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From most-favoured to least favoured nations – how RTAs influenced the WTO MFN-based trade? 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 international trade 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 protectionism 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. Customs union 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 Appellate Body 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 exports 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.

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