1. THE MOST-FAVORED NATION CLAUSE (MFN)
April 15, KUFS, Seoul, Korea Prof. Sung-Eun Stephan Kim
Prof. Sung-Eun S. Kim Law & Policy of International Trade Korea University of Foreign Studies Spring, 2015

2. THE MOST-FAVORED NATION CLAUSE (MFN)
MFN: some basic economic concepts and institutional realities
Meant to be the GATT-means to liberalize trade. Both tariffs and domestic instrument must adhere to this principle.
Why liberalize trade? Grandmont and McFadden  loosely speaking, global free market equilibrium = Pareto optimum: raising the welfare of one single player negatively affect the welfare of someone else. But eco theory suggests trade liberalization is not a zero sum game.
Why then need K like GATT? Why doesn’t free trade just happen naturally? Bagwell and Staiger  not the case that unilateral trade liberal. is best for all countries. Countries that can influence terms of tr. have a strong incentive to tilt the terms and set tariffs under which particular goods are transacted to their advantage.
Unilateral setting of tariffs can lead to terms of trade externalities: a country setting tariffs will choose the level by calculating the welfare implications of tariffs to its domestic producers and consumers  but will be imposing trade externalities on fgn. producers of commodities hit by the tariffs; will not be internalized  Prisoner’s Dilemma: non-cooperative behavior; impose externalities on each other  need for K: a trade agreement is the means to INTERNALIZE these EXTERNALITIES to escape from the Pris. Dilem.  RECIPROCITY is the driving force behind such a negotiation.

3. “Externality”: An externality is an effect of a purchase or use decision by one set of parties on others who did not have a choice and whose interests were not taken into account.
Classic example of a negative externality: pollution, generated by some productive enterprise, and affecting others who had no choice and were probably not taken into account.
Example of a positive externality: Purchase a car of a certain model increases demand and thus availability for mechanics who know that kind of car, which improves the situation for others owning that model.

4. MFN: needed – most efficient way to ensure trade lib
MFN: needed – most efficient way to ensure trade lib. Schwartz and Sykes – w/o MFN risk of concession erosion. Concession. A & B risks being eroded if B & C negotiates better terms
Ethier: MFN functions as an externality which is internalized in multilateralism – non-discrimination is a legal obligation and not just a negotiating technique.
MFN in the GATT-system: carrot to attract members: b/c members not allowed to grant trade advantages to outsiders that were not immediately granted to members at the same time, they (the GATT members) were assured of access to an ever growing # of markets under the most favored terms possible.

5. The MFN regime as enshrined in Art I GATT The coverage summarized
A grants  B trade related advantage. What is A’s obligation to C, another member of WTO? Immediate granting of the same advantage A gave to B, wh/ B is also a WTO member or not.
Both trade and domestic instruments are covered in MFN requirements. By virtue of Art I.1 of GATT, the MFN is applicable to any regulatory intervention by a WTO member
Customs duties– to be applied in a non-discriminatory manner (Art I.1 GATT).
Art XI GATT in principle, prohibits a recourse to QRs. But even in cases of exception where QR can be imposed, it must be done in a non-discriminatory, MFN basis.
The terms used in GATT Articles are open-ended  need to confer adjudicating bodies. De jure – the decisions of adj bodies not legally binding, but de facto, adj bodies have referred to prior case law, providing it w/ legitimacy.

6. The policies (conferring an advantage) covered
2 categories -- Border measures; internal measures
Border measures of a fiscal character
Consolidated/unconsolidated protection. MFN applies to both bound duties and unbound duties (Spain—Un-roasted Coffee-- GATT June 1981)
Applied rates lower than the bound rates: by virtue of MFN clause, must apply to all WTO members
Consular fees, tax rebates, customs user fees – fall into the wider category of duties and charges, EVEN exemption from the imposition of a customs fee considered an advantage under Art I.1 GATT
The methods of levying them also covered
GATT Doc L/3149 (1968) makes it clear that antidumping duties are also covered now covered under WTO Agreement on AD (US—MFN Footwear (GATT June 1992) –countervailing duties cov’d)
Border measures of a non-fiscal character
EC—Bananas III (AB Sep 1997): use of a less complicated licensing procedures; incentive given to operators to purchase bananas of a particular origin; granting of licenses to operators representing products from certain countries only, etc. all found to be advantages within the meaning of Art I.1. of GATT.

7. The original beneficiary of the advantage
United States—MFN Footwear (GATT June 1992): automatic backdating of revocation of countervailing duty order w/o the need to have an injury review  advantage.
EC—Poultry (July 1998 AB): MFN extends to tariff quotas as well.
Quite broad in MFN’s coverage of advantages in adj body’s view
Internal measures—also covered under National Treatment
MFN also covers internal measures (e.g. tax exemptions for products purchased by public bodies) – explicit reference to Art III.2 and III.4 GATT in Art I.1 of GATT Belgium—Family Allowances (Nov 1952 GATT)– discrim based on existence of certain system of family allowance
The original beneficiary of the advantage
Advantage granted to “any other countries” Art I.1 GATT  does not matter if the original beneficiary is a WTO member or not. Used to be an incentive to join (when original GATT members were 23 in 1948) but now with 159 WTO members in 2013, effect is diluted.
The extension of the advantage of WTO membership
Extension to like products—a narrow interpretation
Q: What are “like products”? Art I GATT narrower than Art III GATT (. . . “directly substitutable products” found only in Art III). EEC—Animal Feed Proteins (Mar 1978 GATT)

8. Like products originating in WTO Member States
Japan-SPF Dimension Lumber (July 1989 GATT): tariff classification as the dominant criterion to establish likeness. Used HS classification  has the effect of narrowing down the effect of MFN to a sub-group of the wider DCS (dir competitive or substitutable) category. Rejected Canada’s use of “dimension lumber” as it was not used in any int’l customs classification.
This in effect overruled Spain—Un-roasted Coffee, which held Columbian mild coffee was a like product to unwashed Arabica, robusta and other coffees.
Case law consistent in using tariff classification to define like products under Art I.1 GATT, but no definitive pronouncement that it is the case.
Like products originating in WTO Member States
ROO (Rules of Origin) –no harmonized set of rules that WTO members must observe
ROO will be unilaterally defined but have to respect the national treatment obligation. But if a member applies to imports originating in a non-member state rules of origin that are more favorable to those it applies when conferring origin to its domestic products, MFN requires that it extend this advantage to import of like goods originating in all WTO members.

9. Extending MFN-treatment immediately and unconditionally
Immediately – w/o delay
Unconditionally? Canada—Autos (May 2000). Duty exemption for cars from certain countries, if imported by certain designated mfrs. who are req’d to meet certain performance conditions  resulted in not according same exemptions immediately and unconditionally to like cars from all other WTO member states  discrimination
Belgium—Family Allowances (Nov 1952 GATT): conditional on existence of a certain system of family allowance in the exporting countries violates the mandate that the MFN-treatment be “unconditionally” granted to all members.
Q: Does “unconditionally” mean no conditions can be attached at all, or no additional conditions can be attached besides the original condition?
2 lines of cases: 1st line--
EEC—Imports of Beef (1981 GATT): conditioning a duty waiver upon certification by a particular country violates MFN unconditional req.
Indonesia—Auto (1998): granting tax advantage to Korean cos that have entered into arrangement w/ Indonesian cos, violates MFN unconditional req.

10. EC—Tariff Preferences (Dec 2003): most stringent, impossible to attach conditions even when first granting advantages (pref. given to countries having grave drug problems).
2nd line of cases
If additional conditions became attached when extending an already granted advantage? EEC—Minimum Import Prices (1978 GATT): deposit required from countries that could not guarantee a specified import price. But all countries asked for deposits no discrimination, non-viol of MFN
Canada—Autos (May 2000): “Unconditionally” ≠ all conditions prohibited. Thus if conditions are non-discriminatory, no viol of MFN req.

11. Why deadlock btwn the 2 lines of cases?
The purpose of Art I GATT is to ensure no discrimination will take place btwn like products originating in two different WTO Members, NOT to de-regulate by constraining the choices among instruments which governments might use to express their social policies.
Likeness is the key. But like products? What digit level? If 6–digit level is appropriate level, to what extent national (as opposed to harmonized) classifications—i.e. beyond 6-digit--can serve as a criterion to define likeness?
If country A grants a tariff advantage only to countries producing environmentally friendly steel and gives advantage to B. C complains. Original advantage considered a condition? If yes, first line of cases. (But then, how about 3.3. HS, which allows +6 digit-level classification? Means you can’t have social policies reflected) If no, second line.

12. The standard of review De jure and de facto discrimination covered
Judge-made law. GATT/WTO case law, 3 important classifications 1. both de jure and de facto discrim. are subject to Art I GATT; 2. no demonstration of effects or intent required; 3. no rebalancing permitted (can’t argue that failure in one product is compensated by extra advantage in another product)
De jure and de facto discrimination covered
Art I GATT, not explicit wh/ de jure or de facto discrim.
Canada—Autos (May 2000): held not just “on the face” of the measure, but also discrimination “in fact” are covered by Art I GATT
No demonstration of effects or intent required
EC—Bananas III (Sep 1997): If “possibility” for more favorable treatment exists, viol of MFN req.
No rebalancing permitted
Unilateral re-balancing not permitted in the GATT. US—MFN Footwear (GATT June 1992). Not the overall effect but specific discrimination is against MFN requirement.

13. Exceptions to the MFN clause
1. Enabling Clause; 2. Discriminatory quotas; 3. Waivers BUT also Preferential Trade Agreement (PTA = FTA)
Special and differential treatment for developing countries
The Enabling clause
UNCTAD (UN Conf on Tr and Dev) 1970 Agreed Conclusion –set up the agreed details of GSP (gen sys of prefs)– certain dev’d countries sought a 10 year waiver allowing for pref. rates for imports from dev. Countries only.
Before exp. of the 10 yr waiver, “Differential and More Favorable Treatment, Reciprocity and Fuller Participation of Developing Countries” (the “Enabling Clause”)– adopted decision by GATT Contracting parties Nov 28, 1979
Enabl Cl is the decision of the GATT contracting parties – allowing deviation from the MFN rate a permanent feature of the GATT and now WTO legal order. WTO members can provide, through their national GSP (generalized sys of prefs.) schemes (tariff preferences).
Some historical features
Haberler Report (1958): the existing rules on trade liberalization would not necessarily work to developing countries’ advantage. US waiver on farm policies (subsidies) and EC – the notorious “dual price” system. Import duties to offset the price difference btwn EC and the world price.
1961: Declaration on the Promotion of Trade of Less-Developed Countries liberalization (tariff reduction) on manufactured goods, saw good progress; but not so on farm products. (more interest to dev countries)
Kennedy Round ( ): Part IV of GATT (June 27, 1967)
not binding legal obligations “best endeavors” clause

14. Principles and Objectives (Art 36 GATT): formal recognition that market access for dev countries’ products should be improved– no details but non-reciprocity principle: concessions by dev countries will first be compatible with their development process  essentially extra-flexibility
Commitments (Art 37 GATT): general clause recommending various actions that dev’d countries should undertake to promote issues of interest to dev countries– high (processed goods) and low (primary goods) tariff products.
- deals with issues which later detailed in subsequent agmts. E.g AD duties: when dev’d countries impose AD duties, first examine the feasibility of introducing price undertakings on dumped imports originating in dev countries. Binding obligation in GATT 1994 AD agreement.
Joint Action (Art 38 GATT)– meant to provide institutional vehicle which would make the best endvs. clauses reflected in 36 & 37 happen: Institutional arrangements for furthering objectives of Part IV w/ UN and its organs, agencies. Also monitoring of the rate of growth of the trade of dev countries should be introduced.
- Cont Parties also agreed on setting up the Committee on Tr and Dev (CTD)– to review the mandates of Part IV. Also set up ITC (Int’l Tr Center)  later became a joint agency of UNCTAD and GATT.
Dev countries, felt that Part IV fell short of expectation. It’s not the liberalization that can substitute for all dev policies. Also, Part IV being “best endvs.” it is a wish list—needs mandatory languages.
 Enabling Clause essentially reproduced the non-reciprocity idea. Part IV paved the way to concrete reforms of the world trading system

15. The placement of the Enabling clause in the WTO legal order
EC—Tariff Preferences (panel Dec 2003 AB Apr 2004): held the Enabling clause became an integral part of Art 1(b)(iv) GATT 1994— b/c was adopted as a decision of the contracting parties.
An exception to Art I GATT
Def of developing countries—not in GATT; for SCM, LDC (least developed countries) defined: LDCs are DCs: self-election. Some abuse noted—e.g. Korea declaring itself DC when it faced b-o-p problems. No legal determination on this issue. Generally, OECD members ≠ DC; no benefit from GSP schemes. Exception--Turkey
Non discrimination in the context of the Enabling clause
EC—Tariff Preferences (panel Dec 2003 AB Apr 2004): India & Pakistan, Drug Arrangements. India argued that EC could not give more preferential treatment to Pakistan. Panel agreed but AB rev’d: Sec 3(c) of Enab Cl:
“shall in the case of such treatment accorded by developed contracting parties to developing countries be designed and, if necessary, modified, to respond positively to the development, financial and trade needs of dev countries.”
Meant, developing needs not necessarily shared to the same extent by all developing countries. GSP scheme may still be non-discriminatory even if “identical” tariff treatment is not accorded to all GSP beneficiaries. But the dev’d countries should give equal treatment to “all similarly situated GSP beneficiaries”

16. Did India win the case? EC’s GSP scheme was found to be inconsistent with WTO because it had a closed list of beneficiaries. EC was req’d to modify its current regulations to ensure that it has criteria to provide a basis for distinguishing beneficiaries under the Drug Arrangements from other GSP beneficiaries  opened door to extra preferences but did not provide any principles that could serve as benchmarks

17. Discriminatory quotas (Art XIV GATT)
Allocation of burden of proof
EC—Tariff Preferences held: it is insufficient for a complaining party to merely claim viol of Art I GATT only. Must identify those provision of the Enabling Clause with which the scheme is allegedly inconsistent, w/o bearing the burden of establishing the facts necessary for its case
But this doesn’t really help def. in preparing its defense: not always the case that def will use Enabling Clause as defense, and even so it would already know this defense well.
Discriminatory quotas (Art XIV GATT)
A QR s justified under Art XI:2 Must be imposed in a non-discriminatory manner.
EC—Bananas III (AB Sep 1997): wh/ the MFN requirement applies at an aggregate or a disaggregated level. EC had two quotas– one for ACP and the other, the rest of the world. The AB held that it is at the aggregate level, and EC cannot have two separate quotas unless Lome Waiver provided otherwise; it did not find any waiver.
BUT Art XIV GATT allows deviation from non-discriminatory application of quotas reqs. 1. The quota must be imposed to address the problem related to b of payment; 2. the discriminatory quota must affect only a small part of its trade. For a temporary period.

18. Waivers
Art XXV.5 GATT: provided contracting parties with a wavier of GATT obligations for a predefined period of time—voting requirement.
WTO– Art IX provides granting of waivers. Members can request authorization to waive, on a temporary basis, their obligations under the WTO agreements– needs ¾ of all members agreeing on the terms of the waiver; if more than 1 yr is requested, the conditions for extending beyond 1 year will be reviewed at the end of the 1 yr period.