1|Most Favoured Nation (MFN)

Most Favoured Nation (MFN)

1.1 INTRODUCTION........................................................................................................................................ 1
1.2 HISTORY OF THE MFN PRINCIPLE ............................................................................................................. 1
1.3 MODES OF DISCRIMINATION ................................................................................................................... 2
1.3.1 DE JURE DISCRIMINATION .................................................................................................................................. 2
1.3.2 DE FACTO DISCRIMINATION ................................................................................................................................ 2
1.4 MOST FAVOURED NATION OBLIGATIONS UNDER THE GATT, 1947 .......................................................... 2
1.4.1 SCOPE OF THE MFN PRINCIPLE UNDER THE GATT, 1947 ........................................................................................ 2
1.4.2 TYPES OF MEASURES COVERED UNDER GATT ........................................................................................................ 3
1.4.3 CONDUCT WHICH IS DISCRIMINATORY BY NATURE ................................................................................................... 3
1.4.4 PRODUCT MUST BELONG TO A WTO MEMBER ...................................................................................................... 3
1.4.5 PRODUCT MUST BE A “LIKE” PRODUCT ................................................................................................................. 4
1.5 EXCEPTIONS TO THE MFN PRINCIPLE ....................................................................................................... 4

1.1 Introduction

The principle of Most Favoured Nation (popularly known as the MFN

treatment) is a fundamental principle of trade ensuring non-discrimination between

“like‟ goods and services.

The clause relates to providing the same benefit and concession to one

Member, in case benefits and concessions are provided to another Member. MFN

hence calls for non-discrimination amongst Members inter-se. In this sense, a

nation is bound to treat every other nation as its favourite or most favoured nation.

Thus, with respect to the GATT, a Contracting Party is expected to treat every

other Contracting Party as its favourite nation.

1.2 History of the MFN principle

The MFN origin can be traced back to the European trade alliances during

World War 1 and their discriminatory practises. Realising the importance of MFN,

countries negotiated various bilateral and plurilateral agreements. After the birth of

league of Nations, the MFN principle got major boost.

1.3 Modes of discrimination

In order to obtain a thorough understanding of the principle of most-

favoured nation, it is vital to understand the forms of discrimination. Discrimination

may either be de jure or de facto.

1.3.1 De jure discrimination

De jure discrimination means, discrimination spelt out by law. Impacts of

Laws or Regulations and Tax regime that discriminate between goods and services

provided by two countries even though they are “alike” is considered to be De jure

discrimination.

1.3.2 De facto discrimination

De facto discrimination is discrimination that is not as explicit as de jure

discrimination and is implicit in the type of measures used. Discrimination must

operate so as to distort the conditions of competition between goods and services

that are alike. Though there are multiple rules, it necessarily doesn’t mean that

there has been a discrimination.

1.4 Most Favoured Nation Obligations under the GATT, 1947

GATT 1947 invokes the principle of Most Favoured Nation Treatment,

prohibiting any de-jure or de-facto discrimination between the Contracting Parties.

It provides for non-discrimination among trading partners. The principle is

applicable to every governmental measures in the form of customs duties and

charges and their levying, the rules and formalities applicable in the importation

and exportation of goods.

1.4.1 Scope of the MFN principle under the GATT, 1947

The scope of discrimination is clearly enunciated in the dispute of The

Belgian Family Allowances. In this dispute, it was held that the charges levied on
3|Most Favoured Nation (MFN)

exports on the only grounds that the importing countries like Denmark and Norway

did not have a similar family allowance policy like that of Belgium, was unjustified.

The Panel stated that, only such classification is permitted that is based on the

characteristics of the product and not based on the characteristics of the country

where they originate.

1.4.2 Types of measures covered under GATT

(1) Custom duties and charges of any kind which are requisite for free

and fair trade must be imposed on or applied in connection with the exportation of

goods and services.

(2) The charges imposed on the internal transfer of payment for imports

and exports must be uniform for all countries.

(3) Ad voleram duties must be imposed on products that are exported or

imported and not Specific duties.

(4) Rules and formalities with respect to importation and exportation of

like products must be uniform for all Members so as to maintain a level playing

field.

(5) All laws, regulation and requirements imposed on the goods and

services must be uniform for like products of all countries.

1.4.3 Conduct which is discriminatory by nature

If a Contracting Party applies a measure that provides an advantage, favour,

privilege or immunity on either exportation or importation of a product, such

measure is discriminatory.

1.4.4 Product must belong to a WTO Member

According to GATT, any preferential treatment given to one country must be

given to all other WTO members. The implication of this statement is far reaching.

Thus,
4|Most Favoured Nation (MFN)

(1) WTO members are entitled to get same preferential treatment given

to another country, even if the said country is not a WTO member.

(2) Such preferential treatment must be extended to all other WTO

members immediately and unconditionally.

1.4.5 Product must be a “like” product

In order to prove that the principle of MFN has been violated, the aggrieved

party must first prove that the products are “like”. In Border Tax Adjustment case,

the Panel laid down following guidelines to determine “like goods”:

(i) the property, nature and quality of the products

(ii) the end uses of the product

(iii) consumer tastes and habits

(iv) tariff classification of the products

Hence, the physical properties that makes consumer perceive as serving

same use and as an alternative can be considered as “like goods” for the purpose

of international tariff.

In the Japan Alcoholic Beverages case, the Panel held that though local Soju

and imported Vodka differed in the manufacturing process, their end use and

physical characteristics were similar, and hence Japan had violated MFN principle.

1.5 Exceptions to the MFN principle

The MFN obligation is not sans exceptions. In addition to the general

exceptions7 and the security exceptions8 to the obligations of GATT, the existence

of customs union and free trade areas (FTA‟s) are also justification to measures

that are otherwise GATT inconsistent.

(i) Countries can set up a free trade agreement that applies only to

goods traded within the group and thereby discriminating against goods from

outside.
5|Most Favoured Nation (MFN)

(ii) They can give developing countries special access to their markets.

(iii) A country can raise barriers against products that are considered to be

traded unfairly from specific countries

(iv) Preferential treatment can be extended to the exports of the

developing countries.

---------------------------------------------------------------------------------------------