Most Favored Nation (MFN) Treatment for India An Analysis

What is Most Favored Nation (MFN)?

Most Favored Nation (MFN) treatment is the basic principle and one of the general provisions and obligations of General Agreement on Tariffs and Trade (GATT) and World Trade Organization (WTO). The general principle of this provision is that a member state of the GATT/WTO, will accord the MFN treatment to all other member countries, and will adopt no discrimination against any other. Thus, every other member state of GATT/WTO will be the “most favored nation” on equal, non-discriminatory ground. In trade terms, it means that rates paid by a country declared as MFN on its exports to the markets of the country granting MFN, will also be applicable for the other countries and in this way, all countries will be treated equally as MFN.

Article I of the GATT provides that the member states will accord the MFN treatment to all other member countries and therefore basically lays the rule-principle of non¬discrimination amongst the WTO members with respect to:

•    Customs duties and charges of any kind imposed on or in connection with importation or exportation or imposed on the international transfer of payments for imports or exports;

•    The method of levying such duties and charges;

•    All rules and formalities in connection with importation and exportation, and

•    Advantage, favor, privilege or immunity granted to a WTO Member to any product originating in or destined for any other country and has to be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties.  

Exceptions to MFN

However, the above provisions do not mean that extending MFN treatment to all the member countries is mandatory. GATT, the agreement in operation since January 01, 1948, which transformed into WTO from January 1, 1995 (also known as GATT 1994, as the same agreement was continued with some amendments and several additions) provide certain exception to this general principle. These exceptions include:

•    When two or more member countries enter into a ‘Free-Trade Area’ or ‘Customs Union’ between themselves, they are not required to necessarily accord the equivalent tariff treatment to the members outside such arrangements (Article XXIV of GATT 1994
•    When the member countries accord some trade benefits to another member country with an aim to facilitate frontier traffic (XXIV.3)
•    Besides, MFN treatment does not apply to Government Procurement and can also be denied, citing the security reasons (Article XXI).

It means there are still ‘reasons’ citing which a country can block or deny MFN treatment to other. Besides the exception mentioned above, there is a special exception provided in GATT specifically for Pakistan and India. Paragraph 11 of GATT Article XXIV reads as follows:

“Taking into account the exceptional circumstances arising out of the establishment of India and Pakistan as independent States and recognizing the fact that they have long constituted an economic unit, the contracting parties agree that the provisions of this Agreement shall not prevent the two countries from entering into special arrangements with respect to the trade between them, pending the establishment of their mutual trade relations on a definitive basis.”

This particular exception literally provides the two countries with an exception to enter into a specific arrangement for mutual trade “pending the establishment of their mutual trade relations on a definitive basis.” However, this ‘exception’ is seen by some as more of a ‘positive’ exception than the prohibitive one, as it implied that the two countries, arising out of a single economic unit, were allowed to go for an arrangement beyond general principle of MFN, not denying it.

It may be noted here that Pakistan does not stand out as the only example of exercising an exception and not granting the MFN. The United States has been using the granting of MFN as a tool to achieve its political or economic objectives in case of various countries including China for years.  Hennery Kissinger (2011) in his recent book On China also details how politics has been prevailing over grant of MFN treatment to China by the United States, not very long ago.