NATIONAL LAW INSTITUTE UNIVERSITY

KERWA DAM ROAD

BHOPAL

MOST FAVOURED NATION CLAUSE

&

ITS EXCEPTIONS

TRIMESTER: IX TRIMESTER

SESSION: 2018 – 19

SUBJECT: INTERNATONAL TRADE LAW

SUBMITTED TO: SUBMITTED BY:

PROF. SAUBHAGYA BHADKARIA VIPUL DOHLE

2016.BALLB.110

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 ACKNOWLEDGEMENT

I extend my gratitude to our Professor Saubhagya Bhadkaria Ma’am for giving me an

opportunity to make a project on this topic and for being a guiding force throughout this
submission and being instrumental in successful completion of this project.
The making of this project involved accessing large number of websites, reading many research
articles and sorting different case, this would have been impossible without the help of my
colleagues and friends who helped me in getting familiar with many websites and authors which
proved to be immensely helpful.
I have made my sincere effort to make this project, yet some mistakes might have crept in, I
apologize for the mistakes that may have taken place inadvertently

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 Table of Contents
ACKNOWLEDGEMENT.................................................................................................................................2
INTRODUCTION...........................................................................................................................................4
Most favoured nation Clause......................................................................................................................6
HISTORY...................................................................................................................................................6
ECONOMIC IMPLICATIONS......................................................................................................................7
ADVANTAGES..........................................................................................................................................8
LEGAL FRAMEWORK....................................................................................................................................9
GATT, 1994..............................................................................................................................................9
To understand the functioning of MFN under GATT, 1994 let us take an Example...............................10
ANY ADVANTAGE UNDER ARTICLE I GRANTED TO ANY COUNTRY....................................................11
SHALL BE ACCORDED "IMMEDIATELY ANDUNCONDITIONALLY”.......................................................11
TO“LIKEPRODUCTS”OFALL OTHER MEMBERS...................................................................................11
EXCEPTIONS TO MFN RULE........................................................................................................................12
General Exceptions................................................................................................................................12
Generalized system of Preferences (GSP)..............................................................................................13
Economic Emergency............................................................................................................................13
Regional Integration..............................................................................................................................14
Economic Development.........................................................................................................................14
Waiver Of MFN......................................................................................................................................14
Withdrawal of MFN status.........................................................................................................................15
INDIA - PAKISTAN......................................................................................................................................15
Before Pulwama Attack.........................................................................................................................15
After Pulwama Attack............................................................................................................................16

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 INTRODUCTION

To start with we would first know ‘What is WTO?’ and then we move to ‘What are the
principles underlining WTO?’ in brief.

The World Trade Organization (WTO) is a universal establishment that administers the
worldwide exchange runs between countries. The WTO depends on understandings marked by
most of the world's exchanging countries. The fundamental capacity of the association is to help
makers of merchandise and ventures, exporters, and merchants ensure and deal with their
organizations.

There are certain principles which govern the functioning of WTO namely:

1. Most favoured nation clause (will be discussed in detail in this project)

2. National treatment policy- This principle helps in maintaining equality between the
domestically produced goods and foreign goods in the market. It allows discrimination
with foreign goods till the time they have not entered into the market; thereafter both the
domestic and foreign goods need to be treated equally without any discrimination.

3. Reciprocity- According to this principle if any concession or advantage has been

advanced by one country to another, then the other country receiving this advantage must
revert it back with an equal concession or advantage to the first country. If one country
decreased its trade barriers for one country, other country must reciprocate by decreasing
its trade barriers for that particular country.

4. Transparency- under this principle of WTO, all the trade regulations and policies of a
particular country is made available to all other member nations of WTO to facilitate
them know the trade rules in that country.

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Such are the principles which form the foundation of the multi-lateral trading agreements under
WTO and all these principles aims for promoting open market, fair and equal opportunities to
every member nation, transparency and fairness in the system of trade and its regulations,
promoting efficiency, and the maximizing of consumer welfare.

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 Most favoured nation Clause
MFN is the bedrock principle of WTO which says that no country must be favoured against other
country. This is to say that if one country gives favourable treatment to one country with respect
to a particular issue, then such a favourbale treatment must be given to all other member nations
of WTO in respect of the same particular issue.

As a standard of open global law, it builds up the sovereign fairness of states concerning
exchanging strategy i.e. state’s sovereign equality with respect to trading policies. It embodies
non discrimination principle which is the most essential concept of WTO.

HISTORY

While MFN treatment conditions can be followed back to the twelfth century, they ended up
being regular highlights of numerous trade treaties during the eighteenth and nineteenth century.
The early conditions were very expansive, applying to a wide scope of issues. But the issue with
such MFN clauses was that they were conditional. The beneficiary state was required to grant
same concession to the state that granted it benefits. Therefore reciprocity was that condition to
be fulfiiled. Generally such a MFN status was given to other state through dual party or bilateral
agreements. Also with time emerged the two types of MFN that is, Conditional and
Unconditional MFN.

The unconditional MFN emerged during the other half of the 18th century. The Chevalier-Cobden
Treaty signed in 1869 between Great Britain and France is a prominent example.

The unconditional MFN trend was reversed after World War I and 1930- the Great economic
Depression. Discrimination among and against countries was an important elemnt of
protectionist policy followed by countries at that time. But such a discrimination often results
into resentment among countries, traders leading to economic as well as political conflicts.

The rebirth to Unconditional MFN was made under GATT, 1947 which then became the pillar of
multilateral trade agreements.

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“Draft articles on MFN” 1978 was not adopted by UN as Convention but it showed
acknowledging the importance of MFN by International Law Commission.

At present day, MFN find its application not only in trade in goods but also trade in services and
IPRs.

ECONOMIC IMPLICATIONS

1. Increased efficiency in world economy- MFN helps a country to import any product from
the most efficient supplier. For example, in the event that nation B can supply item X at a
lower price than nation C, nation A can increase its economic efficiency by importing it
from nation B. Assuming, nation A imposes higher tax rates to product X from nation B
than to item X from nation C, nation A will have to import item X from nation C, despite
the fact that nation C is not an efficient supplier. This mutilates exchange and lessens the
welfare of country A and the economic efficiency of the whole world. Assuming that the
MFN is connected between the three nations, at that point nation A will levy its taxes
similarly and accordingly fundamentally import item X from country B since it is less
expensive.
2. Stabilization of Multilateral trade agreements- The MFN demands that ideal treatment
given to one country must be unequivocally allowed to all different countries. Trade
restrictions, as well, should likewise be connected similarly to all. By stabilizing the trade
system, MFN increases consistency, predictability and in this way expands trade and
investment.
3. Reduction of the Cost of Maintaining the Multilateral trade agreements- The foundation
and support of the MFN rule empowers WTO Members to decrease their observing and
negotiation costs for disadvantageous treatment.

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ADVANTAGES

MFN status is fundamentally imperative for smaller and developing nations for a few reasons. It
gives them access to the larger market of world. It brings down the expense of their exports since
trade barriers are the least given and are equal for all. That makes their items more competitive in
the world economy

Distinctive taxes and customs need not be determined for each import since they are all the same
for all the WTO members.

It decreases the evil impacts of trade protectionism followed by a particular nation. Despite the
fact that domestic products will be effected and they may lose their secured position in the
domestic market but this will actually help them in progressing and stand as a competitor in the
world market.

DISADVANTAGES

The most important drawback of Most Favored Nation status is the country should grant
equivalent status to every single country which is a member of the agreement or WTO. This
implies they can't shield their nation's industries from less expensive goods produced by other
countries. A few industries even get wiped away in light of the fact that they can't compete in the
world market with other more efficient industries. It's one of the most disadvantage of MFN
being read impliedly into agreements.

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 LEGAL FRAMEWORK

Being an important principle of WTO, MFN has been included in various provisions of
Agreements establishing WTO like GATT, TRIMs, GATS. The principle of MFN has been
invariably mentioned in these agreements under various articles.

GATT, 1994

GATT Article I provides that WTO Members need to extend MFN treatment to ‘like products’
of other WTO Members regarding tariffs on exports and imports

“any advantage, favour, privilege or immunity granted by any contractingparty to any product
originating in or destined for any other country shallbe accorded immediately and
unconditionally to the like productoriginating in or destined for the territories of all other
contracting parties.”1

GaTT, 1994

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To understand the functioning of MFN under GATT, 1994 let us take an
Example
There are three countries involved in trade of product X:

Country A (member of WTO)

Country B (member of WTO)

Country C (not a member of WTO)

A used to impose 20% tariff on import of X but after WTO negotiations A agreed to impose 0%
tariff on X’s import.

Some inferences to be drawn:

 This 0% tariff has to be extended to all WTO members including B because all member
nations must enjoy most favourable conditions.
 Here A can impose 10% tariff on import from C but has to give duty free access to B.
 But A cannot allow duty free access to C and impose 10% tariff on imports from B
because all WTO members must be benefitted from the best treatment given to “any”
country irrespective of its status with respect to WTO.

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ANY ADVANTAGE UNDER ARTICLE I GRANTED TO ANY COUNTRY

As in above example, now A wish to eliminate some import formalities applicable to import of
X. A can not in particular do so for C. ‘Any Advantage’ under ArticleI of GATT covers a wide
range of measures with respect to import and exports regulations. Therefore all formalities
relating to imports and exports are included therein and hence A has to extend the advantage of
elimination of import formalities to all the member Nations.

SHALL BE ACCORDED "IMMEDIATELY ANDUNCONDITIONALLY”

It means that if a WTO member grants any advantage to imports or exports from any country,
wheter WTO member or not, it will be “immediately aand unconditionally” granted to all the
member nations.

Also unconditional MFN status has been referred in GATT and hence there is no requirement of
any kind of reciprocity.

TO“LIKEPRODUCTS”OFALL OTHER MEMBERS

The most important element of MFN is that ‘like products’ must be treatedequally without any
discrimination. If products are not like products then they can be treated differently without any
hindrance.‘Like Products’- this term has not been defined in GATT or any other agreement
establishing WTO.

Criteria to determine the likeness of product is given under various WTO cases as follows:

 The physical characteristics of the products (nature, properties and quality)

 The products’ end uses
 Consumers’ tastes and habits
 The customs classification of the product

This list is not exhaustive and may include more.

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 EXCEPTIONS TO MFN RULE
Due to protection to be advanced to the issues that run in conflict to liberalization of trade.
The essence of MFN rule has been depriving and one such example of issues to be protected
is societal needs.

For such a scenario arising or might have arised in future, exception provisions were inserted
into GATT which may allow the member nation to adopt such measures which are not
consistent with WTO principle of non discrimination.

The exception are numerous but some of the most common exceptions are:

 GATT ArticleXX- General Exceptions

 Generalized system of preferences
 Economic Emergency
 Regional Integration
 Economic Development
 Waiver of MFN

General Exceptions
Under ArticleXX of GATT, ten general exception have been mentioned from (a)-(j), and any of
the mentioned exception can be used to bypass the MFN rule and hence any advantage for a
particular member country need not be granted to all other WTO members.

Some of those general exceptions are:

1. For the protection of public morals

2. To protect human, animal or plant life or health
3. Any measure relating to imports or exports of gold or silver
4. For complying with the laws which are not inconsistent with provisions of WTO or
GATT.

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Generalized system of Preferences (GSP)

This system is beneficial for developing and under developed countries. Under this exception,
the products manufactured in developing or under developed nations are being granted lower
tariff rates as compared to rates imposed for MFN nations.

This GSP has been defined under the “Enabling case”2 of GATT.

The benefit to be provided under GSP is not to be given to developed countries.

Therefore this benefit is given to the developing nations unilaterally by the developed nations.

Economic Emergency

Working in derogation to MFN principle can be justified by situation of Economic emeregency.

This is provided for under ArticleXIX of GATT.

Under this article, a nation is allowed to make measures inconsistent with WTO if any huge
imports of a product will be detrimental to the domestic industry.

So to curb this situation, import duties may be increased to protect the domestic economy but
only for temporary time period. This temporary period is decided according to the capability of
domestic industry to adjust to the new realms of world economy.

2
See the decision of the members of 28th November 1979, BISD 26S/203

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Regional Integration

Regional integration through custom associations/ unions or free trade areas liberalizes trade
among nations inside the area, while keeping up trade barriers with nations outside the area or
areas. Regional integration therefore may prompt outcomes that are as opposed to the MFN rule
because countries inside and outside particular area are dealt differently. This may have a
negative impact on countries outside the area since they won’t be part of liberalizing trade in that
area

Therefore ArticleXXIV of GATT allows regional integration to be used as an exception of MFN

rule. Two conditions must be satisfied, firstly, tariff barriers need to be eliminated in a particular
are and secondly, tariff barriers must not be higher or restrictive than the earlier tariffs imposed
in that area.

Economic Development

This exemption of MFN rule of not discriminating enables different measures to be embraced in
light of a legitimate concern for developing nations so as to encourage their integration into the
world trade and to advance their economy. This positive exertion for developing nations right
now attempted by the WTO takes numerous structures and is documented in practically all WTO
agreements. The WTO law arrangements for this effect are called special and differential(S&D)
treatment provisions. It ought to be noticed that the S&D treatment arrangements are not
compulsory.

Waiver Of MFN

Under ArticleIX of WTO, any member nation with the consent of 3/4th of all member nations
may waive of any obligation under WTO agreement but for this it has to prove exceptional
circumstances. Also such agreement of waiver must mention the date on which such a waiver
will terminate.

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 Withdrawal of MFN status

INDIA - PAKISTAN
The role of politics is very much recognized in South Asia while dealing with Trade. The latest
news of Pulwama attack, where 40 CRPF personnels lost their life, has led India to withdraw
MFN status from Pakistan.

Since India and Pakistan are two such countries with huge potential for trade but the two don’t
have good trade relations with each other due to regular issues between them.

Before Pulwama Attack

We all know that WTO was established in the year 1995, and just after passing of an year that is
1996, India granted MFN status to Pakistan. Since unconditional MFN is recognized under WTO
and GATT, hence there is no requirement of REcciprocity by the beneficiary nation.

Pakistan was granted MFN status by India but the same was not reciprocated by it. Though in
2011, cabinet decision was made to grant MFN to India but the same was not preceded further.
Two reasons for not granting MFN to India may be, first, because of trade deficit and granting
MFN would widen that deficit more by increase in imports from India. Second, due to fear of
political backlash i.e. negative political returns in Pakistan.

In 2012, Pakistan put forward a step to increase trade relations with India by bringing out a
negative list. This negative list mentioned such products which should not be imported from
India, meaning thereby all other products except which were mentioned in the list can be
imported from India.

Pakistan then introduced Non- Discriminatory Market Access for India but no step was taken
ahead to accomplish such project.

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After Pulwama Attack
The government in response to the terror attack at Pulwama has withdrawn the MFN status given
to Pakistan in 1996. This MFN withdrawal is actually withdrawal of lower import dutygiven to
imports of Pakistan. Now india is in a dominant position to increase import duty on its whims
and it will not be considered as violating WTO and GATT.

The extent of implication of such withdrawal is on imports from Pakistan which has declined
suddenly.

On 16/02/2019, government of India has raised custom duty on all imports from Pakistan to
200%. Such a increase in import duty will result into minimal imports from Pakistan.

The government took security interest under Foreign Trade Act as a reason to safeguard its
decision of raise in import duty.

We may hope for Retaliation from Pakistan as it has done many times. It may also increase
custom duty on India’s exports and may even increase number of items in Negative list. In any
case the Pakistani Industries will suffer as they depend a lot on raw materials exported from
India.

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 WEBLIOGRAPHY

 www.wikipedia.com

 www.meti.go.jp/english/report/data/2016WTO/pdf/02_02.pdf

 mpra.ub.uni-muenchen.de/41237/1/MPRA_paper_41237.pdf

 www.investopedia.com/terms/w/wto.asp

 www.thebalance.com/most-favored-nation-status-3305840

 ecampus.wto.org/admin/files/Course_385/Module_1562/ModuleDocuments/BP-L1-R1- E.pdf

 ecampus.wto.org/admin/files/Course_378/Module_1370/ModuleDocuments/M2_E.pdf

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