Study No. 9.-The Most-Favored-Nation Provision The unconditional most-favored-nation (MFN) provision is the cornerstone of the international trade rules embodied in the General Agreement on Tariffs and Trade (GATT). The basic rationale for MFN is that if every country observes the principle, all countries will benefit in the long run through the resulting more efficient use of resources. Furthermore, if the principle is observed, there is less likelihood of trade disputes. In essence the most important GATT provision on MFN requires a GATT contracting party to grant the products of all other GATT contracting parties the same treatment on importation that it grants to any one of them. A given product of one GATT member will not be placed at a competitive disadvantage as compared with the like product of any third country. History The concept embodied in the MFN clause has been traced to the 12th century, although the phrase "most-favored-nation" did not appear until the end of the 17th century. The emergence of the MFN provision is largely attributable to the growth of world commerce in the 15th and 16th centuries. At that time England and Holland were competing with Spain and Portugal, and the French and the Scandinavians were challenging the Hanseatic League and the Italian Republics. Each country, seeking maximum advantage for its trade, found itself compelled to grant concessions in return. The role of the MFN provision was to link commercial treaties through time and between states. At first the MFN provision applied to concessions granted only to specified states, but gradually the clause became generalized to apply to concessions granted to all countries. The trend toward wide use of the MFN clause necessarily coincided with the decline of mercantilism. The mercantilist view that in any commercial exchange one nation wins and the other loses does not mix with the concept of reciprocal arrangements implicit in the MFN principle. The unconditional form of the MFN clause-guaranteed equal treatment without requiring directly reciprocal compensation-was used exclusively until the late 18th century. In fact, conditional MFN-equal treatment conditional upon adequate compensation--was inaugurated in 1778 by the United States. During the first half of the 19th century, the conditional form was common in treaties in Europe and elsewhere. The wave of liberalism that swept Europe in the second half of the 19th century brought a return to use of the unconditional MFN clause in keeping with the free trade sentiment of the time. While European countries ultimately returned to the unconditional form, the United States was consistent until 1923 in its adherence to the conditional form. It should be noted, however, that in practice only a limited amount of United States trade was affected by reciprocal treaties involving conditional MFN. The United States consistently applied a single-schedule tariff to imports from all countries. Reciprocal treaties granting reductions from the general tariff rates were few in number at any given time. The United States began granting conditional MFN with its first treaty after independence, the United States-France treaty of 1778. Article II provided that, "The Most Christian King and the United States engage mutually not to grant any particular favor to other nations in respect of commerce and navigation, which shall not immediately become common to the other party, who shall enjoy the same favor, Freely, If The Compensation Was Freely Made, Or On Allowing The Same Compensation, If The Concession Was Conditional" (caps added). Similar provisions in treaties with Prussia (1785) and Sweden (1793) served to establish the "American interpretation" that special favors must be specifically bought. The position of the United States as a newcomer to world commerce largely accounts for its novel interpretation of the MFN clause. With the colonial ties to the British Empire broken, the United States had difficulty establishing an equal footing for trade with other nations. France and Spain, as well as Britain, attempted to exclude the Americans from trading with their overseas possessions. At the same time, these countries sought to penetrate the American market. Given European reluctance to grant initial reciprocity, the United States policy was to establish high duties and grant access to the American market only in return for access to markets controlled by Europe. Under the circumstances then prevailing, the conditional MFN clause enabled the United States to maximize its bargaining leverage by offering no gratuitous access privileges. The American principle of conditional MFN had a growing effect on commercial policy abroad, reaching its peak roughly between 1830 and 1860. The year 1810 marked the first conditional MFN clause in a treaty between European states (Great Britain and Portugal). In 1824 the clause was introduced to South America, where it remained dominant for the next 25 years. Of all European states, England was the most consistent in adhering to the unconditional MFN form through the first half of the 19th century, although the conditional clause was not uncommon in its treaties during that period. Beginning with the Cobden treaty between France and England in 1860, the unconditional form of the MFN clause again prevailed in European commercial treaties. The benefits of the Cobden treaty were conditionally extended to other countries by France and unconditionally extended to others by England. It soon became apparent to England that under this arrangement the balance of advantages was in favor of France. To compensate for this, England launched a successful drive to conclude unconditional MFN treaties with other countries. The unconditional MFN clause was used exclusively in Europe after that time, in spite of a return to protectionism on the Continent after 1875. While the United States and Europe were consistent in following their respective interpretations of the MFN clause during the latter 19th century, practice in other parts of the trading world varied. In South and Central America, for example, both forms of the clause were used with no clear-cut pattern, although the conditional form was used consistently in treaties between American states. Japan also used both forms. The divergent interpretations of the MFN principle during the late 19th century were largely a manifestation of the economic relationship between the United States and Europe. World War I altered this relationship dramatically. Following the war, the United States no longer stood to Europe as an underdeveloped nation, dependent upon Europe for industrial goods and capital, content to export to Europe its raw materials. American products were now much in demand in Europe and American capital financed European factories. Therefore, in the 1920's United States policy changed, reflecting its broader and more important export interests. By offering complete and continuous nondiscriminatory treatment the United States sought to obtain the same treatment from other countries, thus reducing discrimination against United States exports. Authority for the United States to offer unconditional MFN was included in the Tariff Act of 1922 and implemented in 1923. The Trade Agreements Act of 1934 included an unconditional MFN provision and made it a requirement of United States domestic law. The GATT Provision The main GATT provision on MFN, Article I:1 is a direct descendent of the MFN clauses in bilateral trade agreements between the United States and other countries. The provision reads as follows: "With respect to customs duties and charges of any kind imposed on or in connection with importation or exportation or imposed on the international transfer of payments for imports or exports, and with respect to the method of levying such duties and charges, and with respect to all rules and formalities in connection with importation and exportation, and with respect to all matters referred to in paragraphs 2 and 4 of Article III, any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties." There are other MFN provisions in GATT in addition to Article I. They apply to such matters as transit, marks of origin, state trading, quotas, the allocation of quotas, and nontariff prohibitions and restrictions. They all require nondiscrimination in these areas. The benefits to the United States and that part of the world following the MFN principle, particularly since World War II, have been impressive. World trade in 1948 amounted to $54 billion; by 1958, it had reached $95 billion, and by 1970, $280 billion. United States exports expanded from $13 billion in 1948 to $43 billion in 1970. A number of other factors were, of course, involved, but adherence to MFN, however qualified as time passed, deserves a good deal of the credit. Exceptions to the GATT Provision The GATT recognizes, however, that MFN remains a goal which cannot, in all cases, be achieved. It provides for a number of exceptions. Many are required for practical reasons and, in fact, serve to reinforce the GATT rules. Others were required for political and economic reasons. For example, Article XIV permits discrimination in the application of quotas justified on balance of payments grounds. Article VI allows imposition of countervailing and antidumping duties on subsidized exports or imports sold at less than domestic prices, resulting in injury to domestic industries. Paragraph 2 of Article XXIII allows a country to retaliate against another contracting party which has nullified or impaired benefits under the GATT. Article XXĮ deviations from MFN are permitted for national security reasons. The most significant GATT exceptions to MFN are found in two Articles related in one way or another to the issue of preferential trade arrangements. These are Article I: 2 dealing with tariff preferences in force when the GATT was drafted and Article XXIV which provides for the formation of customs unions and free trade areas. Article I (Paragraph 2) Article I: 2 permits contracting parties which, prior to the GATT, granted or received preferences under a variety of arrangements to continue to do so. It also prohibits any increase in the margins of preference granted or received. United States preferences for the Philippines fall under the provisions of this article, as do Common |