Most Favoured Nation And National Treatment

Introduction

The principle behind trade policies for developing nations is to make available to them the opportunities for the negotiation of their demands efficiently in order to drive out economic disparities. In a competitive international trade environment, where the efficiency of trade improves with the number of traded commodities and participating nations, the benefits of multilateral negotiations can not be understated. The rules and legal framework under which such a system can be put in place assumes critical importance in this scenario. Non-discrimination being the key operating principle, this is implemented through the Most Favoured Nation (MFN) clause. This implies that no member country can discriminate against similar products of different nations in terms of tariff rates and national restrictions. A similar concept of National Treatment states that once the custom duties are paid, there shall be no discrimination between foreign goods and domestic goods.

The term Most favoured Nation is a little misleading in the sense that it promotes equal treatment and not any form of preferential treatment to one particular nation. Granting of most favoured nation status to a country implies that the tariff rates for that partner will not be any higher or lower than any other country for which the trading partner has given the same status. The end result being that the best trade practice offered by one trading partner will be enjoyed by all the nations that have been given this status. While this ensures a level playing ground for providing equal commercial opportunities, the criticism that this benefits the economically stronger countries more than the developing nations can not be discounted. The implications of these policies for developing nations are discussed in the following critique.

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Developing Countries and Trade Policies under GATT and WTO

A brief review of the evolution of trade policies for developing nations under GATT and WTO would provide a better perspective in evaluating the effectiveness of MFN and National Treatment in their stated objectives. Little presence in the early rounds of negotiations, developing nations benefited mostly through MFN.

Exception in GATT

• Article XVIII: governmental assistance to progressive development of nations in early stages of development. Section A ensured that developing countries could re-impose tariffs to protect industries. Section B put in the structure for balance of payment issues while Section C and D gave governmental assistance for development of industry.
• Greater participation of developing countries with the emphasis on decolonisation in 1950s.
• Realisation for need of reforms in the liberalized trading system for developing countries.
• Developing countries lobby for the creation of UN Conference on trade and Commerce in 1964.

In response, amendments were made in GATT in 1968 with the addition of PART IV, allowing the developing nations on a non-reciprocal basis improved access to developed nations market.

In 1971,two waivers from MFN obligations were introduced for developing nations:

1. Generalized System of Preferences (GSP), in which lower tariff rates would be offered to imports from certain developing countries.
2. Global System of Trade and Preferences (GSTP), for one developing country to provide preferential treatment to another developing country.

MFN waivers made permanent in 1979 by the promulgation of Enabling Clause, stressing on more favourable treatment, reciprocity and fuller participation of developing countries. The Uruguay Round further set out a range of special and differential treatments. These included provisions for increased trade opportunities, requiring developed members to safeguard interests of developing nations, while offering flexibility in meeting these obligations. Transitional time periods and special provisions to least developed countries were introduced.

Need for MFN and National Treatment

The principle of MFN and National Treatment is based on an argument by Adam Smith which promotes division of labour as it ushers greater specialization, efficiency and volume of production, thereby allowing all the parties to sell whatever products that can withstand the competitive environs of international market. Since it is covered in all three areas of trade handled by WTO, this implies that all the members are automatically granted the MFN status.

The MFN and National Treatment and their significance to developing countries can best be evaluated for individual developing countries on a relevancy basis for each developing country. Two cases need to be considered in this regard: the MFN treatment in foreign market and the need for granting National Treatment in home markets. In a competitive international environment, MFN gives benefits to developing countries offering them a free ride on bilateral trade concessions exchanged between developed countries and which they themselves by their own influence in the international market would have never been able to negotiate. Thus, in a non-cooperative international competition, the MFN in the least restrains these disparities and discriminatory trade practices. Offering a framework of co-operative bargaining, MFN changes the dynamics of international trade in favour of developing nations. The MFN and National Treatment principle promote equality and saves time and resources on negotiation and monitoring. It makes possible for nations to import on the efficiency basis for the most competitive tariffs among various nations.

For developing countries, the evaluation of constraints imposed on trade bargaining by MFN assumes critical importance. While for developed nations, this involves a considerable cost as they forgo the need to have a separate bargain with all the countries, for developing nations, this assumes importance in the sense that bargaining being multilateral under MFN , the developing nations can not be coerced into making concessions through bilateral bargaining with developed nations through side payments. Bilateral agreements on trade tariffs with developed countries gives the larger countries opportunities to threat points for garnering concessions in their favour from the developing nations. A multilateral trade agreement under the aegis of MFN eliminates the use of such threat points against the developing nations.

Despite it's stated objectives, one needs to evaluate the advantages of MFN and National Treatment for various categories of nations. The rationale behind this strategy being that MFN rights, obligations and the benefits accrue differently to different types of countries. Such an attempt to model the benefits of MFN statistically was made by Ghosh, Perrony and Whalley.The importing countries also have a tendency for applying on a discriminatory basis taxes on domestic products to protect domestic production. This causes distortion in the competition between imported and domestic goods, thus leading to a closed market. The National Treatment principle is designed to discourage such practises.

Exeptions

In any international agreement with a developing nation, the scope and applicability of MFN and National Treatment is dependent on the exceptions applicable. These are broadly classified as under:

Generalized System of Preferences

These are applicable for the whole agreement and not to some specific provisions. Applicability for such exceptions arise in cases where issues regarding national security, public health and environmental protection.

Specific Exceptions

National Treatment and MFN standards for taxation are excluded in many investment agreements. Intellectual property rights are also excluded in some cases. Agreements involving nations that are also part of regional integration organizations exclude some of the provisions of MFN/NT.

Nation and Sector Specific Exceptions

In some cases, exceptions include a list of sectors specific to which each country reserves the right to deny principles of MFN and National Treatment.

Under MFN and National Treatment, the WTO members are required to give equal treatment to other members with respect to trade tariffs. Such provisions not only silence the critics but also make the scope of MFN and National Treatment trade expanding. Introduced as the Enabling Clause in 1979, another exception in GATT provided a framework for legal authorization for one way tariff preferences. However in 2004,the Appellate Body of WTO mentioned the applicability of this only for cases where similar treatment  is made to all other related beneficiaries of GSP. While this has expanded the scope of MFN since its draft, on certain occasions the WTO has also waived member’s obligations to MFN and National Treatment. These preference clauses on tariffs for developing countries are seemingly not consistent with the MFN obligation since the grant of preferential treatment offered by a country to the goods of some groups of countries is not applicable for all WTO members. However, as these exceptions are essentially promoters for trade liberalisation for developing countries, the opposing fictions have slowly acceded to their rational in a series of clauses to the original text of MFN.

Evolution of trade policies: Conflicting Advantages

Mounting criticism of MFN prompted GATT members to relax the rules to accommodate the concerns voiced by developing countries. The UN Conference on Trade and Development thus proposed to extend preferential treatment for the developing countries in some areas. In 1964 meeting of UNCTAD, a key proposal was put forward for developed countries to grant preferential treatment of tariffs on import of products manufactured in developing countries, thus leading to the promulgation of the so called Generalized System of Preferences (GSP). This provision allows the developed countries to grant preferential treatment to products of developing country, thus allowing goods of developing countries a favourable tariff treatment over developed countries. Formation of regional groups such as European Union posed the challenge to MFN by lowering and in some cases eliminating tariffs among themselves while still maintaining it at a disparity with other nations outside EU.

In 1970, both United States and European Union started offering preferential trade tariffs to developing countries. For some listed products from specified developing nations, these trade preferences resulted in reduced tariff rates. They were offered as non-reciprocal, thus implying that these applied unilaterally with the developing nations not under obligation to reciprocate the favour in any other kind. The motive behind these actions was to address the issues of fairer trade for developing countries. Recent negotiations have however created a little uncertainty about the future of such policies. These preferential trade programs covered under exception such as GSP of MFN helped the developing nations an improved access to EU and US markets. The top beneficiaries from these programs were Ivory Coast, Costa Rica, the Dominican Republic, Colombia, Guatemala, Argentina, China and India. Both EU and U.S imported the trade basket covering processed fruits, vegetables, tobacco and cut flowers.

The EU also imported large amounts of shellfish, oils and fats under these programs. While the value of imports under these programs is only a small share of their total agricultural imports, the developing countries continue to support these programs in light of seeing this as a slow reform in some of the grievances against MFN.

These trade preferences however involve some drawbacks in the longer run for the beneficiary nations. The non-reciprocity of these arrangements undermines the influence of these developing nations in the multilateral trade agreements. The developing nations benefiting under these programs are more interested in a given set of trade preferences and do not push for tariff reductions under MFN. With reductions in MFN tariffs, the potential benefits of the trade preferences under GSP decreases, as a result of which they lose interest in the MFN negotiations, thus the overall process becoming inimical to the multilateral trade regime.

Developing countries however can see through some of the inherent shortcomings in the GSP and other exceptions to MFN, the most glaring one being the exclusion of important sectors and an uncertainty about their duration. Since the developed nations are not receiving any benefit for these preferential treatments, they more often than not do not grant market access for commodities that matter to developing countries under these exceptions. And once some developing country, under such preferential agreement, begins to have a fair share of world trade, they are removed from such exceptions, as happened with Korea and Japan. Any move for widening the trade baskets to include some more commodities is met with the refutation by the developed countries that the developing countries need to concentrate on their own trade policies rather than seeking extensive grants in such preferential treatments.

Problems

For developing countries, an important issue with respect to these provisions is the credibility of these principles. Irrespective of the developing nation's income level, these policies have wide distributional effects and hence a considerable domestic opposition is bound to kick in. The argument to this criticism being that the slow pace and limited liberalization for developing countries is not commensurate with their development needs. In lieu of economic and social problems, the developing nations need to be given the right to withdraw their commitments on a need basis. But certain clauses in MFN and National treatment stall this reform by introducing the Single Undertaking principle under which the countries are bound to accept these provisions in totality and not in parts. Different developing countries due to their own socio-economic and political problems have varying capabilities to implement the policies under MFN and National Treatment, so these obligations put serious burden on them. This essentially comes down to applicability of these reforms to individual developing countries and the need to differentiate real difficulties from the political propaganda to impose excessive protectionism.

Some criticism against MFN and National Treatment is made on the basis that agreements between the developed nations are first made in bilateral trade negotiations which usually lack transparency where the trade tariff rates are decided beforehand, with the end result of negotiations sometimes not justifying the unfair bilateral trade negotiations.

The stated rationale behind the Most Favoured Nation and National Treatment is to stimulate free trade between nations on a parity basis. It can however, be argued that such policies lead to a divergence in prosperity of the developing nations than achieving the convergence or the equality which was its original intent. The factors involving market access and tariffs escalation in commodities traded with developing nations need evaluation in this regard. Few criticisms for the principles underlying MFN and National Treatment thus stem from the anecdotal proof that the developed countries do not target the trade barriers related to the exports of developing countries proportionately. The average tariffs for commodities important to developing countries are significantly lower than those imposed on other products. These include mostly the textiles, apparels and agricultural products. Not only this, a strong escalation of rates can also be observed in case of processed products as compared with raw materials. This indirectly leaves the developing countries with little incentives to move up the specialization chain of the value added products and commodities. Some of the market access promises that were made as corrective measures for these in the Uruguay Round never materialized. The Uruguay Round further resulted in disparity leading to imposition of higher tariffs in some other products.

Several other developments also need to be mentioned with regard to how much of the policies under MFN and National treatment is actually put into action and how developed countries bypass some of them to their advantage. A few developed nations started importing apparels from Mexico, the Caribbean, and Central American and African developing countries under preferential programs. For the developed nations, imports from these nations were less threatening to their own domestic industries whereas developing countries with highest comparative advantage under the MFN could but only sulk in silence as it prevented the developing nations to protest against the policy flaws because the beneficiary developing nations of these programs obviously wanted these grants to continue. Agriculture sector suffers from a similar problem as developed nations continue to provide massive subsidies and some other transfers to their domestic market thus making the National Treatment clause with respect to this sector effectively useless.

Since the MFN principle applies to all nations whether or not they have taken part in the negotiations, nations can become free riders to the agreements even with minimal commitments and participation. This is beneficial for developing countries belonging to “low human development” category that are short on resources to be party to all such negotiations. However, by entering into regional bilateral agreements WTO members can deviate from the MFN and National treatment obligations. While for some developing countries, such as Mexico and South Africa, this has resulted in improved market access, for other developing countries not party to these agreements, it has translated to discrimination in key markets. Every time when these multilateral trade negotiations are held under the auspices of GATT for lowering tariff rates in MFN, they are not always supported by all developing countries themselves. The reason being that substantial tariff cuts would have an adverse effect on developing countries covered under GSP as these would erode their profitability margins.

The key disadvantages of the policies under MFN and National Treatment for the developing nations is summarized hereunder:

• Absence of level playing field: The developed nations not complying with the rules with products and commodities of importance to developing nations such as textiles and agricultural goods.

Textiles

Being labour intensive industry, developing nations have significant comparative advantage. However, the developed nations continue to offer heavy protection to their domestic market thus undermining the scope of MFN and national Treatment itself. Imposing quantitative restrictions on imports from some developing countries, while offering preferential treatment to some, limits the economic gains available to other developing nations as whole.

Agriculture

Agricultural products in developed continue to receive general waiver under subsidization. Trade liberalization in this sector is modest and developed countries are largely not complying. Despite the mounting pressures, there is no commitment whether such protectionist policies by for their domestic markets would be removed.

• The protection offered by developed countries to their domestic markets makes trade with respect to those markets effectively closed for developing nations.
• The wordings of even the preferential treatment offered to some of the developing nations under exceptions to MFN are vague and non-committal. The quoted agreements need to be converted into binding and applicable provisions.

Need for Reforms

Based on the above mentioned shortcomings, the need for improvements to the existing clauses in MFN and National Treatment can thus be felt. Firstly, the developed nations need to create a level playing field for developing nations by committing these practises to all the products and not in a piecemeal approach. The GSP provisions are useful for developing countries but they need to be developed further and made binding. The focus of these policies should not be just the stated objective of integration of developing countries in International trade but on their continued development.

The developing countries need to be a part of broader development programs and should not be limited to trade only in basket of goods that are non-threatening to the developed countries domestic market. A conservative and balanced critique of MFN and National Treatment thus proposes the need for reforms in the existing framework and a balanced approach to development and not merely integration. Market access for developing countries with respect to their specific concerns needs to be improved on an autonomous basis. Necessary technical assistance needs to be provided to them to meet these commitments depending on the socio-economic environment of the developing country. The time period for transition should be reviewed for each developing country on a need basis.

These reforms notwithstanding, even under the existing framework, the developing nations themselves have a wide ground to cover in the unilateral liberalization of tariffs in the domestic market. Many developing nations retain a bias against export due to distortions induced by the government favouring inefficiency in their domestic trade. Even in textile and agriculture sector, manufacturers and farmers face inadequate infrastructure and several other bottlenecks. Doing away with discriminatory measures on foreign goods and according them National Treatment would create an environment for attracting FDI to the developing nations. Developing countries can thus achieve so much by unilateral trade reform while still pressing for reforms in the multilateral trade environment. It is the onus of developing nation to usher domestic trade reforms along with the reforms in policy that need to be taken under MFN and National Treatment. This parallel approach would reinforce the credibility of the process of reforms adopted by the developing countries both in the eyes of foreign investors as well as domestic producers.

Conclusion

So what do MFN and National Treatment finally translate to for developing countries? Upon the evaluation of all the arguments mentioned above, it can be concluded that the policies under MFN and National Treatment are not a monolithic framework of trade agreements but a set of overlapping principles that are sometimes conflicting too. While some of the provisions are not entirely as beneficial to the developing countries as they are touted to be, discounting the whole set of these principles overarching MFN and National Treatment as being regressive for developing countries would not be fair too. Some of the issues as mentioned above do suggest that these trade practises are not as conducive as they should be to developing countries, but within it's framework they do offer some advantages too.

Multilateral trade promoted under MFN and National Treatment offers a key function in the domestic socio-economic environment for both developing and developed nations. Reciprocal commitments guarantee previous measures of trade liberalization and negate the unreasonable protectionism that some nations might otherwise indulge in. This mechanism thus strengthens domestic policy reforms of even developing nations in the eyes of foreign investors. Most developing nations on their own lack the resources to implement unilateral domestic trade reforms due to the prevailing social and political atmosphere. Preferential treatment under MFN is a better alternative to other forms of protectionism as it does not undermine the broader trade liberalization process that must take place.

If the end objective of world trade policies is the continued development and integration of developing nations with the world economy, unilateral trade reforms specific to a developing nation must not be carried in isolation but rather be implemented synergistically with the multilateral trade negotiations under MFN and National Treatment.

With this critique, the principle and the positive intention behind MFN and National Treatment must be seen as an essential means of sustaining the multilateral free trade system. The disparities applicable for regional integration and related exceptions need to be evaluated carefully on need basis for each developing country. Changes should then be made to the existing draft. One should not thus undermine the principles behind MFN and National treatment as a whole based on a few shortcomings because that would so categorically tantamount to “throwing the baby out with the bath water.”

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