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From most-favoured to least favoured nations – how RTAs influenced the WTO MFN-based ?

Magdalena Słok-Wódkowska, Ph. D.

University of Warsaw

Faculty of Law and Administration

preliminary version

Introduction

Most-favoured nation (MFN) clause as it was designed in the GATT’s Article I was a powerful instrument able to change order. Non-discrimination clauses, both MFN and national treatment were pillars of the multilateral liberalization of goods and then, after creation of the WTO, also services. As discriminatory liberalization and was to be blamed for the Great Depression of the 1930s, creation of the GATT with its MFN as a main tool was supposed to be a cure for it.

The WTO has now 162 members and one may say that majority of international trade is governed by the WTO multilateral, non-discriminatory legal framework. But it seems to be less and less true. Already in his famous Termites in Trade Jadish Baghwati pointed out that the WTO MFN clause should be now called “least-favoured nation” clause, as majority of important trading states uses it towards its least privileged partners. With recent growth of importance of RTA, especially with so-called mega-regionals such as Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP), there is a clear shift in significance of the old WTO MFN. Only recently the EU used MFN tariffs for only a few partners and is planning on signing new RTAs with majority of them.

Growing importance of RTAs did not harm the concept of MFN clause known for ages. MFN clauses are still included into RTAs towards trade goods and – even more often – services. It leaves us with double MFN standards: one is regular MFN treatment and second even more- favoured most-favoured nations treatment. RTAs gave MFN clauses its second live. The aim of the paper is the analysis of this issue.

1. Most-favoured nation as a basic standard of treatment

Most-favoured nation clause is one of the oldest clauses used in international agreements. According to some authors, it was used already in Middle-Ages1, where one country was giving some preferences in relation to preferences of other countries. The first MFN similar to its modern version is claimed to be a clause used already in Anglo-Breton agreement in 14862, but this modern version was developed not earlier then in mid XVIII century.3 Modern clause, used to grant tariffs concession, gained popularity together with increased number of friendship, commerce and navigation treaties in XIX century.

Classic definitions of the MFN standard formulated by G. Schwarzenberger states, that it is treatment “on a footing not inferior to that of the most favoured third state”4. MFN, similarly to an NT standard, essence lies in a tertium comparationis (international in case of MFN and internal in case of NT). MFN was definitely the most popular standard of international economic law (out of seven classified by G. Schwarzenberger5) in commercial treaties in relation to goods before creation of the GATT.

Before GATT there were several forms of MFN. The most important division are conditional and unconditional MFN. Conditional MFN clause became popular in the end of XIX and at the beginning of XX century. It was even questioned, whether conditional version remain an MFN clause6. It granted only possibility of granting preferences on the condition that the

1 B. Nolde, La clause de la nation la plus favorisee et les tariffs preferentiels, Recuil des Cours de la Academie du Droit International 1932, vol. 39, p. 25; A. Salmaslian, La clause de la nation la plus favorisee, Paris, 1921, p. 18. 2 B. Nolde, p. 26. 3 Such a thesis was described by: A. Salmaslian, La clause de la nation la plus favorisee, Paris, 1921, p. 29, A. Nussbaum, A concise history of the law of Nations, New York, 1954, p. 205, G. Butler, S. Maccoby, The development of International Law, Longman, 1928, pp. 503-505, R. Hudec, Essays on the N32ature of International Trade, Cameron May, London 1999, p. 293. 4 G. Schwarzenberger, The most-favoured-nation standard in British Practice, British Yearbook of International Law 1945, p. 96. 5 G. Schwarzenberger, The Province and Standards of International Economic Law, “International Law Quarterly”, vol. 2, Autumn 1948; p. 409; International Law and Order, London, 1971, p. 157, The Frontiers of International Law, London, 1962, p. 220, The Principles and Standards of International Economic Law, Hague Academy of International Law, Leyden, 1966, p. 67. 6 B. Nolde, p. 91, G. Schwarzenberger, The most-favoured-nation standard…, p. 102. other side is willing to do it as well. Other versions may be paying compensation for preferences for other states or even entering the negotiations to the other.

Although there is no one universal MFN clause in relation to trade in goods or (or any other area), before creation of the GATT, there were already certain types of it. The most popular division is into positive or negative MFN, although it refers only to pure wording. Negative clause stipulates that a treatment should not be “less favourable” than that accorded to any other party. Positive MFN clause provides that treatment granted should be the same as any other party or that a given party should receive any preferential treatment accorded in another agreement. Although some authors claim, that such differences in wording do not really influence substance7, negative clause can theoretically provide for treatment better that any other party.

MFN clauses can also be divided according to their scopes. In some rare circumstances states provided for MFN treatment in “economic relations” as a whole. It is far more often though, that they grant MFN treatment restricted to a specific area, such as tariffs, trade in services or investments8.

Since XIX century there was also a set catalogue of exceptions from MFN, usually included into commercial treaties. Typical exceptions have been custom unions, regional integration and frontier traffic9. for example were treated mainly as a removal of state border, therefore it was commonly agreed that it should cover all trade. Also regional integration, although more controversial was perceived as a mean of cooperation with particularly close partners, mainly neighbors10.

There are no doubts that MFN was the most important standard of treatment before second world war in commercial treaties. In 1933 there were 625 agreements in force containing MFN clauses11. It was also recommended by a League of Nation to include the standard in a commercial treaty12. But besides many attempts there was never agreed as a standard clause. There were always versions of MFN treatment, turned into clauses only for one particular

7 See B.Nolde. op. cit. p. 32. 8 For more see: S. Basdevant, La clause de la nation la plus favorisee,[w:] “Repertoire de droit international public”, p. 474. 9 See for example R. Riedl, Exceptions to the Most-Favoured Nation Treatment, Londyn, 1931 10 Ibidem, p. 10, Basdevant, p. 477. 11 K. Hyder, Equality of Treatment and Trade Discrimination in International Law, Martinus Nijhoff, Hague, 1968, p. 26. 12 Ibidem, p. 25. agreement. Turning point here, at least in relations to international trade, seems to be creation of the GATT.

2. Most-favoured nation as WTO principle

Despite being known and used for such a long time and some attempts of unification in relation to the MFN, there is no one, commonly agreed clause stipulating MFN. But MFN together with the other standard – national treatment have been highly globalized through the GATT and afterwards through other WTO agreements. Both clauses are a central parts of the agreements and basis of the international trading system. They also became a benchmark for any other MFN or NT granted, especially in regional trade agreements. As the WTO has currently 163 members its MFN clause links almost all economies of the world.

The significance of the MFN clause in the GATT and the WTO legal system is clearly visible in a fact, that MFN treatment was stipulated in the GATT’s very first article. As the underlined in the US – section 31113 “for more than fifty years, the obligation to provide most-favoured-nation treatment in Article I of the GATT 1994 has been both central and essential to assuring the success of a global rules-based system for trade in good”. The clause in the GATT, which is very broad, oblige to give immediately and unconditionally any preferences related to trade in goods, which have been given to another party. What is more, the general MFN in the article I of the GATT is supplemented by other MFN clauses in the GATT’s articles V par. 5 (in relation to transit) and article IX par. 1 (in relation to marks of origin), both of referring to some privileges accorded to a third party and in other WTO agreements such as article 2.1. of an Agreement on Technical Barriers to Trade.

GATT’s MFN clause is unconditional one, with quite broad scope. It refers to all preferences related to trade in goods – “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 internal taxes or other internal charges, as well as all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use. It covers both and imports. It should be granted immediately and unconditionally to any „like product” from any other WTO member.

13 United States – Section 211 Omnibus Appropriations Act of 1998, Appellate Body Report, WT/DS176/AB/R, par. 297 (www.wto.org). GATT’s MFN clause was a benchmark for any other MFN granted in relations to goods in any subsequent agreement. Its strength lies not only in the fact, that is the most comprehensive and broadest MFN clause met in some trade agreements. It strength is also the fact, that it has been gradually clarified in many decisions of the GATT’s and WTO’s dispute settlement bodies. One of the most controversial issue was a definition of „like products”. As a result of many panel and Appellate Body report three-steps test was worked out: at first it is necessary whether there are any preferences in a given measure, then it needs to be determined whether product from one country are like a given product with the other, and finally whether preferences were granted immediately and unconditionally14. It is worth to notice, that it is irrelevant if there was any protectionist goal or of there were any damages caused15.

MFN from the Article I is a subject of traditional exceptions. Although both custom unions and regional cooperation were precisely defined in the Article XXIV, the definition proved to be broad enough to flexible interpretation. Even though there was an attempt that precise definition and requirement to cover “substantially all trade” prevent member to use Article XXIV very often, practice proved otherwise16. During time also other provisions caused erosions of MFN in GATT. Mainly it was a GSP waiver, that enabled to grant unilateral preferences for developing countries and Enabling clause, which gave a permission for preferential trade agreements between developing states that can give partial preferences.

It is also worth to mention, that some MFN clauses are also present in other WTO agreements. The most important is probably MFN from the article II par. 1 of the GATS, although can be perceived as less significant than in the GATT, as it has limited scope. Therefore, we may presume that in this case states can achieve more though regional cooperation, as they can use MFN clauses there to broaden a scope of application of MFN treatment. It results also from the article II par. 2 of the GATS, which enable parties to maintain measures inconsistent with an MFN under a condition they were listed and notified to other parties of the GATS.

MFN clause has been also included in an Agreement on Trade-Related Aspects of Rights (TRIPS), in its articles 3. What can be of special importance here – unlike in

14 P. van den Bosshe, The Law and Policy of the , Cambridge, 2008, p. 324. 15 European Communities — Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/R/E, Report of the Panel, par. 7. 239 i 7.240. 16 J. Bhagwati, Termites in the Trading System, How Preferential Agreements Undermine , Oxford, 2008, p. 10 the GATT and GATS – there is no regional integration exception here. It can be though a significant tool of promotion of intellectual property standards in these states that are not members of the WTO17. On the hand, it can be hardly useful as very often partners of an RTA are the WTO members as well and therefore, already have both NT and MFN treatment granted. There is very limited space for broadening scope here.

3. Erosion of the MFN in the GATT

Probably the most important part of the MFN in the GATT is the so called “MFN ”, meaning tariffs’ rates used by WTO members towards any other member, provided that said member is not eligible for any exceptions. The term “MFN”, referring to GATT’s clause itself is even quite often used in RTAs to describe rates of tariffs levied according to the GATT’s article I, mainly as a benchmark for further preferences18. It is also often used in provisions concerning suspension of preferential treatment19. In this meaning it is rather a symbol of worse treatment20 contrary to preferential treatment on the basis of an RTA. As a result, even though MFN tariff should be preferential, in reality because of overuse of exceptions it became what Bhagwati called “least-favoured nation”21. We can observe gradually, that two parallel processes take place. First one refers to decreasing usage MFN, second is related to changes of MFN clause through regional trade agreements (RTAs), by including separate MFN clauses in them.

Decreasing usage of MFN tariff is caused not only by growing number of RTAs, but even more significantly by preferential trade arrangements. As result all highly developed states hardly use its MFN tariffs. The most significant example is probably Japan. Japan signed 16 RTAs, among which 15 is currently in force. Sixteenth is Transpacific Partnership, already signed, but with unclear future. As majority of them is bilateral22, Japan uses art. XXIV to wave its MFN tariff in relations with only 19 states. At the same it has very broad generalized

17 See B. Mercurio, TRIPS-Plus Provisions in FTA s: Recent Trends (w:) L. Bartels, F. Ortino,Regional…, p. 223. 18 See the US agreements, for example art. 308 of the NAFTA agreement or article 5.10 of the US – Singapore Agreement. 19 For example article 38 of the EU-Albania Agreement or article 3.1 of the EU- South Korea Agreement, article 7.1 of the US-Singapore Agreement. 20 See: J. Baghwati, op. cit, p. 14.; R. Hudec, “Essays on the Nature of International Trade”, Cameron May, 1999, p. 312. 21 Baghwati, op. cit. s. 10. 22 The only multilateral is ASEAN-Japan, but Japan has bilateral agreements with seven out of 10 ASEAN members. System of Preferences (GSP), with quite vast eligibility criteria for countries. As a result there are around 150 countries that are beneficiaries of the system and majority of them are the WTO member states. Japan allow lower tariffs for such states as , Brazil, Argentina or Chile. The significance of the MFN tariff in Japan’s trade relations is remained only by its usage in relations with such major economies like US, Canada and . Nevertheless, it may soon be change, as Canada and United States are signatories of TPP and RTA with the EU has already been negotiated23.

Also other significant developed economies such as United States and European Union rarely use their MFN tariffs. The EU is known for being a leader in regionalism, which means that it has the highest and still growing number of RTAs in force (around 30, many of them multilateral). Moreover it has GSP scheme with 30 countries benefitted from its standard version, 49 from special “everything but arms” scheme for least developed countries and. another 14 from so called GSP+24. As a result, the EU uses its MFN tariffs for around 20 states. Many of them is already negotiating RTAs (like Japan, United States, some of ASEAN member states). Nevertheless, it should be noted, that thanks to stricter policy in granting GSP the number of countries towards which MFN tariffs are used grew recently. Among major economies excluded from the GSP program was China.

The number of countries towards which MFN is used is only slightly higher in case of Unites States. If we exclude signatories of TPP it leaves us only 20 countries and European Union with its 28 member states. The rest of the WTO members are either parties to an RTA (20 states) or eligible for unilateral preferences. US has its GSP scheme well developed, even though the number of eligible countries is far less then in case of Japan. Additionally, US introduced some other preferential trade arrangements notified to the WTO under Enabling clause. The most important is probably African Growth and Opportunity Act (AGOA) established in 2000 and recently prolonged until 2025. It provides for quota and duty free- entry to the US market for some goods, expanding GSP preferences. It is designed to promote development among Sub-Saharan African States.

As above examples show, not only RTAs contribute to the erosion of MFN-based trade under WTO rules. Preferential arrangement, even though undoubtedly positive from development

23 Data received from the WTO RTA (https://www.wto.org/english/tratop_e/region_e/rta_participation_map_e.htm) and PTA (http://ptadb.wto.org/SearchByCountry.aspx) data basis, . 24 Data from: Report on the Generalised Scheme of Preferences covering the period 2014-2015, European Commission, COM(2016)29. point of view are accessible for many more WTO members. As they do not need to meet requirements od substantially all trade, they are much easier to grant. They also do not require costly and time-consuming negotiations.

4. Most-favoured nation in the regional trade agreements

4.1. Trade in goods

Probably due to existence of a very broad and unconditional scope of the GATT’s MFN clause, additional most-favoured nation treatment is rarely granted in regional concluded by the WTO members. It also arises from the fact, that preferential agreements are an exception from the GATT’s MFN and article XXIV enable to grant an exceptions preferences stronger than MFN only for establishing a free trade area or a custom union. And, as establishing of an FTA or a CU means that there are no duties between partners, there should be no space for any further preferences there. Though, it must be noted here, that because of different scopes of FTAs, which in fact rarely cover all trade between members of an FTA, there is a margin, where also MFN could be used.

For example, MFN treatment in relation to goods is not granted in any of 14 of the US agreements or RTAs concluded by Japan or also very active participant of regionalism - Chile. It is also absent in majority of the EU RTAs. Interesting example of attitude towards the universal MFN clause in the GATT is Asia Pacific Trade Agreement. It does not include an MFN clause as such, but it refers to respect “for transparency, national treatment and MFN treatment principles”. Although it does not refer directly to the GATT, one may assume, that when called “the principle” it must be a references to the clause from GATT’s Article I. Similar technique was used in Chile - South Korea agreement, which only briefly refers to the MFN principle.

Nevertheless, the EU is the most active and probably also the most creative member of the WTO as far as regionalism. Therefore, it has a variety of RTAs with serious differences between them25. MFN clauses in relation to goods. Probably the most interesting example of the EU creativity here are Economic Partnership Agreements concluded by the EU with ACP (Africa, Caribbean, Pacific) countries. In all of the EPA agreements, including Interim EPA

25 Further elaboration of that issue can be found in: M. Slok-Wodkowska, K. Sledziewska, (2015) Anatomy of the EU regional trade agreements – what really influences ? (working paper) which covers only trade in goods, there is a clause similar to the MFN included26, although it was named “more favorable treatment”. The clauses are asymmetric – the obligations of the EU and its ACP partner are different. They oblige the EU to grant any better treatment if it gave such to any other partner, but only if these preferences arise from any other . It was probably designed to exclude any other, more developed and tighter modes of cooperation, especially custom unions. It also leaves some space for interpretation whether other types of agreements concluded by the EU, such as association agreements with an FTA component or “deep and comprehensive free trade agreement”, are FTAs in the meaning of EPA’s MFN clauses27.

A relevant obligation of the ACP partners is limited only to FTAs concluded with a “major trading partner”, defined subsequently in the very same article as “a country or territory accounting for a share of world merchandise exports above 1%” or in case of a group of countries or territories above 1,5%. Concluding an FTA with such a partner does not lead to providing any preferences automatically. It only obliged an ACP partner to enter into consultation with the EU. Although asymmetry here clearly arises from the fact, that the main goal of the agreements is development of a weaker partner, it is perceived as being detrimental to an ACP partner28. It can also be seen as inconsistent with the WTO enabling clause, as it triggers a conclusion of the south – south free trade agreements with partners such as Brazil29. It must be noted though, that this quasi MFN does not necessarily means, that some additional preferences are automatically granted. We can assume, that the EU, following to its declared values, will enable a weaker ACP partner to offer some additional preferences to another , even if that developing country is a major trading partner”.

Another interesting examples of MFN in an agreement with developing state could be found in an agreement between Australia and New Guinea. It contains additional MFN clause, with precisely regulated scope. Preferences eligible for MFN treatment are: custom duties and methods of levying them, rules and formalities, restrictions and prohibitions and allocation of

26 Article 19 of the UE-CARIFORUM agreement and of the EU-Cameroon agreement, article 17 of the EU- Ivory Coast Agreement, article 16 of the EU – Pacific countries agreement and of the EU- Eastern & Southern Africa agreement. 27 More about EU MFN clauses: M. Słok-Wódkowska, Most-favoured nation and national treatment in the EU and US regional trade agreements – tools for equal or discriminatory treatment?, in: Reconceptualising the Rule of Law in Global Governance, Resources, Investment and Trade, ed. P. Pazartzis, M. Gavouneli, Bloomsbery, 2016, p. 453. 28 C. Chase, “MFN in the CARIFORUM – EC Economic Partnership Agreement: Policy Blunder or Legal Inconsistency?” (Legal Issues of Economic Integration, issue 2, 2011) 190. 29 Ibidem, 192. foreign exchange. MFN should be granted provided, that it does not derive from an FTA, agreement with developing country or multilateral commodity agreement and frontier traffic regulation. Australia included an MFN clause also to its agreement with New Zealand, but limited to tariffs. If preferences are granted for precisely named states (e.g. New Guinea) they are not accessible on the basis of this MFN clause.

New type of MFN clause was used in ASEAN agreement related to trade in goods. It is not unconditional or immediate. It only entitles to start negotiations in order to receive further preferences. It therefore partly resembles MFN clauses in the EU agreements with ACP states.

Probably the most important from the point of view of GATT’s MFN is a clause included in an Article 9 par.1 of a Global System of Trade Preferences among Developing Countries (GSTP). It states, that any preferences - tariff, para-tariff and non-tariff concessions, negotiated and exchanged among participants in the bilateral/plurilateral negotiations shall, when implemented, be extended to all participants in the GSTP negotiations on a most- favoured-nation (MFN) basis. As a result, it creates a second circle of the MFN treatment. There is less-favoured treatment among all WTO members and MFN treatment among members of the GSTP. It is worth to mention that it is plurilateral agreements with over 40 participants, which might have an impact on the deterioration of MFN clause in the GATT.

4.2. Trade in services

Most-favoured nation clauses are more often used in relation to trade in services than in relation to trade in goods (although there are still many RTAs that do not include such a provision). It is probably because of the fact, that they can have different scope of application than liberalization under auspices of the WTO. It is easier to grant some additional preferences here, and to grant preferences that can potentially expand thanks to the MFN clause. On the one hand though, services are much less liberalized then a trade in goods and on the other there is less agreements, that cover trade in services and were notified to the WTO as EIA.

However, the real assessment of the legal meaning of these provisions is extremely complicated. Because of the nature of MFN clauses both in GATS and in RTAs the actual meaning might be hidden in annexed lists of exceptions and therefore uneasy to grasp30. Nevertheless, the MFN clauses in relation to services are always limited to the way services, investors and investment are treated and excluded broadening of the scope of an RTA to other types of services.

Therefore, MFN clauses in relation to services are very often simple clauses related to treatment of services and investors. Best example here are all EIAs concluded by the United States. All of them include two separate MFN clauses in relation to trade in services – one to supply of services and the other to investments and investors. They are all so called NAFTA– type agreements31, as NAFTA was the first one and became a pattern for others. The wording of clauses is classic, as it simply provides that one party should accord treatment no less favourable to treatment accorded to any third party. The actual meaning and economic importance depends here not on the wording but on exceptions from the MFN treatment usually listed in annexes as well as lists of concessions as a scope of the MFN is related to the scope of concessions.

More creative was the EU. Its most frequently used clause in relation to services is a combined MFN and NT clause. A party should grant NT or MFN treatment, whichever is better. Such wording was probably inspired by investment treaties where such clauses are often used. It was used in the EU-Jordan agreement for the first time and then developed in other agreements concluded shortly after it. It was also used is recently concluded Deep and Comprehensive Free Trade Agreements with Ukraine, Moldova and Georgia32. Such a wording is more preferable to foreigners, because they can be entitled to a better treatment then nationals on the basis of MFN.

Completely different MFN clause has been included into the EU-CARIFORUM agreement. This is the only full EPA concluded so far, but on the basis of the fact, that in every interim EPA we can find alike provisions in relation to trade in goods, we can assume, that in potential EPAs concluded in the future, the MFN clause in relation to goods will be similar, too. The MFN in relation to trade in services is like the MFN clause in relation to trade in goods – asymmetric. Although the EU party is obliged to grant MFN after granting similar preferences to any other partner, the developing states forming CARIFORUM are obliged to

30 More comments in P. Latrille, J. Lee, “Services Rules in Regional Trade Agreements, How Diverse and How Creative as Compared to the GATS Multilateral Rules?” (WTO Staff Working Paper, 2012) 23. 31 Typology after P. Latrille, J. Lee, op.cit. 32 Detailed analysis of the EU MFN clauses in all its RTAs: M. Slok-Wodkowska, op. cit. p. 457. the reciprocity only in case of concluding FTA with a major trading economy (defined in the same way as in relation to trade in goods.), in other cases they have to enter into consultations.

Quite complicated structure has an MFN clause in relation to trade in services in the EU- Mexico agreement. First of all, it refers to “less favourable treatment”, which is forbidden and not, as in majority of agreements, to “more favourable treatment”. It is clearly linked with an obligation stated in a paragraph 3 of the MFN clause33 which oblige a party to enter into negotiations in order to grant some preferences in case of entering into another economic integration agreement. Paragraph 2 expressis verbis excluded from the MFN all agreement concluded before issuing the decision on liberalization, but only those notified under article V of the GATS. The scope of the MFN is also limited and covers only mutual recognition accorded to service suppliers. It means that it can potentially broaden a scope of services liberalized.

Other agreements concluded by the EU with American countries do not include MFN treatment in relation to trade in services. They only refer to lists of commitments and NT. It might be explained by the fact, that they are all cross-regional agreements, concluded by parties with strong and close partners in their regions, with whom they have close economic relations. The same technique was used in initialed agreement with Singapore.

The only other agreement which includes an MFN also in relation to trade in services is the EU – Korea. The MFN has been granted in relation to supply of services and suppliers, but agreements of “significantly higher level” have been excluded from the MFN as well as agreements concluded before entry into force of the EU – Korea agreement. Agreements which are of the significantly higher level, have not been defined, but we can assume that it refers to some future agreements with important and closer partners with whom a party is more integrated. The scope of the MFN clause has been limited to services, which were liberalized in the agreement.

Among other types of MFN used in RTAs in relation to services are again obligations to enter into negotiations. Such a clause was for example used in Chile-EFTA agreement. It is a new type of MFN clause, very similar in its legal meaning to highly criticized one hundred years ago conditional MFN. Apparently in the second round of MFN preferences, states are more reluctant towards commitments that cannot be properly defined in time of signing.

33 Article 5 of the Decision 2/2001.

Conclusion

There are no doubts that MFN clauses in the GATT and GATS decreased in their meaning in recent decades. Even though they are still essential part of the WTO legal system, they are no longer perceived as actual preferences. They are a benchmark and starting point for additional preferences.

Although as showed above, erosion of MFN is caused mainly by the fact, that MFN tariffs and preferences are in fact more and more rarely used by WTO members. With a variety of not only RTAs but mainly preferential trade arrangements for developing countries, especially major developed economies use MFN tariffs in relations with its less-favoured partners.

There is also a second circle of MFN benefactors – even more favoured nation then those most favoured according to the WTO. The best example is probably GSTP with its inner circle of MFN among members only.

Surprisingly, much more simple situation is with trade in services then in goods. If one party grants MFN to the other its aim is probably to widen the scope of MFN compared to the one from GATS to other types of services or modes. It does not change the GATS MFN itself.