Study of Most Favored nation (MFN) principle of WTO with

reference to the Brazil Vs. Spain coffee case.

Term paper

International Trade Law.

Submitted to:

Prof. Kumar Ingnam

Designation: Professor

Submitted by:

Aakriti Bakhadyo

B.A.LLB 4th year (Green zone)

Contents
Chapter 1: Introduction....................................................................................................................

1.1. Background.......................................................................................................................

1.2. Objectives:........................................................................................................................

1.3. Methodology:....................................................................................................................

1.4. Limitations:.......................................................................................................................

Chapter 2: Findings..........................................................................................................................

2.1. MFN provision in WTO Agreement.....................................................................................

2.1.1. General Agreement on Tariffs and Trade, 1994 (GATT)..................................................

2.1.2. General Agreement on Trade in service (GATS)..............................................................

2.2. “COFFEE-CASE”, BISD 28S/106-113................................................................................

Chapter 3: Analysis..........................................................................................................................

Chapter 5: Conclusion.....................................................................................................................

Chapter 6: References:.....................................................................................................................
 Chapter 1: Introduction
1.1. Background
Most favored nation simply means treating all the state equally. The second essential
principle of GATT is non-discrimination by importers across various foreign export sources.
MFN means treating partner equally on the principle of non-discrimination. “Most-Favored-
Nation” (“MFN”) treatment — 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” to all other Members. This is a bedrock principle of the WTO.

MFN in the GATT is a rule for both negotiations and renegotiation. In negotiating round,
when one GATT contracting party offers to Lower its tariff to increase the market access
available to foreign exporters in another GATT country, that same lower tariff and terms of
market access must be then granted to all other GATT countries on a nondiscriminatory,
MFN basis.1 It requires that the country which is the recipient of this treatment must receive
equal trade advantage as the most favored nation. In effect, a country that has been granted
MFN status may not be treated less beneficially than any other country with MFN status by
the promissory country.2

The concept of MFN treatment is not new. Prior to the GATT, an MFN clause was frequently
included in bilateral trade agreements, and as such, it contributed significantly to trade
liberalization. In the 1930s, however, the MFN principle's operation was restricted by
measures. These policies are claimed to have resulted in the partitioning of the international
economy into trade blocs. Lessons were gained from this blunder; during World War II, an
unconditional MFN clause was incorporated in the GATT on a multilateral basis, which has
helped to global trade stability.

Therefore, countries cannot typically discriminate between their trading partners under WTO
accords. If you provide someone a particular favor (such as a lower customs tax rate on one
of their items), you must reciprocate for all other WTO members. In essence, the MFN
principle obliges a country to refrain from discriminating among its trading partners.
Therefore, it has been a central pillar of trade policy. In the nutshell, the idea of MFN can be
presented in following main legal features:3
1
Dr. Ishita Chatterjee, International Trade law, Central law publication, 5th edition, 2020, p-61.
2
Narayan Prasad Sharma, Impression in international trade law, Lumbini prakasan, 2074, p-155
3
United nation conference on trade and development, United Nations, Newyork and Geneva, 2010,
https://unctad.org/system/files/official-document/diaeia20101_en.pdf
  It is a treaty-based obligation that must be contained in a specific treaty.
 It requires a comparison between the treatment afforded to two foreign investors in
like circumstances. It is therefore, a relative standard and must be applied to similar
objective situations.
 An MFN clause is governed by the ejusdem generis principle, in that it may only
apply to issues belonging to the same subject matter or the same category of subjects
to which the clause relates.
 The MFN treatment operates without prejudice to the freedom of contract and thus,
States have no obligation under the MFN treatment clause to grant special privileges
or incentives granted through a contract to an individual investor to other foreign
investors.
 In order to establish a violation of MFN treatment, a less favorable treatment must be
found, based on or originating from the nationality of the foreign investor.

1.2. Objectives:
An objective of this study is discussed below:

 To study about the WTO's Most Favored Nation principle.

 To analyze the notion of the MFN principle in the example of Spain Roasted coffee
case.

1.3. Methodology:
This study leans more toward a descriptive style where a researcher had adopted doctrinal
methods for collecting required data. This paper focuses on secondary sources of data which
includes books, articles, journals etc. Therefore, the sources of data are:

 Online articles
 Online journals
 Books
 Case laws.

1.4. Limitations:
This paper only covers the MFN concept. Furthermore, it provides an evaluation of the Spain
roasted coffee case, which is used as a reference to comprehend the notion of MFN.
 Chapter 2: Findings
2.1. MFN provision in WTO Agreement.
2.1.1. General Agreement on Tariffs and Trade, 1994 (GATT)
Article I: In relation to customs duties, charges, levying methods, rules, formalities, and
matters outlined in Article III, contracting parties must grant immediate and unconditional
advantages, favors, privileges, and immunities to products originating from or destined for
any other country, on par with similar products from all other contracting parties

2.1.2. General Agreement on Trade in service (GATS)

Article II: 1) Each Member must treat services and service suppliers of any other Member in
a manner no less favorable than it treats similar services and service suppliers of any other
country.

2)However, a Member can maintain a measure that deviates from this requirement if it is
listed in and meets the conditions of the Annex on Article II Exemptions.

3) The provisions of this Agreement do not prevent a Member from granting advantages to
neighboring countries to facilitate limited exchanges of locally produced and consumed
services in contiguous frontier zones.

2.2. “COFFEE-CASE”, BISD 28S/106-1134

Fact of the case: In 1979 Spain enacted a law regarding the collection of duties on imports of
unroasted coffee (compared with roasted coffee). Herein, Brazil informed that a new Spanish
law had introduced certain modifications in the tariff treatment applied to imports of
unroasted coffee, according to which imports into Spain of unroasted non-decaffeinated
"unwashed Arabica" and Robusta coffees (tariff No. 09.01A) were now subject to a tariff
treatment (7 percent ad. Val) less favorable than that accorded to "mild" coffee. Prior to this
new rule, there was no distinction in the tariff handling of unroasted coffee imports by Spain.
Brazil, as a major supplier of coffee to Spain, was concerned about the discriminatory nature
of the new tariff rates and requested consultation with Spain under Article XXII of GATT.

Main argument: The Brazilian representative contended that by imposing a 7% tariff on

imports of unroasted, non-decaffeinated coffee of the "unwashed Arabica" and Robusta
groups while granting duty-free treatment to coffee of other groups, the new Spanish tariff

4
“COFFEE-CASE”, BISD 28S/106-113, file:///C:/Users/Ripple/Downloads/text_19_spain-unroasted_coffee.pdf
regime was discriminatory against Brazil, which exports primarily "unwashed Arabica," but
also Robusta coffee, and thus violated Article I:1 of the General Agreement.

The delegate of Spain stressed that no contractual party was required to maintain its tariff
structure or levies on unbound products. Spain adopted the Brussels nomenclature, which
includes tariff headings but enabled each country to create sub-categories within those
headings if they so desired. As a result, Spanish authorities had the authority to develop
subcategories within a specific heading that best suited Spain's foreign trade characteristics,
while still adhering to previously agreed-upon binding duties. The classification criterion
employed was based on international organization classifications, such as the International
Coffee Organization (ICO).

Therefore, In order to ascertain the coverage of Article I:1 it was necessary, in the view of the
Spanish representative, to consider meaning of the term "like products" where Spanish representatives
argued that Although both "mild" and "unwashed Arabica" coffees belonged to the group of
Arabica, the differences in quality also existed between them, as a result of climatic and
growing conditions as well as methods of cultivation and above all the preparation because
aroma and taste, essential features in determining trade and consumption of these products,
were completely different in "washed" and "unwashed" Arabica coffees. Unlike Spain, Brazil
stated that, Coffee was one single product and that therefore one must be considered a “Like
product” as both mild and unwashed coffees come from the same species of plant.

Decision of the Panel: The Panel, therefore, in accordance with its terms of reference,
focused its examination on whether the various types of unroasted coffee listed in the Royal
Decree 1764/79 should be regarded as "like products" within the meaning of Article I:1.

The arguments put forth primarily concerned organoleptic differences arising from
geographical factors, cultivation methods, bean processing, and genetic factors. However, the
Panel deemed these differences insufficient justification for granting distinct tariff treatment.
It emphasized that variations in taste and aroma of agricultural products due to the mentioned
factors are very common.

Given the circumstances, the Panel decided that unroasted, non-decaffeinated coffee beans
classified in the Spanish Customs Tariffs under CCCN 09.01 A.1a, as revised by Royal
Decree 1764/79, should be considered "like products" under Article I:1. Therefore, the panel
decided that, since these were considered "like products," Spain's current tariff regime was
discriminatory.
 Chapter 3: Analysis
The general view of the MFN principle forbids the members to discriminate against the
contracting parties. From the above findings, we could analyze that Most-favored-nation
treatment (MFN), also called normal trade relations, guarantee of trading opportunity equal to
that accorded to the most- favored nation; it is essentially a method of establishing equality of
trading opportunity among states by making originally bilateral agreements multilateral.
Similarly, an MFN clause is governed by the ejusdem generis principle, in that it may only
apply to issues belonging to the same subject matter or the same category of subjects to
which the clause relates. Reference to this, a state hence cannot create a difference between
the very like product just on the basis of organoleptic difference arising from geographical
factors, cultivation methods, bean processing and genetic factors. Herein, these differences
are hence very much common that can be seen on every products and materials. As the panel
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.

There is possibility that some products may receive discriminatory treatment but it does not
mean that the discrimination is hence made in the invalid and irrational basis. Additionally,
like product means a product which is identical, that is to say, alike in all respects, to the
product under consideration, or, in the absence of such a product, another product which,
although not alike in all respects, has characteristics closely resembling those of the product
under consideration.

From the consumer's perspective, practically all coffee, whether roasted or soluble, was
marketed today in the form of blends, which included coffee from various groups in differing
quantities. Furthermore, in common parlance, the phrases kind, quality, and growth were
used interchangeably to refer to different grades of coffee. At the end, it is well defined and
single product that is used for drinking beverages.

Meanwhile, argument of Spain stressing upon the various unreasonable difference between
the same and like product is not reasonable. Thus, argument of panel stating that the
differences given by Spain is not so uncommon is hence so much valid which actually
supported the principle of National treatment. Overall, the analysis of the MFN principle in
the context of the roasted coffee case underscores the significance of non-discrimination and
equal treatment among trading partners. It emphasizes the importance of objective criteria for
tariff treatment and discourages arbitrary distinctions based on subjective factors. By
adhering to the MFN principle, countries can contribute to a more open, transparent, and
equitable global trading system that benefits all participants.

Chapter 4: Conclusion
Most favored nation principle by its term itself clarifies to favor all the states equally. The
case of roasted coffee emphasizes the idea of Most Favored Nation (MFN) treatment in
international trade. According to the MFN principle, any advantage, favor, privilege, or
immunity provided to a product originating in or intended for one nation must be instantly
and unconditionally extended to the same product originating in or destined for all other
countries. While arguments were made regarding organoleptic variances in coffee due to
regional variables, growing methods, processing, and genetics, the Panel determined that
these differences were not significant enough to warrant a different tariff approach. It noted
that differences in flavor and scent caused by agricultural variables were widespread and
were not a valid basis for differentiation. The case emphasizes the significance of treating
similar items from various countries equally, fostering justice and non-discrimination in the
marketplace.

Therefore, by adhering to the MFN principle, countries commit to treating all trading partners
equally, regardless of their economic size, political influence, or other factors. This principle
helps prevent trade wars, trade barriers, and discriminatory practices that can distort
international trade and hinder global economic growth. The MFN principle encourages
countries to engage in negotiations and liberalize their trade regimes, leading to greater
market access, increased competition, and improved efficiency in international trade. It
contributes to a more predictable and transparent trading system, fostering trust among WTO
members and promoting stability in global commerce.
 Chapter 5: References:
1. Kumar Ingnam, An introduction to world trade organization, Kathmandu school of
law.
2. Dr. Ishita Chatterjee, international Trade law, Central Law Chatterjee.
3. Narayan Prasad Sharma, Impressions in international trade law, Lumbini Prakasan.
4. F. Lavdari, “Principle of Most Favoured Nation: Description, Modern Evolution, and
Analysis of the Exceptionality of the
5. Principle in A Contemporary World”, Extsv. Rev., vol. 1, no. 1, pp. 16–29, Dec. 2021
4. F. Lavdari, principle of most favored nation: description, Modern Evolution and
Analysis of the exceptionality of the principle in a contemporary world, Dec 2021
https://www.researchgate.net/publication/356793540_Principle_of_Most_Favoured_Nati
on_Description_Modern_Evolution_and_Analysis_of_the_Exceptionality_of_the_Princip
le_in_A_Contemporary_World

5. “COFFEE-CASE”, BISD 28S/106-113,

file:///C:/Users/Ripple/Downloads/text_19_spain-unroasted_coffee.pdf
6. United nation conference on trade and development, United Nations, Newyork and
Geneva, 2010, https://unctad.org/system/files/official-document/diaeia20101_en.pdf