INTRODUCTION
As stated in the preamble to the Marrakesh Agreement[1], both the non-discrimination principles of Most Favored Nation (MFN)[2] and National Treatment[3] strive towards the ‘elimination of discriminatory treatment in international trade relations’. They aim to ensure that all WTO member countries are allowed equal opportunity to import from or export to other WTO member countries. In the realm of international trade, it is of paramount importance to ensure fairness and equality in trade among nations. The MFN[4] and National Treatment[5] are two foundational principles designed to uphold these values of fairness and equality. These principles aim to eliminate discriminatory practices, improve the conditions of market competition, and create a level playing field for all countries engaging in trade[6]. This ultimately helps to achieve free and fair trade across the globe.
The MFN[7] and National Treatment[8] principles endeavour to provide equal treatment to goods and services ‘like’. Such ‘likeness’ describes the relationship between two goods or services manufactured by two nations. This concept serves as the basis on which the two non-discrimination principles of MFN[9] and National Treatment[10] stand. Four general criteria must be satisfied to hold two goods or services as ‘like’:
- Physical character, nature, and quality of the goods or services,
- End uses of the goods or services,
- Consumer tastes and habits, and
- Tariff classification of the goods or services.
MOST FAVORED NATION (MFN) PRINCIPLE
The Most Favored Nation treatment obligation (under GATT Article 1) seeks to promote non-discrimination between ‘like’ goods and services belonging to different countries at the border of the importing country. It aims to provide the same benefits and concessions to one member country, in case benefits and concessions are advanced to another member country. Accordingly, it maintains that if any advantage, favour, privilege, or immunity is extended to one member country, it must be given immediately and unconditionally to all other member countries[11]. Under the MFN obligation[12], a GATT contracting party is obligated to treat every other contracting party as its favourite. No contracting party is allowed to treat only one contracting party as its favourite and discriminate against the rest. It prohibits a country from discriminating between and among other countries. The MFN treatment obligation[13] is a cornerstone of GATT and a pillar of the WTO trading system[14].
For example, India (a GATT contracting party), applies an additional customs duty on potato chips exported to China (another GATT contracting party), attempting to increase its domestic consumption. Such a measure applied by India shall constitute a violation of the MFN obligation[15], as instead of banning the export of potato chips to all other countries, India only banned the export when its destination was China. This directly violates the rule that no country is permitted to discriminate between and among other countries while engaging in trade.
NATIONAL TREATMENT PRINCIPLE
The National Treatment obligation (under GATT Article 3) seeks to provide equal treatment to goods or services originating in or exported by foreign countries, and ‘like’ domestic goods or services. It aims to provide an equal playing field for both the foreign imported product and the domestically produced product in the country of importation, by preventing any form of protectionism afforded to the domestic industry[16]. Both de jure and de facto discrimination between ‘like’ domestic and imported products are prohibited under the National Treatment Obligation [17]. It seeks to promote the conditions of competition between the trading countries by way of preventing protectionism in the application of internal taxes and regulatory measures in the country of importation. It ensures that imported goods are not faced with any discrimination in the importing country, and thereby ensures that free trade is fair and fair trade is free. Under the National Treatment Obligation [18], it is seen that the internal taxes and internal charges applied in the territory of the importing country are not charged more than the rate applicable to ‘like’ domestic goods, or that such taxes and charges are not applied in a manner that distorts the market competition conditions and as a result affords protection to like domestic goods[19].
For example, the Indian government charges internal taxes of 20% for furniture imported from Italy, and 18% for ‘like’ furniture produced domestically, to afford protection to the domestic furniture producers. This measure applied by India would violate the National Treatment obligation[20], since, as a result of charging a higher rate of internal taxes for furniture imported from Italy than the applicable rate for ‘like’ domestic furniture, the imported furniture suffers discrimination in the territory of the country of importation. This consequently affords protection to domestic Indian furniture and distorts the conditions of market competition between India and Italy.
THE US – AUTOMOBILES DISPUTE (EUROPEAN UNION V. UNITED STATES)[21]
In this case, the European Union alleged that the United States was taxing certain luxurious products such as boats, aeroplanes, fur, etc., sold above USD 30,000 at the rate of 10% above the retail price and that such products were similar to ‘like’ products sold under USD 30,000. Aggrieved, the European Union alleged that the United States had violated GATT Article III:2. Two questions arose: (a) whether the luxury automobiles of both categories were ‘like’ products, and (b) if yes, whether the difference in the taxes for the two categories was so charged to protect the domestic industry. The Panel held that the United States’ conduct of imposing a higher tax rate did not violate Article III:2, since such a high rate was not imposed to protect the domestic industry and distort the conditions of competition. It was held: (a) that the United States was itself selling a large number of luxury products above USD 30,000, and that the European Union had ample opportunity to export products under USD 30,000, and (b) that the United States did not classify the luxury products (sold below and above USD 30,000) to afford protection and distort conditions of market competition, as per the aims and intent test. The Panel rejected the European Union’s allegations and held that the United States through its application of internal taxes did not discriminate between luxury products sold below and above USD 30,000 and did not violate the National Treatment principle[22].
THE KOREAN BEEF DISPUTE (AUSTRALIA AND UNITED STATES V. KOREA)[23]
In this case, the Korean government promulgated a dual retail distribution system for the sale of beef– one each for domestic beef and imported beef. Retailers wishing to sell beef in Korea were called upon to choose whether they preferred to sell domestic or imported beef. Most of the beef sellers decided to sell domestic beef as against imported beef, thus hampering the sale of foreign imported beef in Korea. Consequently, within a few years, the new dual retail system led to 5,000 shops selling imported beef, as against 45,000 shops selling domestic beef in the country. Australia and the United States jointly brought a claim against Korea, that by introducing the new dual retail distribution system, Korea had discriminated against the sale of imported beef in the country and afforded protection to ‘like’ domestic Korean beef, thereby violating the National Treatment obligation[24] under GATT. The Panel held that with the introduction of the dual retail system, the treatment awarded by Korea to foreign imported beef was less favourable than the treatment provided to ‘like’ domestic beef, and hence Korea had violated GATT Article III[25].
DIFFERENCE BETWEEN MFN AND NATIONAL TREATMENT: AN OVERVIEW
- While the MFN principle[26] applies to all forms of governmental measures under its purview including border measures, the National Treatment Obligation[27] only applies to internal government measures like internal taxes, internal charges, and government regulations[28].
- The MFN principle[29] provides equal treatment to ‘like’ goods and services among member countries inter-se. The National Treatment principle[30] provides equal treatment to foreign goods and ‘like’ domestic goods in the importing country’s territory.
- The scope of MFN principle[31] is broader since it applies to both imports as well as exports among countries[32]. However, the National Treatment principle[33] only applies when the foreign imported goods are treated less favourably than ‘like’ domestic goods in the importing country’s territory.
CONCLUSION
While the MFN principle[34] mandates non-discrimination at the border, requiring that any benefit given to one member country must be extended to all other member countries unconditionally, the National Treatment principle[35] focuses on internal measures within a country, ensuring that foreign and domestic goods or services receive equal treatment. Both the non-discrimination principles are integral to maintaining fairness and equality in global trade. By ensuring equal treatment for ‘like’ goods and services, these principles form the backbone of international trade relations.
The US – Automobiles Dispute highlights the importance of intent behind tax measures, where the Panel ruled that differential tax rates did not necessarily constitute protectionism if they did not distort market competition. On the other hand, the Korean Beef Dispute underscores how retail distribution systems could violate the National Treatment principle[36] by creating a significant disadvantage for imported goods.
Author(s) Name: Gaurav Chakrabarti (St. Xavier’s University, Kolkata)
References:
[1] Marrakesh Agreement Establishing the World Trade Organization (adopted 15 April 1994, entered into force 1 January 1995) 1867 UNTS 3 (Marrakesh Agreement) preamble
[2] General Agreement on Tariffs and Trade (adopted 30 October 1947, entered into force 1 January 1948) 55 UNTS 194 (GATT) art 1
[3] General Agreement on Tariffs and Trade (adopted 30 October 1947, entered into force 1 January 1948) 55 UNTS 194 (GATT) art 3
[4] GATT art 1
[5] GATT art 3
[6] Van den Bossche, P., PRINCIPLES OF NON-DISCRIMINATION (in The Law and Policy of the World Trade Organization: Text, Cases and Materials, Cambridge: Cambridge University Press 2008) 320–400
[7] GATT art 1
[8] GATT art 3
[9] GATT art 1
[10] GATT art 3
[11] Vranes, Erich, ‘Non-Discrimination and Justification in the GATT’, (Trade and the Environment: Fundamental Issues in International Law, WTO Law, and Legal Theory, International Economic Law Series, Oxford, 2009; online edn, Oxford Academic, 1 May 2009), <https://www.doi.org/10.1093/acprof:oso/9780199562787.003.0007> accessed 14 June 2024.
[12] GATT art 1
[13] GATT art 1
[14] Fisher, George C, ‘The “Most Favored Nation” Clause in GATT: A Need for Reevaluation?’ (Stanford Law Review, vol. 19, no. 4, April 1967), pp. 841–55. JSTOR, <https://www.doi.org/10.2307/1227536> accessed 14 June 2024
[15] GATT art 1
[16] All Answers ltd, ‘The National Treatment Standard’ (Lawteacher.net, June 2024) <https://www.lawteacher.net/free-law-essays/international-law/the-national-treatment-standard.php?vref=1> accessed 14 June 2024
[17] GATT art 3
[18] GATT art 3
[19] Lakshmi Neelakantan, ‘National Treatment principle – Analysis of GATT Article III’ (Lakshmikumaran & Sridharan: Insights- Articles, 15 November 2013) <https://www.lakshmisri.com/insights/articles/national-treatment-principle-analysis-of-gatt-article-iii/#> accessed 14 June 2024
[20] GATT art 3
[21] European Union v United States (US – Automobiles Dispute) WTO Doc WT/DS31/R (1994)
[22] GATT art 3
[23] Australia and United States v Korea (Korean Beef Dispute) WTO Doc WT/DS161/R, WT/DS169/R (2000)
[24] GATT art 3
[25] Neel Gandhi, ‘The Korean Beef Case’ (The Invisible Hand, 5 July 2019) <https://www.theinvisiblehand.home.blog/2019/07/05/the-korean-beef-case/> accessed 14 June 2024
[26] GATT art 1
[27] GATT art 3
[28] Schuyler “Rocky” Reidel, ‘Most Favored Nation (MFN) vs. National Treatment’ (Reidel Law Firm, 13 July 2023) <https://www.reidellawfirm.com/most-favored-nation-mfn-vs-national-treatment/> accessed 14 June 2024
[29] GATT art 1
[30] GATT art 3
[31] GATT art 1
[32] Ziegler, Andreas R., ‘Most-Favoured-Nation (MFN) Treatment’, (in August Reinisch (ed.), Standards of Investment Protection, Oxford, 2008; online edn, Oxford Academic, 22 March 2012), <https://doi.org/10.1093/acprof:oso/9780199547432.003.0004> accessed 14 June 2024
[33] GATT art 3
[34] GATT art 1
[35] GATT art 3
[36] GATT art 3
