UNIVERSITY INSTITUTE OF LEGAL STUDIES

PANJAB UNIVERSITY, CHANDIGARH

A Project Report submitted to UILS, as a part of curriculum of B.Com.LLB (Hons.) in the

subject of INTERNATIONAL TRADE LAW on the topic of:
“MOST FAVOURED NATION”

Submitted to: Submitted by:

Ms. Mahima Harmanpreet Kaur
UILS, PU B.com. LLB (Hons.)
Chandigarh Section – D
Semester – VIII
Roll No. 222/20

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ACKNOWLEDGEMENT
Presentation, inspiration and motivation have always played a key role in the success of any venture. The
completion of this project requires a lot of guidance and assistance from many people.
Primarily, I would like to thank God for being able to complete this project with success. I would like to
express my sincere gratitude to my professor, Ms. Mahima, University Institute of Legal Studies,
Chandigarh who gave me the opportunity, encouragement, valuable suggestions and fruitful guidance to do
this project. Class lecture helped me a lot to understand the topic and complete the project successfully on
the topic, “Inquiry and Procedure under Competition Act, 2002.”
I feel to acknowledge my indebtedness and deep sense of gratitude to the entire faculty of department of
legal studies, from where I learnt the basics of law. All the informal discussions and intellectual support
helped me in the entire duration of this work.

HARMANPREET KAUR

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TABLE OF CONTENTS
 INTRODUCTION………………………………………..…………………….………… 5
 BACKGORUND/HISTORY…………………………………….……….……………… 6-7
 LEGAL FRAMEWORK
 GATT Provisions regarding the MFN Principle………………………………….. 7-10
 Advantages of MFN Principle…………………………………………………….. 10
 Disadvantages of MFN Principle…………………………………………….……. 11
 EXCEPTIONS TO THE GENERAL PRINCIPLE OF MFN TREATMENT…………… 11-14
 MFN PROVISIONS OUTSIDE OF GATT 199……………………………….………… 14-15
 REVOCATION OF MOST FAVOURED NATION STATUS.....……………………....... 15
 SIGNIFICANCE OF MOST FAVOURED NATION PRINCIPLE………….………...... 15-16
 MOST FAVOURED NATION AND WTO………………………..…………….………. 16-17
 MAJOR CASES WITH REGARD TO MOST FAVOURED NATION POLICY……..... 18-21
 RECENT UPDATE ON MOST FAVOURED NATION………………...………………… 21
 CONCLUSION…………………………………………………………….………………... 22
 BIBLIOGRAPGHY…………………………………………………………………………. 23

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LIST OF CASES
Canada – Measures Regarding Automobiles (DS139)…………………………….……….. 18-19
EU– Differential provision of tariff preferences to developing countries (DS246)………… 20-21
EU – Measures Regarding Bananas (DS27)………………………………………………… 19-20
Spain – Unroasted Coffee case……………………………………………………………… 7-8

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INTRODUCTION
The most favoured nation clause is a term that is given to a certain country, and it implies that the recipient
of the favourable treatment must receive equal trade advantages as the most favoured nation of a country’s
trade policy. It essentially means that nay country with “the most favoured” nation status cannot be treated
any less advantageously as other countries within the World Trade Organization. The WTO promotes equal
treatment of all countries regarding trade agreements.

For example, if a country within the World Trade Organization would normally give a tariff of 5% to one
country. The most favoured nation clause requires them to apply a 5% tariff to all member countries.

Along with the principle of national treatment, which is a principle of international law that requires the
treatment of foreigners and local to be equal, the most-favoured-nation clause is a foundation of WTO’s
trade law. The organization’s trade law is meant to promote non-discriminatory trade policies between
member countries. An exception to the most-favored-nation clause may be granted to developing countries
that can receive more favourable than the most favoured nation.

Favoured treatment includes the use of trade benefits, such as:-

 Low tariffs;
 High import quotas;
 Free trade agreements;
 Custom unions.

There is a debate in legal circles whether MFN clauses in bilateral investment treaties include only
substantive rules or also procedural protections1. The members of the World Trade Organization (WTO)
agree to accord MFN status to each other. In effect, a country that has been accorded MFN status may not be
treated less advantageously than any other country with MFN status by the promising country.

Under the rules of WTO, a member country is not allowed to discriminate between trade partners and if a
special status is granted to one trade partner, the country is required to extend it to all members of WTO. In
a nutshell, MFN is a non-discriminatory trade policy as it ensures equal trading among all WTO member
nations rather than exclusive trading privileges.

1
McCloure, Mike (2011-07-25). “Most Favoured Nation Clauses – No favoured view on how they should be interpreted”. Kluwer Arbitration Blog. Archived
from the original on 2011-10-07. Retrieved 2011-07-26.
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BACKGROUND/HISTORY
“Most-Favoured-Nation” (“MFN”) treatment requires members to accord the most favourable tariff and
regulatory treatment given to the product of any one member at the time of import or export of “like
products” to all members. This is a founding principle of the WTO. Under the MFN rule, if WTO member X
agrees in negotiations with Z, which need not be a WTO member, to reduce the tariff on product P to 5%,
this same “tariff rate” must also be extended to all other WTO members. In other words, if a country
provides favourable treatment to one country, it must provide the same favourable treatment to all member
countries. Therefore, the essence of MFN treatment is non-discriminatory treatment by providing the same
conditions given to one member to other members. In the context of trade, it is a principle that prohibits
different treatment given to the same products depending on the country of origin.

The concept of MFN is a long history. The earliest form of the MFN status can be found as early as the 11th
century. Today’s concept of the MFN status starts to appear in the 18th century, when the division
conditional and unconditional MFN status began2. Prior to the GATT, an MFN clause was often included in
bilateral trade agreements and, as such, contributed greatly to trade liberalization.

In the early days of international trade, “Most-Favoured-Nation” status was used on a dual-party, state-to-
state basis. A nation could enter into a “MFN” treaty with another nation. In the Treaty of Madrid (1667),
Spain granted England “most favoured nation” trading status3. With the Jay Treaty in 1974, the US also
granted the same to Britain. In the Joseon-United States Treaty of 1882, the Korean kingdom Joseon was
compelled by the United States to give it MFN status4.

However, in the 1930s, countries around the world took protectionist measures because of the impact of the
world depression. Various systems to limit MFN treatment, including trade-restrictive measures by the
British Commonwealth of Nations (commonly known as the sterling bloc) and the French franc bloc. After
the World War II, tariff and trade agreements were negotiated by all interested parties through the General
Agreement on Tariffs and Trade (GATT), which ultimately resulted in World Trade Organization in
1995.The WTO requires members to grant one another “most favoured nation” status. A “MFN” clause is
also included in most bilateral investment treaties concluded between capital exporting and capital importing
countries after World War II.

2
Yi, Seong Deong (2004). Commemorative Edition in Honour of Professor Paik, Choong-Hyun on his Retirement: Articles, Most-Faoured-Nation Treatment: Its
Historical Developments and Concept. Vol. 11 No. 1
3
The Economist: Weekly Commercial Times, Banker’s Gazette and Railway Monitor, Volume 1. Economist Newspaper Limited. 1845. p.551.
4
Jo, Kyu-hyun (2023), Jo, Kyu-hyun (ed.), “The First Unequal Treaties and the Forced Opening Of Korean Ports”, Japanese “Judicial Imperialism” and the
Origins of the Coercive Illegality of Japan’s Annexation of Korea: A Study of Unequal Treaties between Korea and Japan, 1876-1910, Singapore: Springer
Nature, pp.27-74, retrieved 2023-05-06.
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Considering the background of MFN, the treatment in particular under MFN clause must be recognized as a
fundamental principle for sustaining the multilateral trading system. Regional integration and related
exceptions must be uniformly administered so as not to undermine the MFN principle.

LEGAL FRAMEWORK

GATT PROVISIONS REGARDING THE MFN PRINCIPLE

Most Favoured Nation treatment is provided for in GATT Articles I, III: 7, V, and XVII.

1. GENERAL MOST-FAVOURED-NATION TREATMENT (GATT ARTICLE I: 1)

GATT Article I:1 requires WTO members to extend MFN treatment to “like products” of other WTO
members with respect to tariffs, regulations on exports and imports, internal taxes and charges on imported
products, and internal regulations. In other words, “like” products from all WTO members must be accorded
the same treatment as the most advantageous treatment accorded by a member to the products of any one
state or territory under the jurisdiction of that member.

LIKE PRODUCTS: The meaning of “like products” raises an issue. There are only a few determinations in
WTO dispute settlement cases, and determinations made in the former ATT era are used as precedents for
interpretation.5 According to the Panel on discriminatory tariff treatment of unroasted coffee by Spain, “like
products” are determined by the following three factors6:-

i. Physical characteristics of the products;

ii. Their end-users;
iii. Tariff regimes of other members.

In this case, different tariff rates were established for four varieties of coffee beans, and the issue was
whether or not these four varieties of coffee beans were “like products”. Based on the above mentioned three
factors, the Panel determined that four varieties of coffee beans were “like products” because of following
reasons:-

i. Most of these four were sold in the form of blends;

ii. Consumers regarded these four varieties as a single product intended for drinking;

5
Rudiger Wolfrum, Peter-Tobias Stoll, Holger P. Hestermeyer (ed.) “WTO – Trade in Goods” (Maz Planck Commentaries on World Trade Law), describing the
above-mentioned tow cases; Peter Van den Bossche and Werner Zdouc “The Law and Policy of the World Trade Organization: Text, Cases and Materials”,
describing only the Spain-Unroasted Coffee case.
6
Panel Report, Spain – Unroasted Coffee case.
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 iii. The tariff regimes of many GATT contracting parties did not apply different tariff rates to these four
varieties7.

Therefore, the Panel concluded that establishing different rates for certain varieties of unroasted coffee
beans was in violation of the MFN treatment obligations.

An importing country, by setting different tariff rates to “like products” of one exporting country over
another – then it would clearly violate GATT Article I: 1. However, GATT Article I: 1 violations can also
occur when the discrimination against the product of another member is less apparent, such as when an
importing country accords differentia; treatment among products that are considered to be like products.

This is also often defined as de facto discrimination. One such case involved Canada’s automobile measures.
In this case, Canada’s system, which eliminated tariffs on imported automobiles from the United States
under certain conditions, was at issue. The system was open to companies of other countries and could be
used by meeting certain conditions. However, in actual, the acceptance of new applications was suspended
after the conclusion of the US-Canada FTA, making it practically available only to the US companies. The
Panel and the Appellate Body both determined that the measures were de facto discrimination and
concluded that they were in violation of GATT Article I: 1.

2. NON-DISCRIMINATORY ADMINISTRATION OF QUANTATIVE REGULATION RELATING

TO THE MIXTURE, PROCESSING OR USE OF PRODUCTS (GATT ARTICLE III: 7)
GATT Article III: 7 stipulates that no internal quantitative regulation relating to the mixture, processing or
use of products in specified amounts or proportions shall be applied in such a manner as to allocate any such
amount of proportion among external sources of supply. This provides for MFN treatment in the
administration of quantitative restrictions relating to the mixture, processing or use of products, and
supplements the disciplines under Article I.

3. NON-DISCRIMINATORY ADMINISTRATION OF FREEDOM OF TRANSIT (GATT

ARTICLE V)
GATT Article V stipulates that there shall be freedom of transit through the territory of each contracting
party, via the routes most convenient for international transit, for traffic in transit to or from the territory of
other contracting parties and that no distinction shall be made which is based on the flag of vessels, the place

7
Ibid., Paras 4.7-8.
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of origin, departure, entry, exit or destination, etc. This is MFN treatment in freedom of transit, and
supplements GATT Article I.

4. NON-DISCRIMINATORY ADMINISTRATION OF QUANTITATIVE RESTRICTIONS (GATT

ARTICLE XIII)
In order to ensure fairness among countries in applying quantitative restrictions, GATT Article XIII
stipulates that when imposing quantitative restrictions or tariff rate quotas on any product, they shall be
imposed non-discriminatory on like products of all countries, and that in applying import restrictions to any
product, contracting parties shall aim at a distribution of trade in such product approaching as closely as
possible the shares which the various contracting parties might be expected to obtain in the absence of such
restrictions, based upon the proportions for a previous representative period etc. This supplements GATT
Article I. The part that applies to quantitative restrictions and tariff rate quotas provides for non-
discriminatory treatment, the essence of MFN treatment as described above. It provides that no like product
of any country shall be given exemptions from quantitative restrictions or tariff rate quotas.

However, GATT Article XIII, which states that contracting parties shall “aim at a distribution of trade in
such product [subject to import restrictions and tariff rate quotas], approaching as closely as possible the
shares which the various contracting parties might be expected t obtain in the absence of such restrictions”,
requires attention. This is, beyond the application of import restrictions and tariff rate quotas, applying
formally equal ratios for permitted import volumes may constitute a violation of GATT Article XIII.

For example, the Panel on “United States – Definitive Safeguard Measures on Imports of Circular Welded
Carbon Quality Line Pipe from Korea” determined that the imposition by the United States of import
restrictions of 9,000 tons uniformly on line pipes from various exporting countries without taking into
consideration the principle of the above-mentioned shares by country when implementing safeguard
measures was in violation of GATT Article XIII. In this respect, the provision differs, for instance, from the
MFN treatment obligation, which requires in essence the application of the same tariff rates/laws.

5. STATE TRADING ENTERPRISES (GATT ARTICLE XVII)

GATT Article XVII defines “State trading Enterprises” as:-

i. State enterprises established or maintained by a WTO member;

ii. Private enterprises granted exclusive or special privileges by WTO members that make purchases or
sales involving either imports or exports.

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By using their monopolistic status, such enterprises could operate against the principles of international
trade by discriminating against an importing country or importing quantitative restrictions, etc. GATT
Article XIII requires WTO members to act in accordance with the general principle of non-discriminatory
treatment, including the MFN treatment obligation (ArticleXVII: 1(a)), while at the same time it provides
that they must act solely in accordance with commercial considerations (Article XVII: 2(b)).

ADVANTAGES OF MFN PRINCIPLE

Trade experts consider MFN clauses to have the following benefits:-

 INCREASE TRADE CREATION AND DECREASES TRADE DIVERSION: A country that

grants MFN on imports will have its imports provided by the most efficient supplier if the most
efficient supplier is within the group of MFN. Otherwise, that is, if the most efficient producer is
outside the group of MFN and additionally, is charged higher rates of tariffs, then it is possible that
trade would merely be diverted from this most efficient producer to a less efficient producer within
the group of MFN (or with a tariff rate of 0). This leads to economic costs for the importing country,
which can outweigh the gains from free trade.
 PARTICIPATION OF SMALLER COUNTRIES: MFN allows smaller countries, in particular, to
participate in the advantages that larger countries often grant to each other, whereas on their own.
Smaller countries would often not be powerful enough to negotiate such advantages by themselves.
 GRANTING MFN DOMESTIC BENEFITS: Having one set of tariffs for all countries simplifies
the rules and makes them more transparent. Theoretically, if all countries in the world confer MFN
status to each other, there will be no need to establish complex and administratively costly rules of
origin to determine which country (that may contain parts from all over the world) must be attributed
to for customs purposes. However, if at least one nation lies outside the MFN alliance, then customs
cannot be done away with.
 RESTRAINS OBTAINING PROTECTIONIST MEASURES: MFN restrains domestic special
interests from obtaining protectionist measures. For example, butter products in country X may not
be able to lobby for high tariffs on butter to prevent cheap imports from developing country A,
because, as the higher tariffs would apply to every country, the interest of X’s principal ally Y might
get impaired

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DISADVANTAGES OF MFN
1. ALL MEMBERS OBTIAN THE SAME ADVANTAGE: The disadvantage of MFN status is the
nation must also award the same trade benefits to all other members of the agreement of the World
Trade Organization (WTO).
2. BECOMES A VICITM OF SHADY TRADE PRACTICES: Occasionally, the nations fund their
domestic industries, allowing subsidized firms to export at extremely low prices. This practice is
termed dumping and can get a nation in trouble with the WTO.
3. HIGH TARIFFS FOR DEVELPOING NATIONS: Developing nations have brought to the notice
of the WTO that they still face very heavy tariffs, termed tariff peaks, on products like fish and its
products, textiles, and clothing.

EXCEPTIONS TO THE GENERAL PRINCIPLE OF

MFN TREATMENT

GATT provides for exceptions with respect to the provisions concerning MFN treatment.

CUSTOMS UNIONS/FREE-TRADE AREAS (GATT ARTICLE XXIV)

In order to strengthen economic relation between two countries, regional trade agreements are permitted for
customs unions/free-trade areas under certain conditions. These agreements liberalize trade among countries
within the regions, while maintaining trade barriers with countries outside the region or regions. They may
also lead to results that are contrary to the MFN principle because countries inside and outside the region are
treated differently. Thus, countries outside the region could be disadvantaged. However, completely
prohibiting such agreements is considered too severe, and GATT allows them under strict conditions.
GATT Article XXIV provides that regional integration may be allowed as an exception to the MFN
principle only if the following conditions are met:
i. tariffs and other barriers to trade must be eliminated with respect to substantially all trade within the
region; and
ii. the tariffs and other barriers to trade applied to outside countries must not be higher or more
restrictive than they were prior to regional integration.

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ENABLING CLAUSE
The Generalized System of Preferences (GSP) program is a system that grants certain products originating
in eligible developing countries preferential tariff treatment over those normally granted under MFN status.
GSP is a special measure designed to help developing countries increase their export earnings and promote
development.
GSP is defined in the GATT decision on “Generalized System of Preferences” of June 1971. Granting GSP
preferences is allowed in GATT 1947 as a measure based on the 1979 GATT decision on “Differential and
More Favourable Treatment, Reciprocity, and Fuller Participation of Developing Countries” or the
so-called “Enabling Clause”.
GSP must have the following characteristics:
i. preferential tariffs may be applied not only to countries with special historical and political
relationships, but also to developing countries more generally (thus the system is described as
“generalized”);
ii. the beneficiaries are limited to developing countries; and
iii. it is a benefit unilaterally granted by developed countries to developing countries. In addition, of
GSP beneficiaries, the least developed countries (47 countries) are provided with further preferential
treatment such as duty-free, etc. for items subject to special preferential treatment.

Regional trade agreements concluded between developing countries need not meet the requirements
provided for in GATT Article XXIV because of the preferential treatment based on the Enabling Clause,
and, regardless of the provisions of GATT Article I, contracting countries can provide developing countries
with different and favourable treatment without providing the same to other contracting countries8.

NON-APPLICATION OF MULTILATERAL TRADE AGREEMENTS

BETWEEN PARTICULAR MEMBER STATES (WTO AGREEMENT
ARTICLE XIII)
Article XIII of the Marrakesh Agreement Establishing the World Trade Organization (the “WTO
Agreement”) provides that “this Agreement and the Multilateral Trade Agreement in Annexes 1 and 2
shall not apply as between any Member and any other Member”, when any of the following two
conditions are met:-

8
Examples of regional trade agreements based on the Enabling Clause are described in WTO Analytical Index, Volume 1, and PP383-388.
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 a) a the time the WTO Agreement went into force, Article XXXV of GATT 1947(note) had been
invoked earlier9 and was effective as between original Members of the WTO which were Members
of GATT 1947; or
b) between a Member and another Member which has newly acceded, the Member not consenting to
the application has so notified the Ministerial Conference before the approval of the agreement on
the terms of accession by the Ministerial Conference.

Note: Although there is also a provision about non-application in GATT Article XXXV, it is recognized
that WTO Article XIII prevails against GATT Article XXXV. This situation occurs because WTO Article
XVI stipulates that “In the event of a conflict between a provision of this Agreement and a provision of any
of the Multilateral Trade Agreements, the provision of this Agreement shall prevail to the extent of the
conflict”. In the case of non-application, benefits enjoyed by other Members are not provided to the country
of non-application, which leads to results that are contrary to the MFN principle.
The WTO Agreement Article XIII provisions were created to deal with accession related issues. Ideally,
the MFN rule would be strictly applied so that when country B newly accedes to the Agreement, it is
required to confer MFN status on all other Members, and they, in turn, are required to confer MFN status on
country B. However, country A, which is already a Member of the WTO, may have reasons for not
conferring all rights and obligations of the WTO on new Member B. Because the WTO only requires the
consent of two-thirds of the existing membership for accession, it is conceivable that country A may, against
its will, be forced to grant MFN status to country B. WTO Article XIII is a way to respect country A’s concerns
by preventing a WTO relationship from taking effect between countries A and B. Conversely, WTO Article XIII
also provides a means for accession of country B, even when more than one-third of the membership, like
country A, has reasons for not wanting a WTO relationship with country B (in which case they will object to the
accession itself) by allowing for so-called non-application.

OTHER EXCEPTIONS
Other exceptions particular to MFN include GATT Article XXIV: 3 regarding frontier traffic with adjacent
countries, and Article I: 2 regarding historical preferences that were in force at the signing of the GATT.
General exceptions to the GATT that may be applied to the MFN treatment obligation include GATT Article
XX regarding general exceptions for measures necessary to protect public morals, life and health, etc.,
and GATT Article XXI regarding security exceptions. It is also possible to obtain a waiver from the MFN
principle.

9
GATT Article XXXV initially applied to Japan, but Japan officially joined the international trade system in the 1970s when the European countries abolished the
measure invoking Article XXXV
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Under WTO, Article IX: 3, countries may, with the agreement of other Members, waive their obligations
under the agreement. Article IX: 3 stipulate that exceptional circumstances, the terms and conditions
governing the application of the waiver, and the date on which the waiver will be terminated shall be clearly
stated. These waivers are also subject to annual review under Article IX: 410.

MFN PROVISIONS OUTSIDE OF GATT 1994

The idea of MFN treatment has been extended in agreements other than the GATT. Article 2.1 of the TBT
Agreement provides the MFN treatment obligation with respect to technical regulations. The MFN
provisions of Article 2.1 of the TBT Agreement are different from that of GATT Article I in wording, and
there was a case in which the Appellate Body determined that they were interpreted differently (EC – Seal
Products case). In this case, the Appellate Body concluded that while the MFN treatment obligation
provided for in GATT Article I was determined solely based on whether or not the measure worsened the
competitive conditions of imported like products regardless of the legitimacy of the objectives of the
measure, violations of the MFN treatment obligation provided for in Article 2.1 of the TBT Agreement were
determined after taking into consideration the objectives of the measure. The Appellate Body pointed out
that this difference was due to the fact that in GATT the regulatory objectives were to be considered under
Article XX (General Exceptions), but that general exception provisions similar to GATT Article XX did not
exist in the TBT Agreement. Nevertheless, the objectives of the measure are indeed considered in both
GATT and the TBT Agreement, and the determination of whether or not the measure is in violation of the
obligation do not differ between these Agreements.

In addition, Article 2 of the SPS Agreement provides for the MFN treatment obligation with regard to
sanitary and phytosanitary measures. Article 4 of the Agreement on Government Procurement (GPA)
provides a non-discriminatory provides for general exceptions to allow exemptions from the non-
discriminatory treatment obligation. For the trade in services and intellectual property rights sectors, Article
II of the General Agreement on Trade in Services (GATS) provides for MFN treatment of services and
service providers; Article 4 of the Agreement on Trade-Related Aspects of Intellectual Property Rights
(TRIPS) contains the same requirements for the protection of intellectual property rights. The GATS

10
As of the end of September 2011, waivers applied in 31 cases (WTO Analytical Index, Volume 1, PP47).311 Chapter 1 Most-Favored-Nation Treatment
Principle.
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provides exceptions where Members may waive their obligation to provide MFN treatment for specific
measures in specific sectors by listing the measure in the Annex on Article II Exemptions. The TRIPS
Agreement also provides for exemptions regarding measures based on existing treaties in the area of
intellectual property.

REVOCATION OF MOST FAVOURED NATION

STATUS
WTO rules allow any country to revoke the MFN status that it had previously accorded to another: in
particular, Article 21 (National Security) allows it to do so without further explanation.11

INDIA REVOKES PAKISTN’S MFN STATUS (2019)

In February 2019, following the 2019 Pulwama attack that killed 40 CRPF personnel, India withdrew the
MFN status that it had accorded to Pakistan.

G7 REVOKES RUSSIAN MFN STATUS (2022)

In March 2022, in response to the 2022 Russian invasion of Ukraine, the G7 countries resolved jointly to
withdraw ‘most favoured nation’ status from Russia ad to impose punitive tariffs12. In a statement, the group
declared that “Russia cannot grossly violate international law and expect to benefit from being part of the
international; economic order”.

SIGNIFICANCE OF MOST FAVOURED NATION

PRINCIPLE
The significance of the MFN principle can be summarized by the following three points: -
1. Increased Efficiency in the World Economy: MFN treatment makes it possible for
countries to import from the most efficient supplier, in accordance with the principle of comparative
advantage. For example, if country B can supply product X at a lower price than country C, country
A can increase its economic efficiency by importing it from country B. If, however, country A

11
Suneja, Kirtika (February 16, 2019). Pakistan’s most-favoured-nation status scrapped”. The Economic Times.
12
Partington, Richard (11 March 2022). “G7 nations strip Russia of ‘most favoured nation’ status”. The Guardian. Retrieved 11 March 2022.
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 applies higher tariff rates to product X from country B than to product X from country C, country A
may be forced to import product X from country C, even though country C is not as efficient a
supplier. This distorts trade and reduces the welfare of country A and the economic efficiency of the
entire world.
However, under the MFN principle, country A must levy its tariffs equally with respect to countries
B and C and therefore necessarily will import product X from country B because it is cheaper to do so.
The most efficient result is thus attained.
2. Stabilization of the Multilateral Trading System: The MFN rule requires that favourable
treatment granted to one country be immediately and unconditionally granted to all other countries.
Trade restrictions, too, must be applied equally. This increases the risk of trade restrictions
becoming a political issue, i.e., it raises the costs and consequences of doing so, and therefore tends
to support the liberalized status quo. By stabilizing the free trade system in this manner, MFN
increases predictability and therefore increases trade and investment.
3. Reduction of the Cost of Maintaining the Multilateral Trading System: MFN
reduces the cost of maintaining the multilateral trading system. The equal treatment demanded by
the MFN principle tends to act as a force for unifying treatment at the most advantageous level (for
trade that means the most liberal level). The establishment and maintenance of the MFN rule
enables WTO Members to reduce their costs in monitoring the treatment given to them in
comparison to the treatment given to third countries and in negotiating vis-à-vis disadvantageous
treatment.
In short, the MFN rule has the effect of reducing the cost of maintaining the free trade system. In
addition, as long as the MFN rule is honored, imports from all WTO Members are treated equally,
reducing the cost of determining an import’s origin and improving economic efficiency.

MOST FAVOURED NATION AND WTO

 The 164 WTO member nations agree to grant each other MFN status. Exceptions allow preferential
treatment for developing nations, regional trade blocs, and customs unions. Along with national
treatment, MFN is fundamental to WTO trade law.
 “Most favoured nation” relationships expand reciprocity between trading partners under GATT and
WTO rules. In bilateral reciprocity, a concession by one party extends only to reciprocating parties.
But in multilateral reciprocity, the concession applies to all agreeing to it, regardless of their role in

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 negotiating it. GATT/WTO’s non-discrimination requires reciprocally negotiated concessions to
apply to all members.
 MFN status is granted to ensure non-discriminatory trade between WTO partners. The nations
offering MFN status must offer concessions, privileges, and immunity in trade deals. MFN is
GATT’s initial clause.
 Under WTO rules, members cannot discriminate among trading partners. If a special status is granted
to one, it must extend to all WTO members. In short, MFN enables equal trade among all WTO
members, not unique trading privileges.

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MAJOR CASES WITH REGARD TO MOST
FAVOURED NATION POLICY
The MFN principle is often invoked in GATT disputes as a basic principle of the GATT together with the
national treatment principle. However, it is rare for MFN to be invoked on its own, and provisions regarding
national treatment, quantitative restrictions, TRIMs, rules of origin, and technical barriers to trade are often
cited in conjunction.
Therefore, the number of precedents is small. In the following section, we discuss Canada’s measures
regarding automobiles, the EU’s measures regarding bananas, the EC’s generalized tariff preferences
scheme, and the EU’s measures prohibiting the importation and marketing of seal products, where MFN was
a major issue.
Canada – Measures Regarding Automobiles (DS139)
Under the Agreement Concerning Automotive Products with the United States, which took effect in 1966
(the “Auto Pact”), the government of Canada accorded duty-free treatment to vehicles, provided that
importers (the Big Three and others, hereinafter referred as “Auto Pact members”) met certain conditions
(e.g., Canadian value-added — the required rates varied, but in general they were 60 percent or more). The
system was implemented to provide tariff exemption to automobiles imported by any company that met the
above conditions. However, the Free Trade Agreement (FTA) between the United States and Canada
resulted in barring extension of the Auto Pact status to any new companies. This treatment continued after
the North American Free Trade Agreement (NAFTA) took effect. What this essentially meant was that
original Auto Pact member companies in Canada could import automobiles duty-free, provided they met the
cited conditions, while non-members had to pay a 6.1 percent tariff (rate as of February 2000), despite the
fact that all of these companies produced and offered like products and services.
The Ministry of Economy, Trade and Industry (METI) deemed this a priority trade policy issue and, in July
1998, requested bilateral consultations with Canada under WTO dispute settlement procedures. Japan
requested the establishment of a panel in November of that year, and in February 1999 a panel was
established to review the Japanese complaint in conjunction with a similar EU complaint. The panel issued
its report in February 2000, and the Appellate Body issued its report in May. Both reports upheld virtually
all of Japan’s arguments, finding that the measure:
1) violated GATT Article I: 1 (MFN treatment);
2) violated GATT Article III: 4 (national treatment);
3) violated the SCM Agreement; and
4) violated Article XVII of the GATS (national treatment).

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However, the Appellate Body overturned the finding of the panel that the duty waiver violated Article II of
the GATS (MFN treatment) and Article XVII (national treatment) of the GATS, stating that the panel based
its ruling on a lack of sufficient evidence.

EU – Measures Regarding Bananas (DS27)

Under the Lomé Convention, the European Union maintains measures that provide preferential treatment to
imports of bananas from countries in Africa, the Caribbean, and the Pacific (ACP) in the form of tariff
quotas (i.e., different tariffs are applied to set in-quota and out-of-quota amounts for the individual ACP
countries). These measures have been before a panel twice under the GATT.
After the conclusion of the Uruguay Round, the European Union created a new tariff quota regime for
bananas. However, the United States, whose companies mainly deal in Latin American bananas, was
dissatisfied with the new regime and argued that the licensing system provided preferential treatment to
ACP bananas. The United States further argued that the preferential allocation of the quota to Latin
American countries, who are parties to the “Framework Agreement on Bananas (BFA)” (especially
Colombia and Costa Rica), was inconsistent with the WTO Agreement. After bilateral negotiations under
GATT Article XXII between the European Union and the United States, as well as with some Latin
American countries (Ecuador, Guatemala, Honduras, and Mexico), a panel was established in May 1996.
Japan participated in the panel process as a third party.
In the report submitted in May 1997, the panel found that the EU’s measures were inconsistent with the
WTO agreements on the following points. The report of the Appellate Body generally upheld the main
findings of the panel that are as:-
1) Allocating a portion of the quota regarding third-country and non-traditional ACP bananas to only
operators who deal in the EU and traditional ACP bananas is inconsistent with Article I: 1 (MFN)
and Article III: 4 (national treatment) of the GATT. The Lomé waiver does not waive the EU’s
obligations under Article I: 1 with respect to licensing procedures applied to third-country and non-
traditional ACP imports. The obligation under GATT Article I: 1 was therefore still in force.
2) The above preferential allocation of the quota to operators who deal in traditional ACP bananas
creates less favourable conditions of competition for like service suppliers from third countries, and
is therefore inconsistent with the requirements of Article II (MFN treatment) and Article XVII
(national treatment) of GATS.
3) Regarding the “BFA”, although it was not unreasonable for the EU to conclude at the time the BFA
was negotiated that Colombia and Costa Rica were the only Members that had a substantial interest
in supplying the EU market, the EU’s allocation of tariff quota shares is inconsistent with Article
XIII:1 (nondiscriminatory administration of quantitative restrictions). Regarding the relationship

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 between the inclusion of the BFA tariff quota shares in the EU’s tariff schedule and GATT Article
XIII, the GATT Article XIII prevails over the EU’s tariff schedule.

EU– Differential provision of tariff preferences to developing countries (DS246)

On December 10, 2001, the European Council announced Council Regulation No. 2501/2001 of generalized
tariff preferences scheme covering the period from January 1, 2002 to December 31, 2004. The regulation
consists of:
i. general arrangements;
ii. special incentive arrangements for the protection of labor rights;
iii. special incentive arrangements for the protection of the environment;
iv. special arrangements for least developed countries; and
v. special arrangements to combat drug production and trafficking (the “drug arrangement”).

Among these arrangements, the general arrangements are for developing countries in general, while the drug
arrangement (v) is applicable only to the following twelve countries: Bolivia, Colombia, Costa Rica,
Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, Pakistan, Panama, Peru, and Venezuela.
India argued that the Regulation is discriminatory since only twelve beneficiary countries are granted duty
free access to the EC market, while all other developing countries are entitled only to the full applicable
duties or duty reductions. In March 2002, India requested WTO dispute settlement consultations over the
inconsistency of the Regulation with MFN and the Enabling Clause.

India requested the establishment of a panel in December 2002. The panel report was circulated to Member
countries in December 2003. The panel found that the drug arrangement constituted a special treatment
benefiting only some developing countries and, therefore, was inconsistent with GATT Article I. The panel
further found that the measure’s inconsistency with GATT could not be justified under the Enabling Clause,
because not all developing countries equally received the special treatment, and such differential treatment
was not based on special treatment for the least developed countries. Moreover, the panel found that the
drug arrangement could not be justified under GATT Article XX (b), since it allows exceptions only for
“necessary measures to protect life and health” and the drug arrangement was not intended as such.

The EU appealed the panel’s findings to the Appellate Body in January 2004. The Appellate Body report
was issued in April 2004, and subsequently adopted. The Appellate Body found that, in light of the object
and purpose of the WTO Agreement and the Enabling Clause, the Enabling Clause does not necessarily
prohibit the granting of different special treatment to different GSP (Generalized System of Preferences)

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beneficiaries. However, the Appellate Body also found that identical treatment should be granted to all GSP
beneficiaries who are at the same level of “development, financial and trade needs” that the treatment is
expected to solve. The Appellate Body upheld for different reasons the panel’s findings that the EU violated
its WTO obligations because the drug arrangement did not establish any criteria of grounds to differentiate
the beneficiaries under the drug arrangement from other GSP beneficiaries and that, therefore, all similarly-
situated GSP beneficiaries did not benefit from the drug arrangement.

RECENT UPDATE ON MOST FAVOURED NATION

 The Unite States, Canada, the European Union, and Japan have moved collectively to cancel
Russia’s Most favoured nation (MFN) status over its encroachment on Ukraine.
 The cancellation of Russia’s MFN status sends a strong signals that the United States and its western
allies do not consider Russia, an economic partner in any way. Still, it does not in itself alter
conditions for trade.
 It officially permits the Western allies to increase import tariffs or enforce quotas on Russian goods,
or even ban them and curtail services out of the nation. They could also disregard Russian
intellectual property rights (IPR).
 Before removing MFN status, the Unites States had previously announced a ban on Russian oil and
gas imports.
 The MFN move comes from unparalleled sanctions. Export controls, and banking limitations
directed at pressuring Russian President Vladimir Putin to end the largest conflict in Europe since
World War II.

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CONCLUSION
The WTO agreements are length and complex because they are legal texts covering a wide range of
activities. They deal with agriculture, textiles and clothing, banking, telecommunications, government
purchases, industrial standards and product safety, food sanitation regulations, intellectual property and
many others also. But a number of simple, fundamental principles run throughout all of these documents.
These principles are the foundation of the multilateral trading system. The most favoured nation (MFN)
principle is based on the idea that countries should treat all their trade partners equally – that no one country
should be “more favored”. It means no country should give special treatment to goods or services coming
from one particular trading partner.

The WTO has made the most favoured nation principle part of its rules. WTO members are not allowed to
favour any one country with, for example, lower tariffs on particular products without giving all members
the same benefit. Countries should also not give preferred treatment to their own products and services –
which would be known as national treatment. MFN treatment makes it possible for countries to import from
the most efficient supplier, in accordance with the principle of comparative advantage. For example, if
country B can supply product X at a lower price lower price than country C, country A can increase its
economic efficiency by importing it form county B.

The title of most favoured nation (MFN) is a status or level of treatment given by one country to another
with respect to international trade. This ensures that the country conferring the title must give all sorts of
trade benefits to the most favoured nation. Most favoured nation (MFN) tariffs are tariff rates a country
applies to imports from all trading partners that are members of the WTO, unless the country has a
preferential trade agreement, like NAFTA, that stipulates different (lower) duties on imports form specific
countries.

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BIBLIOGRAPHY
 REFERRED WEBSITES
 https://www.wto.org
 https://www.investopedia.com
 https://byjus.com
 https://www.nextias.com
 RESEARCH PAPERS
 T-NSIAD-98-209 China Trade: WTO Membership and Most-Favoured-Nation
https://www.gao.gov
 Most-Favoured-Nation Treatment Principle Report https://www.meti.go.jp

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