination against the product of another Member. De
facto discrimination is a common term to describe this. For instance, a government may
impose a different tax on one type of unroasted coffee compared to another type, but this
differential tariff may only affect imports from certain countries if the two types of coffee
beans are not considered to be “similar products.” That might be breaking the MFN rule 1. In
the SPF (“spruce, pine, and fir”) case involving Japan, the idea of comparable items was
rigorously interpreted. The legality of tariff classifications would be proven to the degree that
it did not discriminate against the same products from different WTO Member countries, the
panel in that decision acknowledged, recognising that each WTO Member can exercise wide
discretion as to tariff classifications.
Quantitative limits or tariff quotas on any product must be implemented in a non-
discriminatory manner with respect to like products, as per GATT Article XIII. It also
requires WTO members to assign shares in a manner as close as possible to what would be
the case if import restrictions and tariff quotas did not exist. MFN treatment in the

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implementation of quantitative constraints is provided for in Article XIII, which also serves to
supplement the rules established in Article I.
“States Trading Enterprises” means:
 Government-owned businesses that are run by a WTO member.
 WTO Members that buy or sell imports or exports from private companies that have
been awarded exclusive or special advantages.
Using their monopoly power, these companies risk violating the rules of international trade
by engaging in practices like imposing quotas or discriminating against the country of origin
of their imports. Members of the World Trade Organization are obligated by Article
XXVII of the GATT to adhere to the non-discrimination norms, which include the MFN rule.

Exceptions to the MFN principle

Regional Integration (GATT Article XXIV)
Trade within regions that have integrated through customs unions or free trade areas is
liberalised, while trade barriers with nations outside of the region or regions are maintained.
As a result, the MFN principle may be violated as a result of regional integration if it causes
differences in treatment between countries within and outside the region. This goes against
the liberalisation of trade and could have unintended consequences for countries beyond the
region. Therefore, regional integration may be permitted as an exception to the MFN
requirement only if the following conditions are met, as stated in GATT Article XXIV. The
first step is to eliminate tariffs and other trade obstacles for almost all regional trade. Second,
after regional integration, tariffs and other trade obstacles applied to non-regional countries
must not be higher or more restrictive than they were before.

Generalised System of Preferences

Commodities from poor nations can take advantage of reduced tariff rates than would be the
case under MFN status due to the Generalised System of Preferences (GSP). The Generalised
System of Preferences (GSP) is a set of preferences given to developing countries in order to
boost their export revenues and aid in their economic growth. The “Generalised System of
Preferences” (GSP) is outlined in a June 1971 resolution made by the GATT. The
“Differential and More Favourable Treatment, Reciprocity, and Fuller Participation of
Developing Countries” or “Enabling Clause” decision from the GATT in 1979 provides the
legal basis for the grant of GSP benefits. Among the many features of the GSP are: To begin,
preferential tariffs are not limited to countries that have a common political or historical bond
(like the countries of the British Commonwealth). Second, it only helps countries that are
struggling economically. Finally, it’s a perk industrialised nations hand down to their poorer
counterparts.

Member states not applying multilateral trade agreements (WTO Article XIII)
If either of the following two requirements is met, then “this Agreement and the Multilateral
Trade Agreement in Annexes 1 and 2 shall not apply as between any Member and any other

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Member,” as stated in the Marrakesh Agreement Establishing the World Trade Organization
(the WTO Agreement):
1. Earlier invocation of Article XXXV of GATT 1947, which was effective as between
founding Members Members of the WTO that were Members to GATT 19475, or
Article XXXV of GATT 1947 had been invoked and was effective as between original
Members of the WTO.
2. The Ministerial Conference must approve the agreement on the terms of accession
between a Member and another Member that has acceded under Article XII if the
Member not consenting to the application has notified the Ministerial Conference of
this fact prior to the approval of the agreement on the terms of accession.
A violation of the MFN principle occurs when a Member State fails to apply for benefits that
are available to other Members. To address issues that may arise as a result of accession, the
provisions of Article XIII were drafted. If the MFN norm were properly enforced, country B
would have to grant MFN status to all the other Members upon joining the Agreement, and
the other Members would have to grant the same to country B.
While country A is already a member of the WTO, it is possible that it might not choose to
have new member B inherit its rights and responsibilities as a WTO member. Due to the fact
that two-thirds of the current membership is enough to approve an applicant’s entrance to the
WTO, it is possible that nation A will be coerced into granting MFN status to country B.
Country A’s preferences can be honoured by WTO Article XIII, which prevents a WTO
partnership between Country A and Country B. However, if more than a third of the
membership, including country A, has reasons for not having a WTO relationship with
country B (in which case they will object to the accession itself), then WTO Article XIII
provides a method for the admission of country B by providing for non-application. U.S.
officials informed the General Council in January 1995 that their country will not be applying
the MTAs listed in Annexes 1 and 2 to Romania. However, the United States withdrew their
invocation in February 1997. Additionally, the United States informed Mongolia, the Kyrgyz
Republic, and Georgia that it would not apply the aforementioned accords to them. This
notification was withdrawn for Mongolia in July 1999, for the Kyrgyz Republic in September
2000, and for Georgia in January 2001.

National Treatment Principle

As a corollary to the principle of most-favoured-nation treatment (MFN), national treatment
(GATT Article III) is a cornerstone of the WTO Agreement. In accordance with the national
treatment rule, members cannot provide unequal treatment to similar imported goods and
similar domestic ones. Some clauses of the GATT and the TRIPS Agreement are very similar.
This rule is meant to prevent countries from using tariffs or other forms of non-tariff barriers
to try and counteract the impacts of other forms of protectionist trade policy. To illustrate the
latter, suppose that Member A lowers its import tariff on product X from 10% to 5%, only to
afterwards implement a 5% domestic consumption tax on imported product X, thus nullifying
the effect of the 5% reduction in tariff. With the national treatment rule in place, WTO

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members are required to treat imported goods no less favourably than they treat items of
national origin, effectively removing “hidden” domestic trade obstacles. To keep the scales of
justice in the international trading system in equilibrium, it is crucial that all parties adhere to
this concept.

GATT Article III

WTO members are bound by Article III of the GATT to treat all other WTO members as if
they were domestic customers. Members are prohibited from using tariffs, quotas, or other
quantitative restrictions on imports or domestic production as a means of protecting domestic
industry in accordance with Article III:1.
Article III:2 of the WTO Agreement states that WTO Members shall not discriminate
between imported goods and “similar” local goods, or between imported goods and “a
directly competitive or substitutable product,” with respect to internal taxes or other internal
charges. Article III:4 states that when it comes to domestic rules and regulations, Members
shall not treat imported items less favourably than they treat “similar products” of national
origin.
GATT panel reports have used a variety of criteria, such as tariff classifications, the product’s
end uses in a specific market, customer preferences, and the product’s features, nature, and
quality, to determine the resemblance of “like products.” Reports by WTO panels and the
Appellate Body both include the same basic notion.

Exceptions to Article III

While GATT’s national treatment principle is fundamental, the following are
exceptions:
Government procurement
One of the exceptions to the national treatment rule is government procurement, which is
allowed under GATT Article III:8(a). Members of the World Trade Organization allow for
this exemption because they value public procurement’s contribution to national
policymaking. There could be a need to create and buy items at home for security reasons, or
government procurement could be used as a policy instrument to favourably influence the
economy by favouring niche markets, domestic manufacturers, and cutting-edge
technologies.
While the GATT created an exception for government procurement from the national
treatment requirement, the Uruguay Round resulted in an Agreement on Government
Procurement that requires signatories to provide national treatment for government
procurement. While membership in the Agreement on Government Procurement is
encouraged, it is not required of WTO members.
In fact, most of the countries that have signed on are the ones that have the most advanced
economies. Therefore, the national treatment rule applies only to those who have signed the

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Agreement on Government Procurement, while the usual exception remains in effect for
everyone else.

Domestic subsidies
To avoid violating other sections of Article III and the Agreement on Subsidies and
Countervailing Measures, GATT Article III:8(b) permits the payment of subsidies only to
domestic producers as an exception to the national treatment requirement. Subsidies are
exempted from the rule since they are a valid instrument of policy and fall mostly within the
purview of national policymakers.
Yet, the Agreement on Subsidies and Countervailing Measures set stringent limits on the use
of subsidies due to the possibility of adverse effects on trade.

GATT Article XVIII:C

Promoting the construction of newborn businesses can help members in the early stages of
growth increase their standard of life, although this may require government backing, and the
goal may not be practically feasible with policies that conform to the GATT. In such a
circumstance, a country may use GATT Article XVIII:C to notify WTO Members and begin
discussions. The GATT’s Articles I, II, and XIII are the only ones with which these countries
are not authorised to take actions that are inconsistent with, but only after discussions have
been conducted and under particular constraints. In order to support native infant industries,
the GATT Article XVIII:C procedure permits both border measures and violations of the
national treatment commitments, in contrast to the trade restrictions for balance of payment
reasons in GATT Article XVIII:B.
Malaysia used GATT Article XVIII:C as justification for enforcing import limits on
polyethylene as part of its import permit system for petrochemical products.
Although Singapore initially complained to the WTO about this action by Malaysia, it later
withdrew its concerns. As a result, neither a panel nor the Appellant Body had the chance to
rule on the matter.

Other Exceptions to National Treatment

The exception on screen quotas of cinematographic films under Article III:10 and Article
IV is an example of an exception that is specific to national treatment. The national treatment
requirement is subject to the exceptions and waivers outlined in Articles XX and XXI of the
GATT and Article IX of the WTO.

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