For almost fifty years, key provisions of GATT outlawed discrimination among members and between imported and domestically-produced merchandise. This basic principle of the multilateral trading system is embodied in the WTO Agreement, deriving mostly from the principles that constituted the foundations of the GATT. This principle is guaranteed through the operation of various clauses included in the multilateral agreements on the trade in goods, in the GATS, and in the TRIPs Agreement.

The principle of non-discrimination consists of three aspects:

The first is the most-favored-nation status, the cornerstone of multilateral trade. It emphasizes that no matter which country or region a product, service or provider of the service comes from, the items should be treated equally upon entering customs. The most-favored-nation status oversees equality and fairness, but not the depth of trade.

The second is national status, which means a product, service or provider of the service is treated as its own national by the government of the country upon whose customs house the items reach, or into which they enter, according to the foreign investment policy of that given country.

The third is mutual benefit, which means an equal degree of opening to each other, and equal rates of tariff duties.

There are four important exceptions to the key GATT principle of non-discrimination.

1. Developed countries can give tariff preference to developing countries.

2. Countries entering into regional free trade agreements do not need to extend the preferences negotiated in this context on an MFN basis.

3. A country can invoke temporary «safeguard» protection to one of its industries suffering serious injury due to a surge of imports.

4. Temporary quantitative restrictions can be invoked by a country with serious balance of payment problems.

In the latter two cases, these measures are temporary exceptions to the member's commitment to the GATT, and a public investigation has to be undertaken to allow for limited relief from GATT obligations.

Most-Favored-Nation (MFN) Treatment.

This commitment is the starting-point of the WTO system of rights and obligations. It is fundamental to all the multilateral trade agreements annexed to the WTO Agreements. Quite contrary to its name, this provision does not mean any special favor to any country; in fact, it prohibits special favors even to the friendliest country. What this principle actually means is that any benefit in connection with exporting or importing given to a product of a most favored nation (whether a member or not) has to be given to the like product of all Members without discrimination. According to Article I of both GATT1947 and GATT1994, the famous “most-favored-nation” clause, members (or the Contracting Parties to the GATT 1947) are bound to grant to the products of other members (Contracting Parties) treatment no less favorable than that accorded to the products of any other country. Besides, members of the WTO have entered into this commitment under the GATS (Article II) in relation to treatment of service suppliers and trade in services, and under the TRIPs (Article 4) in regard to the protection of intellectual property. No reason whatsoever is sufficient to justify any deviation from MFN treatment. Thus, no country is to give special trading advantages to another or to discriminate against it. All are on an equal basis and all share the benefits of any moves towards lower trade barriers.

The principle of MFN treatment applies to both imports and exports, i.e., when a Member:

· imports like products originating in the territories of other Members, and

· exports like products destined for the territories of other Members.

For example, if Member country A has been imposing a customs duty of 10% on steel bars, and if it now starts charging only 6% duty on the steel bars of any particular country (whether a Member or not), it has to reduce the duty to 6% for the steel bars of all Member countries. Similarly, if a Member had earlier banned the export of coal, and now allows its export to a particular country (whether a Member or not), it has to allow export to all Member countries.

Of course, a Member is not bound to give MFN treatment to a country which is not a Member of the WTO. The treatment given to non-Member countries depends on the Member's bilateral agreements with each one of them. However, if a Member gives a certain trade benefit to a non-Member, then that benefit has to be extended to all Members in accordance with the principle of MFN treatment.

Forms of Benefit.

The benefits covered by MFN treatment may be in the form of advantages, favors, privileges or immunities granted by a Member in respect of a product. For example, an advantage may be in the form of a reduced tariff level; a favor may be extended by allowing the export of a raw material which was not allowed earlier; a privilege may be in the form of exemption from a tax; and immunity may be given by exemption from a health hazard test. The obligation on a Member is to give these benefits immediately and unconditionally to the like products of all Members once these have been given to a product of any country.

Coverage of Benefit

The benefits which have to be extended to all Members may be with respect to the following items:

· Customs duties, i.e., the tariff imposed at the time of importation;

· Charges of any kind imposed on importation or exportation, e.g., import surcharge, variable levy, excise duty or export tax;

· Charges of any kind imposed in connection with importation or exportation, e.g., customs fee, consular fee, quality inspection fee;

· Charges imposed on the international transfer of payments for imports or exports, e.g., some tax or fee charged by governments at the time of these transfers;

· The method of levying such duties and charges, e.g., the method of assessing the base value on which the duty or charge is calculated, or the type of forms seeking information which will help in calculating the amount to be charged;

· All rules and formalities in connection with importation and exportation, e.g., requirement of giving specific information or declarations at the time of import or export;

· Internal taxes or other internal charges, e.g., sales tax, charges imposed by local bodies;

· Laws, regulations and requirements affection internal sale, offering for sale, purchase, transportation, distribution or use of any product, e.g., requirement of quality certificates, restrictions relating to movement, transport, storage or retailing channels, need for particular type of packaging, restriction on use.

The simplest implication of MFN treatment is that a Member cannot apply different rates of customs duty on a product imported from different Member countries. Similarly, in any of the matters mentioned above, a Member cannot give different treatment to different Member countries, nor can it give better treatment to a non-Member country.

For example, if a Member charges a 10% import duty on a product, say textile machinery, imported from Member countries, it will not be permissible to charge only a 5% duty on the textile machinery coming from a Member country which has allowed aid to buy this product. Similarly, if a Member charges a 3% customs duty on a product coming from Member countries in general and now wishes to raise it to 5% for an unfriendly Member, it is not permitted to do so. Similar discipline applies to the other matters listed above.

Some Important Concepts.

· listing of products in the tariff schedule

· duties applied to the products

· process of production

· composition and content

· chemical and synthetic origin.

For example, Spain had divided unroasted coffee into five tariff classifications: Colombian mild, other mild, unwashed Arabica, Robusta and other. The first two were duty-free and the other three were subject to a 7% duty. Brazil claimed that all these were like products and that different rates of duty were inconsistent with Article I. The Panel on Spain's Tariff Treatment of Unroasted Coffee (June 1981) noted that the arguments given for differentiation were based on geographical factors, cultivation methods, the processing of the beans and genetic factors. The Panel did not consider such grounds as sufficient for differentiation and noted that no other Member made such a classification. It concluded that these should be considered like products within the meaning of Article I.

Unconditional Application of Benefits: MFN treatment has to be extended to Members immediately and unconditionally. If a Member formulates an improved set of rules on the trade of goods within the framework of GATT 1994, it cannot limit the application of these rules to only those Members that fulfill some conditions. For example, it cannot say that the improved rules will be applicable only to those that undertake to adopt similar rules. Such a limited application will be treated as a conditional application, and will not be allowed.

For example, the Working Party on the accession of Hungary examined in 1973 the practice of providing certain benefits of tariff treatment only to countries which had a cooperation contract with Hungary. During the course of examination of this matter, the GATT Secretariat gave, on request, a legal opinion that the prerequisite of having a cooperative contract in order to get beneficial tariff treatment appeared to imply conditional MFN treatment and would not appear to be compatible with Article I.

Another example is the US. Before China's accession to the WTO, the US Congress reviewed annually the MFN treatment to China. This treatment was always connected with non-business issues such as the Taiwan Question, the Tibetan minority nationality, the Tiananmen Square Incident, and human rights. After China's WTO accession, these practices are not allowed any longer.

Some Considerations.

Coverage of unbound duty. If a Member is committed not to raise the customs duty on a product beyond a particular level, the duty is said to be bound, otherwise, the duty is unbound. The MFN treatment obligation applies equally to bound and unbound customs duties.

Balancing of treatment not permissible. Each relevant measure or step has to satisfy the condition of MFN treatment by itself. A Member is not allowed to give less favorable treatment in one case to balance more favorable treatment in another case.

Goods transited through several countries. The benefits apply to products “originating in” the territories of Members. This phrase signifies that even if the product might have passed through some other countries on the way, it has to be given the particular benefit in the importing Member country based on its country of origin.

Possibility of circumvention. There may be cases where the rules and procedures appear non-discriminatory and yet the application of these rules and procedures causes discrimination in actual practice. For example, the Panel report on EEC' Imports of Beef from Canada (March 1981) examined an EEC regulation imposing a levy-free tariff quota on high-quality grain-fed beef. The suspension of import levy was conditional on the production of a certificate of authenticity. The Panel found that the only authorized certifying agency was a US agency authorized to certify only meat from the US. The Panel concluded that the regulation had the effect of preventing access of like products from other countries and was thus inconsistent with Article I.

Exceptions.

Some provisions of GATT 1994 and some decisions of Members have provided for exceptions to MFN treatment.

Enabling clause: A measure agreed at the end of the Tokyo Round in 1979 and normally referred to as the «enabling clause», provides a permanent legal basis for the market access concession made by developed to developing countries under the generalized system of preferences (GSP). GSP is a system of tariff preferences accorded by developed countries to developing countries. It allows developed Members to accord differential and more favorable treatment to developing countries without according such treatment to other Members and, to that extent, it is a relaxation of the MFN clause.

The treatment covered by this exception is specified as follows: Differential and more favorable treatment in respect of non-tariff measures governed by the provisions of instruments multilaterally negotiated earlier under the auspices of the GATT and now within the framework of the WTO. Through this exception, special treatment was given to developing countries in various Codes which emerged after the Tokyo Round and in various agreements resulting from the Uruguay Round. Arrangements among developing countries as a whole or among a few of them on tariff preferences. Special treatment of the least developed countries in the context of general or special measures in favor of developing countries.

Free-Trade Area, Customs Union: A group of Members may constitute themselves into a customs union or a free-trade area, and have totally free trade or reduced levels of duties and of other trade-restrictive regulations among themselves without the obligation of extending such treatment to other Members.

A free-trade area is a group of two or more countries in which duties and other trade-restrictive regulations are eliminated on substantially all the trade between these countries. A customs union is a group of countries forming themselves into one customs territory in which duties and other trade-restrictive regulations are eliminated with respect to substantially all the trade between the countries or, at least, with respect to substantially all the trade in products originating in these countries. Further, the Members constituting the customs union should apply substantially the same duties and other trade regulations to the products of countries outside the union.

Disciplines followed while forming a free-trade area or a customs union:

1) At the time of the formation of a customs union, the duties and other trade regulations applied to Members outside the union must not be, on the whole, higher or more restrictive than what were applicable in these countries prior to the formation of the union.

2) In respect of a free-trade area, the duties and other trade regulations in the countries forming the area should not be higher or more restrictive at the time of formation of the area than what they were in these countries prior to the formation of the area.

Frontier Trade: Advantages accorded by a Member to adjacent countries in order to facilitate frontier traffic are permitted (Article XXIV.3 of GATT 1994).

Government Procurement: The MFN obligation of Article I does not apply to the import of products for immediate or ultimate consumption in government use and not otherwise for resale or use in the production of goods for sale. There is a special plurilateral agreement governing such purchases.

General Exceptions: Article XX of GATT1994 allows Members to restrict imports or export from/to specific sources. Such measures can be taken for some specified purposes, for example, for the protection of public morals, protection of human, animal or plant life or health, etc.

Security Exception: Restrictions on imports and exports from/to specific countries can be imposed for security reasons in accordance with Article XXI of GATT1994.

The basic objective of the MFN treatment principle is to strengthen the multilateral process in international trade policy. When two countries exchanging tariff concessions between themselves extend these new tariff levels to all Members, the principle that gets emphasized is that all Members have an expectation of sharing the benefits of the system. In the same way, when a Member gets into some difficulty, for example, because of a balance-of-payments problem or increased imports, all Members get prepared to share the burden of reduced export opportunities into the territory of that Member.

The multilateral process is further eroded by the formation of large regional trading blocs. If the world is divided into a few very large trading blocs, the relevance of the multilateral system will be very much reduced. Another risk to the multilateral process comes from unilateral action or the threat of such action from economically strong Members of the system. It reduces the confidence of the weaker Members in the efficacy and effectiveness of the system.

National Treatment.

Basic Discipline of NT.

Imported products must not be accorded treatment less favorable than that accorded to like domestic products with respect to laws, regulations and requirements affecting their sale, purchase, transportation, distribution or use. For example, it is not permissible to lay down a condition that an imported product must be stored in particular types of warehouses or must be transported by particular types of vehicles, when no such conditions apply to a like domestic product.

A Member cannot have any quantitative regulation requiring compulsory utilization of a product from a domestic source in preference to using a like imported product. For example, it cannot be prescribed that in the manufacture of a chemical, a certain quantity or proportion of a constituent must be obtained from domestic sources.

A Member cannot apply internal taxes or other internal charges or internal quantitative regulations in a manner so as to afford protection to domestic production. Here, “domestic production” does not mean only the production of that particular product; it also means the production of directly competitive or substitutable products. This means that even if the taxes or charges are applied at the same rate on the imported and like domestic products, the manner of application should not afford protection to domestic production. Clearly, a distinction is to be drawn between a `like product' and a `directly competitive or substitutable product'. For example, a country may apply a very high internal tax rate on oranges which is applicable to both imported and domestic products, but if this country does not produce oranges, this tax, in effect, goes to raise the price of only imported oranges. And in this manner, this country may be affording protection to its own production of apples, in so far as oranges are directly competitive or substitutable with apples.

Important Concepts.

Sample cases on “like products”

1) The Panel on US-Taxes on Petroleum and Certain Imported Substances (June 1987) examined the differential internal taxation on domestic and imported petroleum and some petroleum products. It found that the domestic products were crude oil, crude oil condensates and natural gasoline, and the imported products were crude oil, crude oil condensates, natural gasoline, refined and residual oil, and certain other liquid hydrocarbon products. It concluded that either the domestic products and imported products were identical or they served substantially identical end uses. The Panel considered them like products.

2) The Panel on US-Measures Affecting Alcoholic and Malt Beverages (June 1992) considered the exercise tax exemption on wine made from a particular type of grape, i.e., scuppernong grapes. On the complaint of Canada that this practice was inconsistent with Article III, the US argued that the tax provision was uniformly applicable to all wines produced from this particular variety of grape. The Panel examined this question based on the usual criteria of end use, consumer tastes and habits, and the properties, nature and quality of the products, and also on the objective of Article III. The Panel found it relevant to consider whether the differentiation of the products was being made so as to afford protection to domestic production. It observed that tariff classification and tax laws in the US did not claim any public policy purpose for this tax provision except the purpose of subsidizing the small local producers. The Panel concluded that unsweetened still wines were like products and that the differentiation in the tax regulation was affording protection to local products and was therefore inconsistent with Article III.

Discrimination against Imported Products, Protection of Domestic Products:

Discrimination against imported products or protection of domestic products can often be easily detected if done through differential internal taxes or differential internal charges. However, it is not easy if the discrimination or protection is alleged in respect of laws, regulations and requirements affecting sale, purchase, transportation, distribution and use. This matter has been the subject of a large number of disputes in the past. Certain principles have evolved in the course of the consideration of this issue by the various panels. Some of these important principles are given below.

Any requirement on the imported product going beyond the obligation to indicate the origin of the product would be considered inconsistent with Article III 1994 if it dose not also apply to the domestic product. For example, there was a Hawaiian regulation that firms which sold imported eggs had to display a placard stating “we sell foreign eggs”. Australia complained that this requirement affecting sale was inconsistent with Article III.4. The regulation was later withdrawn.

Granting financial facilities, e.g., special credit facilities, tax refunds or tax remission or exemption, for the purchase of domestic products would be considered discriminatory against imported products and as protection of domestic products. For example, the Panel on US Measures Affecting Alcoholic and Malt Beverages (June 1992) examined the US tax measure providing excise tax exemption for domestic producers of beer and wine, which was not available for imported products. The Panel found that the tax law operated to create a lower tax rate on domestic beer and wine than on like imported products and that thus it was discriminatory.

If investors or local industry or importers are obliged to purchase domestic products, there is a denial of opportunity to the like imported products for competing in this particular market. Hence, it would be considered discriminatory against the imported products. For example, the Panel on Canada-Administration of Foreign Investment Review Act (June 1983) examined the Canadian system of written undertakings on purchase and export. Investors were required to give an undertaking to purchase goods of domestic origin. The Panel held that such a requirement clearly meant that imported goods were less favorably treated than domestic goods and that hence, this provision was not consistent with Article III. Further, even if the undertaking was conditional on the goods being competitively available in Canada, the less favorable treatment still held as it resulted in giving preference to domestic products when imported and domestic products were available on equivalent terms.

Imported products cannot be subjected to any special processing requirement which is not obligatory for the domestic product. For example, the UK had a regulation that domestic poultry, after slaughter, could be chilled by any method, whereas imported poultry was to be cooled by only the spin-chill method. The US complained about it and a panel was formed, but the matter got settled in the meantime.

If imported products are required to pass through certain specified wholesale or retail channels or some specified means of transport and if this requirement is not applicable to domestic products, such a requirement will be held to be discriminatory against the imported products. For example, the Panel on US Measures Affecting Alcoholic and Malt Beverages (June 1992) considered a requirement in some states of the US that imported beer and wine be sold only through in-state wholesalers or other middlemen, while some in-state like products were permitted to be sold directly to retailers. The US argued that in-state breweries and wineries bore the same costs as did the wholesalers in respect of record-keeping, auditing, inspection and tax collection. It also said that most in-state beer and wine producers preferred to use wholesalers rather than to market their products directly to retailers. The Panel held that Article III requires relative competition opportunities in the market, irrespective of the actual choices made by enterprises, and that denial of such opportunities creates less favorable treatment to the imported products. This Panel also examined the requirement of some states in the US that alcoholic beverages imported into the state be transported by common carriers authorized to operate as such within the state, whereas in-state producers of alcoholic beverages could deliver their products to customers in their own vehicles. The Panel concluded that such a requirement resulted in less favorable treatment to imported products.

A regulation that domestic products and imported products should both adhere to a minimum-price requirement is not consistent with Article III of GATT 1994, even though the regulation is equally applicable to both domestic and imported products. For example, the Panel on Canada-Import, Distribution and Sale of Certain Alcoholic Drinks by Provincial Marketing Agencies (February 1992). The Panel was of the opinion that this practice did not necessarily accord equal conditions of competition to imported and domestic products in the sense that the imported product was prevented from being supplied at a price below that of the domestic product.

Important Considerations.

For example, the Panel on US-Measures Affecting Alcoholic and Malt Beverages (June 1992) examined a complaint regarding the reduction of excise duty for some domestic products. In the Panel hearing, the US argued that only 1.5% of domestic beer was eligible for the reduction in the excise tax on beer and less than 1% benefited from the reduction, hence, the tax neither discriminated against imported beer nor provided protection to domestic production. The Panel was of the opinion that Article III protects competitive conditions between imported and domestic products and that this protection is not conditional on trade effects.

Exceptions.

Emerging Problems.

So far, the criteria of determining like products have been based on the characteristics of the products; attempts have been initiated to broaden the scope so as to include in the criteria even the method of production of the products. This is the emerging problem. For example, suppose the imported product is produced in factories which pollute the environment by discharging harmful fluids into the neighboring river. At present, this aspect of the production will be totally irrelevant in comparing this imported product with the domestic product having similar composition, use and other characteristics. The domestic product and the imported product will be considered like products, and, as such, the imported product will have the benefit of national treatment.

Now, attempts are being made to distinguish the imported product from the domestic product on the grounds of whether the production process of the former causes pollution to the environment. If this is accepted as a criterion for determining the like product, the imported product will be declared as not being a like product, and thus will not have the benefit of national treatment.

2. Progressive trade liberalization and Transparency