HIMACHAL PRADESH NATIONAL LAW UNIVERSITY,

SHIMLA

DISCIPLINE: INTERNATIONAL TRADE LAW

TITLE: - SCOPE OF MOST FAVOURED NATION AND NATIONAL TREATMENT

PRINCIPLE

SUBMITTED BY- SUBMITTED TO

ROHIT DHAMIJA DR. NUTAN KANWAR
1020202105 TEACHING ASSOCIATE
BA.LLB, 7TH SEMESTER HPNLU, SHIMLA

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 ACKNOWLEDGEMENT

I Rohit Dhamija a FOURTH-year law student would like to express my sincere gratitude towards
Dr Nutan Kanwar, Teaching Associate, who always stand for us and helped me at every possible
step of my assignment. And without whose guidance I would not have completed my assignment
successfully. I would also like to sincerely thank Himachal Pradesh National Law University,
Shimla and its faculty for guiding and encouraging me at every step of my assignment.

I would also like to extend gratitude to my seniors and friends who played an important role and
assisted me with the insights they had. Last but not the least I bestow my heartfelt gratitude towards
my parents and family members whose instant motivations kept me going throughout the
assignment.

ROHIT DHAMIJA
B.A. L.L.B (Hons)
7th SEMESTER

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 DECLARATION BY THE STUDENT

I, the undersigned solemnly declare that the present assignment on the topic “Scope of Most
Favoured Nation and National Treatment Principle” is purely based on my own work as it have
been carried out during my study under the esteemed guidance and supervision of Dr. Nutan
Kanwar, Teaching Associate, at the Himachal Pradesh National Law University, Shimla and also
from the help of various online websites and research papers. I would like to make clear that the
whole assignment is typed by me on my own words after taking the help from the mentioned
sources. It is important to note that plagiarism may be found as I haven’t done the assignment
paraphrase. I further certify that:

1. The work contained in the assignment is not purely original but has been done by myefforts and
hard work.

2. The work is not submitted to any other organizations, journals, websites, etc.

3. I’ve followed the guidelines provided by the university in writing the assignment.

ROHIT DHAMIJA
B.A. L.L.B (Hons)
7th SEMESTER

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 CONTENTS

1. RESEARCH METHODLOGY ................................................................................5

2. RESEARCH OBJECTIVE …. ..................................................................................5

3. RESEARCH QUESTIONS .......................................................................................5

4. INTRODUCTION .................................................................................................... 6

5. MOST FAVOURED NATION PRINCIPLE ............................................................. …6

 Introduction

 Legal Framework

 Application

 Scope

 Economic advantages

 Declining Effectiveness

 Exceptions

6. NATIONAL TREATMENT PRINCIPLE . ........................................................... .22

 Introduction

 Legal Framework

 Application

 Scope

 Exceptions

7. CONCLUSION ................................................................................................... …31

8. BIBLIOGRAPHY ............................................................................................... …32

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 RESEARCH METHODLOGY

1. This assignment adheres to both the combination of doctrinal and non-doctrinal (empirical) method
of research as there are both legal studies and the paper at same time concentrates on the social
values which is present in such a theoretical analyzing paper. This assignment utilizes the both
primary and secondary sources of data such as journal articles, books, unpublished thesis and other
empirical data as well. Adopted a comparative research design to systematically analyze and
compare procedural and substantive laws in the Indian legal system. Collected primary data from
relevant legal texts, statutes, and legislative documents to understand the provisions of procedural
and substantive laws in India. Analyzed significant judicial decisions to comprehend the application
and interpretation of procedural and substantive laws.

RESEARCH OJBECTIVES:

2. To examine the historical evolution of the Most Favored Nation (MFN) and National Treatment
principles in international trade law.
3. To conduct a comparative analysis of the scope, application, and implications of MFN and National
Treatment.
4. To identify challenges and controversies associated with the implementation of MFN and National
Treatment principles.
5. To explore current trends and emerging issues related to the application of MFN and National
Treatment in the contemporary global trade landscape.

RESEARCH QUESTIONS OR HYPOTHESES:

6. What are the core legal provisions governing MFN and National Treatment in international trade
agreements, and how do they contribute to fair and equitable trade relations?
7. In what ways does the MFN principle promote non-discriminatory treatment among trading
partners, and what are the implications of invoking this principle in trade disputes?
8. How effectively does National Treatment ensure equal treatment for domestic and foreign entities
in the international trade arena, and what challenges does it face in implementation?
9. What are the key similarities and differences in the scope and application of MFN and National
Treatment, and how do they contribute to or challenge the objectives of international trade
agreements?

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 INTRODUCTION

1. In International trade (under World trade organization law and policy), having access to the market
of other Member States is not enough: this access should take place on a non-discriminatory basis.
The concept of non-discrimination is without doubt the crux of World Trade Organization (WTO)
Law 1 and takes two forms: Most-Favored Nation (MFN) Treatment and National Treatment, in the
WTO provisions on goods (under the GATT), services (under the GATS). On the one hand, a
Member State cannot discriminate among all his trading partners. This is the Most-Favored Nation
(MFN) treatment. On the other hand, in principle, once the imported products, services etc have
crossed the border, the imported products must receive National treatment.
2. Most Favoured Nation and National Treatment obligations are at the core of the WTO regime for
non-discriminatory multilateral trade relations. The nature and scope of the two obligations and the
exceptions thereto are by and large similar in GATT and GATS, with some marked differences.
This assignment traces the evolution of these concepts in WTO framework and in the reports of the
Panel and Appellate Body. A study of the Most favoured Nation obligation in GATT, its key
elements and exceptions is followed by an analysis of the same for National Treatment obligations,
and its contrast with the former ,followed by a conclusion on the comparative analysis.

MOST FAVOURED NATION PRINCIPLE

3. The principle of Most Favored Nation (popularly known as the MFN treatment) is a fundamental
principle of trade ensuring non-discrimination between “like goods and services”. The clause on
the Most Favored Treatment principle is in essence a misnomer. The clause relates to providing the
same benefit and concession to one Member, in case benefits and concessions are provided to
another Member. MFN hence calls for nondiscrimination amongst Members inter-se; so for
example, in case a country “A” provides a tariff concession to a country “B” by imposing a 10%
duty on import of cars, “A” is obligated to charge the same rate of 10% to the imports of cars by
Country “C”. In this sense, a nation is bound to treat every other nation as its favorite or most
favored nation. Thus, with respect to the GATT, a Contracting Party is expected to treat every other
Contracting Party as its favorite nation.

1
. Jan Wouters and Bart De Meester, ‘The World Trade Organization: A Legal and Institutional Analysis (Intersentia 2007) page
23.
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4. The initial instances of MFN treaties can be traced back to the 13th century where the Roman
Empire decided to award the same concession to the merchants from Marseilleas were being
enjoyed by other states such as Genoa. This way parity was restored. The proper evolution of this
policy started in the 18th and 19th centuries with prominent examples such as the 1778 Treaty
between US and France. Initially, it had a sort of conditional character with implicit condition that
the advantages being handed over by one state are reciprocated by the other beneficiary by giving
similar value concessions.
5. The wave of unconditional treaties was seen to emerge in the later phases of 18th century where
prominent treaties such as the signing of Chevalier- Cobden treaty by Britain with France. In such
treaties, it was not mandatory for the state receiving benefits to give back similar concessions. These
sort of treaties remained the norm till the First World War in the beginning of 20th century.
Commerce was governed by these treaties for a long time but it wasn’t until the 1970s that the
international community actually began recognising it officially and formalising it.
6. ILC was at the forefront of this codification and even proposed to the UN General Assembly to
make it mandatory for every state. Although Assembly didn’t accept this proposal but the draft
proposal which had been submitted by the ILC even today continues to govern this principle
throughout the world. The principle of Most-favoured-nation treatment is not a new concept but
has been in existence since the formation of economic treaties. The aim MFN treatment tries to
achieve, parties treat each other in as much possible favourable terms as it treats other parties. In
today’s investment treaties, it is used widely considering the significance of MFN treatment. The
clause of MFN treatment given under international trade law forms the basis of understanding the
concept.
7. The most-favoured-nation (MFN) principle is the mainstay of the multilateral trading system
conceived after World War II. It seeks to replace the frictions and distortions of power-based
(bilateral) policies with the guarantees of a rules-based framework where trading rights do not
depend on the individual participants’ economic or political clout. Rather, the best access and
benefiting conditions that have been conceded to one country must automatically be extended to all
other participants in the system. This allows everybody to benefit, without exercising additional
negotiating effort, from concessions that may have been agreed between and/or among the large
trading partners with much negotiating leverage.
8. In other words, it can be described that the Most Favoured Nation (MFN) Treatment mandatorily
requires, only if the member of WTO, that if the member nation benefits or concedes any
concessions/subsidies, on the basis of MFN principle, under a particular category of products or
services then the same member nation is expected to acknowledge the same concessions/subsidies

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 on the “like products” to all the other member nations of WTO. In addition to that, it also
noteworthy, that supposedly if the concessions are bequeathed to one member nation, then, it has
to be born in mind that the same benefits must be conceded to all the other member nations on the
like products/services. Simply it means, if one member is not imparting benefits to all the other
member as it is expected to give, then that member does not hold any ground either to snatch/lift
up the benefits primarily given or increase the thresholds of such benefits than agreed on stipulated
terms. Yes, in case of that member nation wants to decrease or subsidize the tariffs below the
stipulated threshold, it will be accounted under the head of MFN principle.
9. Hence, the ‘Most Favoured Nation’ suggests special treatment to one country, the MFN clause in
WTO’s General Agreement on Tariffs and Trade is intended to ensure the opposite — that member
countries of the organisation do not discriminate between their trade partners. In trade contracts,
the ‘most favoured customer clause’ is a clause by which the seller agrees to give a buyer the best
terms he makes available to any other buyer. Thus, every WTO member nation usually grants MFN
status to all other members, in effect promising that everyone will receive equitable treatment from
it. The primary condition under MFN is that a country must charge the same tariff rate on imports
irrespective of their origin.
10. The MFN treatment provision has the following main legal features:
 It is a treaty-based obligation that must be contained in a specific treaty.
 It requires a comparison between the treatment afforded to two foreign investors in like
circumstances. It is therefore, a relative standard and must be applied to similar objective situations.
 An MFN clause is governed by the ejusdem generis principle, in that it may only apply to issues
belonging to the same subject matter or the same category of subjects to which the clause relates.
 The MFN treatment operates without prejudice to the freedom of contract and thus, States have no
obligation under the MFN treatment clause to grant special privileges or incentives granted through
a contract to an individual investor to other foreign investors.
 In order to establish a violation of MFN treatment, a less favourable treatment must be found,
based on or originating from the nationality of the foreign investor.6

LEGAL FRAMEWORK
i) Under GATT
11. The WTO’s principle of non-discrimination is to the effect that all WTO member countries must
give the same trade concessions to one another and no one member must be treated differently from
any other member. Article 1.1 of the GATT 1994 provides that:
“With respect to customs duties and charges of any kind imposed on or in connection with
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 importation or exportation or imposed on the international transfer of payments for imports or
exports, and with respect to 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 all
matters referred to in paragraphs 2 and 4 of article 11 any advantage, favour, privilege or
immunity granted by any contracting party to any product originating in or destined for any
other country shall be accorded immediately and unconditionally to the like product originating
in or destined for the territories of all other contracting parties.”2
12. First it is important to note that the General Agreement on Tariffs and Trade (GATT) applies to
goods being exported or imported by member countries. The emphasis is on trade in goods. Article
1.1 of the GATT 1994 simply is to the effect that any advantage or favour being granted to one
member country “shall immediately and unconditionally be accorded” to other WTO members.
Article 1.1 of GATT 1994 applies to any advantage applied to goods being exported to or imported
from any WTO member country. This could either be custom duties, rules, procedures, payments
etc.

Application
13. In EC-BANANA III 3, the measure at issue was the import regime for bananas of the European
Communities under which bananas from Latin American countries were treated less favorably than
bananas from, broadly speaking, former European colonies, or African – Caribbean Pacific
bananas. 4 Article I (1) of the GATT not only covers ‘in law’ discrimination, but also ‘in fact’
discrimination.5 It appears, accordingly, that Article I (1) applies not to ‘origin-based’ measures,
but also to measures which, on face, may appear origin-neutral and yet discriminatory.6
14. Consequently, in Canada-Auto, it was rejected, as the Panel had done when Canada argued that
Article I (1) does not apply to measures which appear, on their face, to be ‘origin-neutral’. 7
Subsequently, measures which appear on their face to be ‘origin-neutral’ can give certain countries
more favorable trade than others and may be in violation of the non-discriminatory obligation of
Article I (1) of the GATT. The measure at issue in Canada-Autos was an import duty exemption
accorded by Canada to imports of motor vehicles by certain manufacturers. There appeared to be
no restrictions on the origin of the motor vehicles that were eligible for exemption. However, the
manufacturers tended only to import their own make of motor vehicles and those of related

2
General Agreement on Tariffs and Trade (GATT),1994, Article 1.1.
3
Panel Report, EC- Bananas III, EC- Regime for the Importation, Sale and Distribution of Bananas, Complaint by Ecuador,
WT/DS27/R/ECU, (25 September 1997), as modified by the Appellate Body Report, WT/DS27/AB/R, DSR 1997:III
4
Peter Van Den Bossche
5
EC-Bananas Supra
6
Supra Note 4
7
Appellate Body Report, Canada-Autos,
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 companies. Because of the measures applied by Canada, this meant that only motor vehicles
originating from a small number of countries could benefit from the exemption. 8
15. In a previous GATT Panel decision, it was found that a European Union regulation, making
suspension on import levy conditional on production of a certificate of authenticity were
inconsistent with the MFN treatment obligation after it was established that the only certifying
agency authorized to produce a certificate of authenticity was an agency in the USA. 9

(ii) Under GATS

16. Article II of the GATS rules also provides that;
“With respect to any measure covered by this Agreement, each Member shall accord immediately
and unconditionally to services and service suppliers of any other Member treatment no less
favourable than that it accords to like services and service suppliers of any other country.”10
17. The Provision of the General Agreement on Trade in Services (GATS) on the other hand is
applicable to trade in services.11 Services currently accounts for over 60 percent of global
production and employment, and with globalization, cross border flow of services continues to
grow.12 The definition of services trade under the GATS is four-pronged, depending on the
territorial presence of the supplier and the consumer at the time of the transaction. 13 Article 1 of
GATS provides that
“… For the purposes of this Agreement, trade in services is defined as the supply of a service:
(a) from the territory of one Member into the territory of any other Member;
(b) in the territory of one Member to the service consumer of any other Member;
(c) by a service supplier of one Member, through commercial presence in the territory of any other
Member;
(d) by a service supplier of one Member, through presence of natural persons of a Member in the
territory of any other Member.”14
18. This means that the GATS agreement covers all services supplied from one WTO country into
another WTO country, services supplied by a WTO member country to the consumers of another
member country, services provided in another WTO country by virtue of a commercial presence

8
GATT Panel Report, EEC- Imports of Beef, EEC Community- Imports of Beef from Canada, (10 March 1981), BISD 28S/92
9
. Eric Leroux,”Eleven Years of GATS Case Law: What Have We Learned?” Journal of International Economic Law (2007),
10(4), page 750
10
General Agreement on Trade in Services (GATS), Article II.
11
Trade in Services refers to the sale and delivery of an intangible product, called aservice, between a producer and consumer.
12
WTO, ‘The General Agreement on Trade in Services (GATS): Objectives, Coverage and Disciplines’
<https://www.wto.org/english/tratop_e/serv_e/gatsqa_e.htm> Accessed 23rd November 2023.
13
WTO, ‘Basic Purpose and Concepts’ <https://www.wto.org/english/tratop_e/serv_e/cbt_course_e/c1s3p1_e.htm> Accessed 23rd
November 2023.
14
General Agreement on Trade in Services (GATS), Article 1.2.
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 for example banking services, telecommunication services and services provided in another
member country through natural persons.
19. The WTO GATS agreement provides in article 4 that where services are provided or supplied to
any other WTO member country in the manner explained by article 1 of GATS, then the principle
of non-discrimination (no Most-Favoured Nation (MFN) must apply.

Application
20. Since the GATS provides that it applies to measures by Member States effecting trade in services,
measures of all levels of government are covered, as well as in non-governmental bodies taken in
the exercise of powers delegated to them by such bodies. 15 Moreover, trade in services refers to
four modes of supply of services which are: (i) from the territory of one Member State into the
territory of another Member State (cross-border trade); 16 (ii) in the territory of one Member State
to the service consumer of another Member State (consumption abroad); (iii) by the service supplier
of one Member State through the presence of natural persons of that Member State in the territory
of another Member State; (iv) by the service supplier of one Member State through commercial
presence in the territory of another Member. 17 All services fall within the scope of the GATS, with
the exception of services supplied in the exercise of governmental authority and certain air transport
services. 18
21. The first issue relating to the application of the GATS is said to have arose in the context of
Canada-Periodicals. Canada argued that a tax equal to 80% of the value of all advertisements
contained in so called split-run periodicals was a measure affecting trade in services . Furthermore,
Canada opined that the measure could only be reviewed under the National Treatment obligation
of the GATS in respect of who no commitments on advertising services were undertaken. Both the
Panel and the Appellate Bodies rejected Canada’s arguments, determining that the obligations of
both agreements are cumulative and so-exist, rather than the obligations of one Agreement, GATS
overriding those of the GATT. Therefore, this put in place the foundations for a later determination
that the GATT and the GATS are mutually exclusive and may overlap.

(iii) Most Favoured Nation Principle under TRIPs

22. TRIPS is an international treaty which globalizes and regulates intellectual Property. It is one of
the WTO multilateral trade agreements. It was agreed upon with the aim of protecting the

15
Eric Leroux.
16
GATS 1994, Article I (2)
17
Eric Leroux,”What is a ‘Service Supplied in the Exercise of Governmental Authority’ Under Article I : 3(b) and (c) of the
General Agreement on Trade in Services?” Journal of World Trade (2006) pages 345-385.

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 intellectual property rights of innovators of new ideas and knowledge in areas of medicine,
technology, film, music, books to mention but a few. As in GATT and GATS, the principle of non-
discrimination also applies under the TRIPs agreement and members of the WTO are obligated to
abide by the MFN obligation.
23. Article 4 of the TRIPS agreement provides that:
“With regard to the protection of intellectual property, any advantage, favour, privilege or
immunity granted by a Member to the nationals of any other country shall be accorded immediately
and unconditionally to the nationals of all other Members.” 19
24. In other words, while country A supplies services to Country B, both Countries A and B must trade
on the same similar terms with all other WTO member countries that might want to supply services
to either Country A or Country B. Hence, there should be no evidence of favouring one nation over
another.
25. It is important to note that trade in services covers all services being supplied across one WTO
border over another except the service supplied is “…in the exercise of government authority” and
the service supplied was “…neither on a commercial basis, nor in competition with one or more
service suppliers.”20

SCOPE OF THE PRINCIPLE

26. Article I of the GATT enshrines the MFN treatment principle and aims to prohibit discrimination
among like products originating in or destined for different countries. The MFN principle requires
WTO Members to extend MFN treatment to like products of other WTO Members with respect to
tariffs, regulations on exports and imports, internal taxes and charges on imported products, and
internal regulations. Article I:1 of the GATT can be sub-divided in the following manner to
understand the scope of the principle comprehensively: -
 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,
 and with respect to 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 all matters referred to in paragraphs 2 and 4 of Article III,
 any advantage, favour, privilege or immunity granted by any member

19
Trade Related Aspects of Intellectual property, Article 4.
20
General Agreement on Trade in Services (GATS), Article 1.3(a) and (b).
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 to any product originating in or destined for any other country
 shall be accorded immediately and unconditionally
 to the like product originating in or destined for the territories of all other members.
 On a holistic reading of the above Article, it is clear that the following factors need to be considered
to establish a violation of the MFN principle by a Member:-

a) Like products-
27. The MFN treatment obligation only applies to like products. An advantage granted to a product
originating in or destined for any other country shall be accorded to other like products originating
in or destined for the territories of all other WTO Members. The phrase ‘like product’ has been the
subject of different and varying interpretations and the GATT Panels have not followed uniform
criteria to decide what constitutes ‘like product’6.
28. In Spain – Unroasted Coffee7, the issue before the Panel was whether different types of unroasted
coffee were ‘like’ within the meaning of Article I:1 of the GATT. The Panel considered the
characteristics of the products, their end-use and tariff regimes of other Members as the criteria for
determining the issue. The Panel determined that the four varieties of coffee beans were like
products because most of these four varieties were sold in the form of blends, consumers regarded
these four varieties as a single product intended for drinking, and the tariff regimes of many GATT
contracting parties did not apply different tariff rates to these four varieties. It concluded that
establishing different tariff rates for certain varieties of unroasted coffee beans was in violation of
the MFN treatment obligation.
29. However, in the SPF (spruce, pine, fir) dimension lumber8, establishing different tariff rates on
SPF in the tariff regime was claimed to accord discriminatory treatment between lumber from
certain countries and lumber from other countries, butte panel recognized that each WTO Member
could exercise considerable discretion as to tariff classifications and relied on the standards of each
importing country in determining like products.
30. The key test, set out by the Appellate Body in the 1996 Japan Alcoholic Beverages, is the physical
characteristics, consumer tastes and the end uses of the good.

b) any advantage, favour, privilege or immunity -

31. The MFN treatment obligation concerns any advantage granted by any Member to any product
originating in or destined for any other country through a variety of measures. The obligation to
provide MFN treatment is not confined to tariffs. The measures include tariffs and charges of any
kind imposed in connection with importation and exportation, the method of levying tariffs and
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 such charges, rules and formalities in connection with importation and exportation, internal taxes
and charges on imported goods, internal laws, regulations and requirements affecting sales.
32. It is important to emphasize that the MFN treatment obligation not only takes into consideration
advantages conferred upon products originating in or destined for WTO Members, but also
advantages granted to ‘any other country’. Therefore, if a WTO Member grants an advantage to
products originating in or destined for a non-Member, the Member is compelled to grant the same
advantage to all other WTO Members10.
33. In the EC-Bananas-III11, the imports of bananas from certain countries qualified for allocation of
the tariff quota only if they fulfilled requirements which differed from those imposed on importers
of bananas from other countries. The Appellate Body of the WTO while accepting the Panel
findings that the procedural and administrative requirement of the activity function rules for
importing third country and non-traditional ACP differ from, and go significantly beyond those
required for importing from traditional ACP bananas, held that the method is discriminatory as the
rules discriminate among like products originating from different Members.

c) Immediately and unconditionally

34. Once a WTO Member has granted an advantage to a country, it cannot impose conditions on other
WTO Members for them to benefit from that same advantage. The WTO Member must extend the
benefit of the advantage to all WTO Members immediately and unconditionally.
35. In Indonesia – Autos12, the Panel found that under the Indonesia car programmes, customs duty
and tax benefits were conditional on achieving a certain local content value for the finished car.
The Panel concluded that these conditions were inconsistent with the provisions of Article I:1 which
provides that tax and customs duty advantages accorded to products of one Member (in that case,
on products from the Republic of Korea) be accorded to imported like products from other Members
‘immediately and unconditionally’.
36. A 1992 panel report considered the United States-Denial of MFN treatment as to non-rubber
footwear from Brazil13 and held that Article I:1 does not permit balancing more favourable
treatment under some procedures against a less favourable treatment under others.

d) Discrimination
37. Discrimination can be de jure or de facto14. Setting different tariff rates for differential treatment
to “like products” of one country over another would clearly violate Article I:1. However,
discrimination less apparent would also amount to a violation and is defined as de facto
discrimination. One such case involved Canada’s automobile measures15. In this case, Canada’s

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 system, which eliminated tariffs on imported automobiles from the United States under certain
conditions, was at issue. The system was open to companies of other countries and could be used
by meeting certain conditions. In actuality, however, the acceptance of new applications was
suspended after the conclusion of the US-Canada FTA, making it practically available only to the
US companies. The Panel and the Appellate Body both determined that the measures were de facto
discrimination and concluded that they were in violation of Article I:1. Relevant paragraph has been
extracted below:
38. “we observe first that the words of Article I:1 do not restrict its scope only to cases in which the
failure to accord an “advantage” to like products of all other Members appears on the face of the
measure, or can be demonstrated on the basis of the words of the measure. Neither the words “de
jure” nor “de facto” appear in Article I:1. Nevertheless, we observe that Article I:1 does not cover
only “in law”, or de jure, discrimination. As several GATT panel reports confirmed, Article I:1
covers also “in fact”, or de facto, discrimination. Like the Panel, we cannot accept Canada’s
argument that Article I:1 does not apply to measures which, on their face, are “origin-neutral”.”

ECONOMIC BENEFITS OF THE MOST FAVOURED NATION ( NON-

DISCRIMINATION) PRINCIPLE

 Increased Efficiency in the World Economy

39. Non discrimination principle makes it possible for countries to import from the most efficient
supplier, in accordance with the principle of comparative advantage. For example, if country “B”
can supply product “X” at a lower price than country “C”, country “A” can increase its economic
efficiency by importing it from country “B”. If, however, country “A” applies higher tariff rates to
product “X” from country “B” than to product “X” from country “C”, country “A” may be forced
to import product “X” from country “C”, even though country “C” is not as efficient a supplier.
This distorts trade and reduces the welfare of country “A” and the economic efficiency of the entire
world. However, under the MFN principle, country “A” must levy its tariffs equally with respect to
countries “B” and “C” and therefore necessarily will import product “X” from country “B” because
it is cheaper to do so. The most efficient result is thus attained.

 Stabilisation of the Multilateral Trading System

40. The Non discrimination principle requires that favourable treatment granted to one country be
immediately and unconditionally granted to all other countries. Trade restrictions, too, must be
applied equally. This increases the risk of trade restrictions becoming a political issue, i.e., it raises

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 the costs and consequences of doing so, and therefore tends to support the liberalized status quo.
By stabilising the free trade system in this manner, the principle increases predictability and
therefore increases trade and investment.

 Reduction of the Cost of Maintaining the Multilateral Trading System

41. Non Discrimination principle reduces the cost of maintaining the multilateral trading system. The
equal treatment demanded by the principle tends to act as a force for unifying treatment at the most
advantageous level (for trade that means the most liberal level). The establishment and maintenance
of the principle enables WTO Members to reduce their monitoring and negotiating costs vis-à-vis
disadvantageous treatment. In short, the principle has the effect of reducing the cost of maintaining
the free trade system. Also, imports from all WTO Members are treated equally, reducing the cost
of determining an import’s origin and improving economic efficiency.

DECLINING EFFECTIVENESS OF THE MOST FAVOURED NATION PRINCIPLE

42. The principle that was once tenaciously held on to by Union members has progressively lost its
importance in the last three decades. The United States and other industrialised countries were once
strong proponents of the generalised, unconditional Non Discrimination principle as a fundamental
principle of International trade but in light of today’s realities that support has greatly diminished
as countries routinely adopt policies that circumvent the principle. Over time, union members have
come up with a steady stream of de jure and de facto exceptions to the Non Discrimination principle.
43. A critical look at the background of the principle reveals a very different use of the principle by
states; the clauses were used tactically as a means of gaining advantage over competitors, rather
than due to any idealistic commitment to nondiscrimination; For example, The United States
jettisoned the conditional clause to endorse the unconditional non discrimination clause not because
of a newfound appreciation of the benefits of multilateral nondiscrimination, but because the United
States’ continued use of conditional clauses had become counterproductive in the face of the
hostility of its trading partners. Thus from the onset, the motive behind the principle has never been
to achieve equilibrium between trading partners in international trade. The draftsmen of the GATT
were not oblivious of this fact and this may have informed the various loopholes that have been left
in the GATT as a getaway ticket from the stranglehold of the non discrimination principle. States
have resorted to the loopholes contained in the various trade agreements as a means of reducing the
effect of the principle.
44. Prominent among these loopholes is the provisions of article XXIV of GATT. Article XXIV of
GATT allows Custom Unions and Free Trade Agreements as exceptions to the non discrimination

16 | P a g e
 principle. To say that this exception has been grossly abused is an understatement; lately, countries
have used these exceptions to create preferential trade situations and play favourites through these
agreements. Preferential trade situations have the effect of creating the “beggar thy neighbour
policies” between nations by opening up the possibilities of playing favourites; when someone is
the favourite, there are others who are not and this leads to bad political relations-the mischief that
the MFN was designed to curb. It could be argued that the drafters of article XXIV foresaw a
possibility of its abuse by stating that:
45. For the purposes of this Agreement:
(a) A customs union shall be understood to mean the substitution of a single customs territory for
two or more customs territories, so that
(i) duties and other restrictive regulations of commerce (except, where necessary, those permitted
under Articles XI, XII, XIII, XIV, XV and XX) are eliminated with respect to substantially all the
trade between the constituent territories of the union or at least with respect to substantially all the
trade in products originating in such territories, and,
(ii) subject to the provisions of paragraph 9, substantially the same duties and other regulations of
commerce are applied by each of the members of the union to the trade of territories not included
in the union;
(b) A free-trade area shall be understood to mean a group of two or more customs territories in
which the duties and other restrictive regulations of commerce (except, where necessary, those
permitted under Articles XI, XII, XIII, XIV, XV and XX) are eliminated on substantially all the trade
between the constituent territories in products originating in such territories.

46. From 1948-94 there were 124 notifications to the WTO of distinct Preferential Trade Agreements
by its members. Since 1995, there have been at least an additional 90. According to Gardener
Patterson, a former deputy director of the WTO:
 Of all the GATT articles, this is [article XXIV] one of the most abused, and those abuses are among
the least noted. Unfortunately therefore, those framing any new area[Free Trade Area]need have
little fear that they will be embarrassed by some GATT body finding them in violation of their
international obligations and commitments and recommending that they abandon or alter what
they are about to do.
47. Thus, article XXIV has unwittingly whittled down the effect of article I of GATT which made
provision fornon discrimination in trade relations.
48. Also, the Generalised system of preferences was in principle supposed to be applied to less
developed countries generally and not LDCs that have special historical and political relationships

17 | P a g e
 with developed countries. This is however far from what is obtainable in practice as developed
countries tend to associate themselves with LDCs that have historical and political relationships
with them.

EXCEPTIONSTO THE MFN TREATMENT UNDER GATT

49. The GATT obligations are subject to a general set of exceptions (Article XX) and to security exceptions
(Article XXI). There are also some specific exceptions to the principle of MFN.

a) General Exceptions-
50. Article XX in its Chapeau obligates the members that nothing in the Agreement shall be construed to
prevent the adoption or enforcement of any contracting party of measures/exceptions as listed in
paragraphs (a)–(j) of the Article subject to the condition that these exceptions/measures should not be
applied arbitrarily or unjustifiably between the countries where the same conditions prevail. And these
exceptions/measures should not amount to disguised restrictions on international trade.
51. The exceptions listed under this Article are measures related to public morals, life and health,
conservation of exhaustible natural resources etc.
52. An importing WTO member adopting a trade restrictive measure and invoking an Article XX defence
must first prove that the measure fits within one of the ten paragraphs in the Article. If it does, then the
measure must pass muster under the requirements set forth in the Chapeau to Article XX 16.

b) Security exceptions-
53. The security exceptions in Article XXI are the most sensitive of GATT as the wording of this Article
suggests that every country is the sole judge on questions relating to its own security. In the cases in
respect of security exceptions, Article XXI, although laudable to respect the political and economic
sovereignty of nations, yet on balance the political considerations outweigh the economic
considerations17.

c) Specific exceptions-

1. Regional Integration (GATT ARTICLE XXIV)

54. Regional integration through customs unions or free trade areas liberalizes trade among countries
within the regions, while maintaining trade barriers with countries outside the region or regions.
Regional integration therefore may lead to results that are contrary to the MFN principle because
countries inside and outside the region are treated differently. Thus, countries outside the region

18 | P a g e
 could be disadvantaged. Nevertheless, GATT Article XXIV provides that regional integration may
be allowed as an exception to the MFN rule only if the following conditions are met:
a. tariffs and other barriers to trade must be eliminated with respect to substantially all trade within
the region; and
b. the tariffs and other barriers to trade applied to outside countries must not be higher or more
restrictive than they were prior to regional integration.
55. Under Article XXIV, a customs union or a free trade area agreement is a permitted exception to the
principle of MFN, as it is generally recognised that such arrangements and agreements are helpful in
achieving economic integration without adversely affecting the economic interests of third countries.
The regional integration may be allowed as an exception to the MFN principle only if the following
conditions are met: tariffs and other barriers to trade must be eliminated with respect to substantially all
trade within the region; and the tariffs and other barriers to trade applied to outside countries must not
be higher or more restrictive than they were prior to regional integration.
56. ii. Preferential treatment to developing countries (Enabling clause)-
57. The Generalized System of Preferences (GSP) program is a system that grants certain products
originating in eligible developing countries preferential tariff treatment over those normally granted
under MFN status. It plays a vital role in promoting trade as a means of stimulating economic growth
and development.

58. The 1979 GATT Decision on Differential and More Favourable Treatment, Reciprocity, and Fuller
Participation of Developing Countries, which is commonly referred to as the ‘Enabling Clause’ allows
grant of GSP preference. The deviation from the MFN obligation is allowed only when the conditions
provided in the Enabling Clause are satisfied.

2. Generalised System of Preferences

59. The Generalised System of Preferences (GSP) program is a system that grants certain products
originating in eligible developing countries preferential tariff treatment over those normally granted
under MFN status. GSP is a special measure designed to help developing countries increase their
export earnings and promote development. It is a benefit unilaterally granted by developed
countries to less developed countries. GSP is allowed in the GATT decision on “Generalized
System of Preferences” of June 1971. To be permissible, GSP must have the following
characteristics:
a. preferential tariffs should be applied not only to countries with special historical and political
relationships (e.g., the British Commonwealth), but also to developing countries more generally;
and
b. the beneficiaries are limited to developing countries.
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 3. Frontier Traffic Exception
60. Article XXIV: 3 of the GATT allows advantages to be accorded by any contracting party to adjacent
countries in order to facilitate frontier traffic
4. Historical Preferences
61. Article I: 2 creates an exception regarding historical preferences that were in force at the signing
of the GATT, such as the British Commonwealth.
5. Measures Necessary to Protect Public Health, Morals Life Etc
62. Article XX of the GATT allows contracting parties to make measures necessary to protect
public morals, human, animal or plant life or health, etc.
6. Security Exceptions
63. Article XXI of the GATT allows a contracting party to go out of the principle on security
grounds. It provides inter alia that a contracting party may refuse the disclosure of any information
the disclosure of which it considers contrary to its essential security interests; a contracting party
can also take actions which it considers necessary for the protection of its essential security interests

7. Non-Application of Multilateral Trade Agreements between Particular Member States under

WTO Article XIII
64. The Marrakesh Agreement Establishing the World Trade Organization (the “WTO Agreement”)
provides that:
“this Agreement and the Multilateral Trade Agreement in Annexes 1 and 2 shall not apply as
between any Member and any other Member”, when any of the following two conditions are met:
(a) at the time the WTO went into force, Article XXXV of GATT 1947 had been invoked earlier and
was effective as between original Members of the WTO which were Members to GATT 1947or; (b)
“between a Member and another Member which has acceded under Article XII(of the WTO
agreement) only if the Member not consenting to the application has so notified the Ministerial
Conference before the approval of the agreement on the terms of accession by the Ministerial
Conference.”
65. In January 1995, the United States notified the General Council that it would not apply the
Agreement and the Multilateral Trade Agreements in Annexes 1 and 2 to Romania. In February
1997 the United States withdrew its notification. In addition, the United States notified that it would
not apply the above-mentioned agreements to three other new Members: Mongolia, the Kyrgyz
Republic, and Georgia. The United States withdrew its notification for Mongolia in July 1999, for
the Kyrgyz Republic in September 2000, and for Georgia in January 2001.
66. In the case of non-application, benefits enjoyed by other Members are not provided to the country
of non-application, which leads to results that are contrary to the MFN principle.
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 EXEMPTION FROM THE MFN TREATMENT UNDER GATS
67. Article II: 2 of the GATS provides:
A Member may maintain a measure inconsistent with paragraph 1 provided that such a measure is
listed in, and meets the conditions of, the Annex on Article II Exemptions.
68. In principle, exemptions should not exceed a period of ten years thus by January 2005, all
exemptions under Article II: 2 should have come to an end. In the meantime, all exemptions granted
for a period of more than five years are reviewed after five years by the Council for Trade in
Services. In such a review, the Council examines whether the conditions that created the need for
the exemption still prevail and sets a date for any further review. In any case, the exemption
terminates on the date provided for in the exemption. It is important to note that the exemption list
may not identify Members that would not benefit from MFN; the exemption list may only identify
members which would benefit from more market access than other members.
69. It should be noted that by virtue of paragraph II on the annex on article II exemption, any new
exemption applied for after the date of entry into force of the WTO agreement, shall be dealt with
under paragraph 3 of article IX of the WTO agreement.The GATS allows for exceptions where
Members may waive their obligation to provide most-favoured-nation treatment for specific
measures in specific fields by listing the measure in the Annex on Article II Exemptions.

EXCEPTIONS TO THE MFN TREATMENT UNDER TRIPS

70. The concluding paragraph of article 4 of the TRIPS provides:
……. Exempted from this obligation are any advantage, favour, privilege or immunity accorded by
a Member:
(a) deriving from international agreements on judicial assistance or law enforcement of a general
nature and not particularly confined to the protection of intellectual property;
(b) granted in accordance with the provisions of the Berne Convention (1971) or the Rome
Convention authorizing that the treatment accorded be a function not of national treatment but of
the treatment accorded in another country;
(c) in respect of the rights of performers, producers of phonograms and broadcasting organizations
not provided under this Agreement;
(d) deriving from international agreements related to the protection of intellectual property which
entered into force prior to the entry into force of the WTO Agreement, provided that such
agreements are notified to the Council for TRIPS and do not constitute an arbitrary or unjustifiable
discrimination against nationals of other Members.
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 71. Article 5 of the TRIPS provides that the obligations under Articles 4 do not apply to procedures
provided in multilateral agreements concluded under the auspices of WIPO relating to the
acquisition or maintenance of intellectual property rights; thus if there is any provision in the TRIPS
relating to the non discrimination principle that is inconsistent with any of these multilateral
agreements, the provisions of such multilateral agreement will prevail. However, the TRIPS
Agreement can provide for exemptions regarding measures based on existing treaties in the area of
intellectual property.

THE PRINCIPLE OF NATIONAL TREATMENT

72. The second pillar and or principle of non-discrimination is the National Treatment principle. This
principle applies generally to all WTO members and it is to the effect that no WTO member country
should treat its own country with better preference than other WTO members. The National
Treatment principle is found in the General Agreement on Tariffs and Trade, General Agreement
on Trade in Services and the Trade Related Aspects of Intellectual Property. The NTP prohibits any
of the member nations from favouring or giving any advantages or raising any benefits to their
domestic products/ goods over imported products of other member nations. Article III of GATT
1994 specifically deals with NTP and explains the secondary need of NTP after MFN principles to
fight against any discrimination of imported products. NTP has been well defined under paragraph
1, 2 & 4 of Article III and 2nd sentence of Article III. NTP deals with the products of any member
imported by any other member shall not be treated less favourable than that to like products of
national or domestic product in respect of all laws, regulations, requirements affecting their internal
sale etc., which means the domestic country should not make any rules or law which protects its
domestic products over imported products. So reading NTP with MFN gives a brief difference
between both of the principles that one deals with protectionism and MFN deals with favourable
treatment to all nations.
73. Generally, national treatment requires that a nation treats within its own borders goods, services
and service providers etc. originating from outside its borders in the same manner as it treats those
which are of domestic origin. 21
74. Clearly, the National Treatment principle complements the MFN treatment principle. Liberation
commitments, applied on a non-discriminatory basis, would be of no value if there were not some

21
. Jan Wouters and Bart De Meester, page 27.
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 limitations on the types of internal taxation or regulation that a country could impose. The rule is
of a wide range. Therefore, almost every domestic policy measure- whether it is in the form of
taxation or regulation- will come within its scope. Consequently, many domestic policies conflict
with the national treatment principle, leading to several disputes before the Dispute Settlement
Body of the WTO.
75. However, national policies that treat national products, services, service providers more favorably
than like imported products, services, service providers and are discriminating on basis of origin
may have valid reasons such as wanting to protect public health, improve welfare in
underdeveloped countries, and protect the environment. Here, the WTO agreements provide a
number of exceptions, which will be discussed later. Moreover, national regulations and taxation
that at first sight are origin-neutral, might in fact be un- favorable to imported products in practice.
This ‘disguised discrimination’ can be a purposeful protective policy of a State, but may equally
just be an unintended side effect of an acceptable policy goal. It is clear that this dilemma always
involves a difficult and delicate balancing act between free trade and other objectives.

Reasons Behind NTP

76. The main reason why GATT/ WTO drafter has proposed NTP was after imposing so much
restriction with regard to MFN principles, the drafter considered that the member nation can
discriminate the imported product indirectly and to prevent such indirect acts of member nations
NTP was introduced to prevent and restrict the domestic government from imposing any internal
regulation that may create scope for discrimination to imported products over domestic product.
77. Illustration- Let’s assume that India is manufacturing a certain mobile phone for Rs. 10k and on
the other hand China is manufacturing a certain mobile phone with the same configurations and
quality for just Rs.7k. In that case, being both the countries a member nation of GATT/ WTO, India
can’t impose any restrictions on exporting Chinese Mobile phones from China to India, but India
may impose certain heavy taxes to protect its domestic market. To protect such measures the drafter
of GATT/ WTO introduced NTP which prohibit any member nation from doing such activities.

78. Now it can be assumed that the main purpose of Article III of the GATT 1994 was to prohibit or
limit the use of trade-restricting by requiring non-discriminatory treatment between imported and
domestic goods.

(i) National Treatment under GATT

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 79. The National Treatment principle under the WTO multilateral trade agreement GATT 1994
provides that no WTO member country should give trade preference to its own country over other
WTO member countries. It is in this vein that article 3.2 of the GATT 1994 provides that:
“The products of the territory of any contracting party imported into the territory of any other
contracting party shall not be subject, directly or indirectly, to internal taxes or other internal
charges of any kind in excess of those applied, directly or indirectly, to like domestic products.”22
80. Article 3.1 of the GATT 1994 also provides that:
“The contracting parties recognize that internal taxes and other internal charges, and laws,
regulations and requirements affecting the internal sale, offering for sale, purchase, transportation,
distribution or use of products, and internal quantitative regulations requiring the mixture,
processing or use of products in specified amounts or proportions, should not be applied to
imported or domestic products so as to afford protection to domestic production.”23
Application
81. It has been stated that the National treatment principle prohibits discrimination by a party in favor
of its domestic product with respect to domestic taxes and regulation. 24It is somewhat evident that
to recognize discrimination, one may have to limit the set of products in such a way that any
differentiation between products within the set with respect to border or inside the border measures
would be deemed without doubt discriminatory.25 Furthermore, unsurprisingly the text of the GATT
itself, reports of its working parties, panels on disputes, as well as the Appellate Body of WTO’s
Dispute Settlement Mechanism, appear to use several phrases such as ‘like products’ 26, ‘similar
products’, ‘directly competitive products’, and ‘competitive or substitutable products’, in an
attempt to set such limit. Consequently, depending on the meaning attached to each of the phrases,
the associated sets could consist of a few or many products.27
82. It seems that any discrimination by one party in favor of a product originating in another party’s
market for the product through border measures is seen as affecting the access of the parties not so
favored to the same market.28 Obviously, Article I of the GATT prohibits such discrimination as it
uses the phrases such as ‘like products’ to limit the set of products within which prohibition applies
and Article III prohibits such discrimination among products within a set that is specific to each

22
General Agreement on Tariffs and Trade (GATT) 1994, Article 3.2.
23
General Agreement on Tariffs and Trade (GATT) 1994, Article 3.1.
24
. GATT 1994, Article III
25
. National Treatment on International Taxation and Regulation, Section 1(a) and (b) on GATT
26
. Peter Van Den Bossche, Supra Note 4 page 322.
27
. EC- Measures Affecting Differential and Favorable treatment of coffee
28
. Panel Report, Japan- Alcoholic Beverages II, Japan- Taxes on Alcoholic Beverages, WT/DS58/R, WT/DS10/R, WT/DS11/R,
(1 November 1996) modified by the Appellate Body Report, WT/DS58/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, DSR 1996: 1
24 | P a g e
 relevant paragraph of the Article, if such discrimination is applied ‘so as to as to afford protection
to the domestic product’.29

(ii) National Treatment under GATS

83. A similar principle is found under the provisions of the General Agreement on Trade in Services.
Article 17 of the GATS rules provides that;
“…each Member shall accord to services and service suppliers of any other Member, in respect of all
measures affecting the supply of services, treatment no less favourable than that it accords to its
own like services and service suppliers.”30\
84. The GATS outlines this principle in Article XVII. It has been surmised that the National treatment
principle of the GATS, like that of the GATT, refers to equal treatment for foreign and domestic
providers, or equal competitive opportunity where identical services are on offer. 31 This principle
of non-discrimination is that fundamental concept of trade that binds Members. Furthermore, it has
been opined that trade in service is of the substantial and growing importance to the world and
national economies, hence its introduction at the Uruguay Round.32 However, the GATS and its
National treatment obligation seem to have come into effect before WTO Members were willing to
completely eliminate discriminatory measures in service trade, and as a result, it is argued that the
negotiators faced (and still face) significant challenges when having to draft a comprehensive set
of rules governing the multilateral trade in services, and as a result the accomplishment has been a
complex one.33
85. Nonetheless, the challenges to multilateral disciplines posed by the clear-cut departures from the
MFN obligation, such as the exceptions for the regional integration agreement and the MFN
exemptions listed by the schedules of the commitments of the Member States are widely
recognized. Moreover, it has been acknowledged that the difficulties from less visible, implicit
discrimination have not adequately appreciated. 34 It has been opined that, on average across all
WTO Members, only one-third of all services sectors have been combined with significant
limitation on market access and national treatment or with the complete exclusion of particular
types of transaction (Mode of Supply) from coverage. 35

29
. Ibid
30
General Agreement on Trade in Services (GATS), Article 17.
31
. Reymond Saner, “Negotiating Trade In Educational Services within the WTO/GATS context.” Aussenwirtschaft (2003),
Vol.59 : 278
32
. John Jackson and Others, Legal Principles of International Economic Relations (3rd Edition, West Publishers 1995) page 893
33
. Eric Leroux, Supra Note 20, page 749.
34
. Anne Krueger, “Trade in services in the Asia-Pacific Region.” (University of Chicago Press 2003) Vol. 11 page 66.
35
. GATS 1994, Article I (2)(a-d)
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 86. However, while the services negotiations may provide an opportunity to harmonize the rule-making
efforts of the Uruguay Round with genuine market opening, several governments have found it
difficult, despite generally more restrictive access regimes 36, and thus, potentially higher gains from
liberalization than merchandise trade to undertake economically significant bindings across a broad
range of services.37 Finally, more obligations, in particular the MFN obligations, apply to any
measures affecting trade in services, subject only to exemptions. 38

(iii) National Treatment under TRIPs

87. The National Treatment principle also applies in Article 3 of the TRIPS agreement.
88. Article 3 of the TRIPs agreement provides that:

“Each Member shall accord to the nationals of other Members treatment no less favourable than
that it accords to its own nationals with regard to the protection of intellectual property…”39

SCOPE OF NTP

89. Just like the MFN principle, the scope of the NTP also covers the scope of de jure and de
facto discrimination of imported products. A stance is de jure discriminatory when discrimination
can clearly be seen between imported and domestic like products in term of a legal manner. And
when the discrimination is very much clear on the face of a legal instrument that it doesn’t have
any complexity to understand, then it can be de facto discrimination. The most important part of
NTP is that it only applies to internal measures, and it does not at the border on imported goods.
90. Illustration- Let’s assume a case when India imposes a 10% tariff on importing automatic
machines and but on the other hand India only imposes 7% tariff on Indian manufacturer of
automatic machines. Then it can be clearly seen that India is discriminating against imported
products and protecting its domestic products. And any tariffs imposed on imported products
collected at the time of importation in the country are not considered as against the NTP, as Article
III only deals with internal taxes which are discriminating against imported products over domestic
products.
91. In Argentina – Hides and Leather, the Panel expressed that VAT of Argentina was an internal
measure or internal tax and comes under Article III:2 of WTO.

36
. Rudolf Adlung et al,”Turning Hills into Mountains? Current Commitments under the GATS and Prospects for Change”
Journal of World Trade (2005) 39(6) page 1163.
37
. EC-Bananas,
38
. Rudolf Adlung et al,.
39
Trade related aspects of Intellectual property, Article 3.
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92. NT principle provides that Members must not accord discriminatory treatment between imports and
like domestic products (with the exception of the imposition of tariffs, which is a border measure).
93. Article III:1 stipulates the general principle that Members must not apply internal taxes or other
internal charges, laws, regulations, and requirements affecting imported or domestic products to
afford protection to domestic production.
94. In relation to internal taxes or other internal charges, Article III:2 stipulates that Members shall
not apply charges in excess of those imposed on domestic products between imported goods and
like domestic goods, or between imported goods and a directly competitive or substitutable product.
95. About internal regulations and laws, Article III:4 provides that Members shall accord imported
products treatment no less favourable than that accorded to ‘like products’ of national origin. It is
important to note that Article III is only concerned with internal measures and not border measures.
96. In the subsequent paragraphs, the scope of Article III has been dealt with in detail:

a) Article III:2 (first sentence)-

97. Internal taxes and internal charges- Internal taxes and other charges of any kind which are applied
directly or indirectly on products are covered here. Taxes on products such as value added taxes
(VAT), sales taxes, excise, GST which are applied on products would constitute internal taxes on
products.
98. Like Products- The national treatment obligation under Article III-2, first sentence, only applies to
like products. In Japan – Alcoholic Beverages II18, the Appellate Body examined in detail the
scope of the concept of like products within the meaning of Article III:2, first sentence. The issue
was whether shochu and vodka could be considered like products. The Appellate Body confirmed
the basic approach for determining ‘likeness’ set out in the 1970 Report of the Working Party on
Border Tax-
99. “…Some criteria were suggested for determining, on a case-by-case basis, whether a product is
“similar”: the product’s end uses in a given market; consumers’ tastes and habits, which change
from country to country; the product’s properties, nature and quality.”
100. The Panel in this dispute was of the view that despite the fact that vodka and sochu had
different alcoholic strengths, it did not necessarily mean that the two would have been dissimilar
products. The Panel took into consideration the physical properties, the extent to which the product
maybe perceived as serving the same end use, the extent to which consumers perceive and treat the
products as an alternative and the international classification of the products for tariff purposes. On
appeal, the Appellate Body agreed with the above-mentioned views of the Panel and upheld that
vodka and sochu must be considered as like goods for the purpose of this dispute.

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 111. Charge in excess-Once it has been ascertained that the products in question are like, one must
next examine whether the like products have been internally taxed or internally charged at rates in
excess of that which are being charged to domestic goods. While ensuring that internal taxes or
internal charges are not applied in excess, the principle of NT ensures that even the slightest
difference in the amount of taxes makes the measure illegal. The exception of de minimis and the
trade effect test is not a valid exception to the principle.

b) Article III:2 (second sentence)-

112. No Member must additionally apply internal taxes or other internal charges to imported or
domestic products in a manner contrary to the principles set forth in Article III:1. Even when a
Member has satisfactorily fulfilled the first criteria, it must in addition successfully prove that the
internal taxes or internal charges have not been applied in a manner that would distort the
competition in favour of the domestic production.
113.In Japan – Alcoholic Beverages, the Appellate Body stated19 that in Article III:2, second
sentence20, and the accompanying Ad Note to Article III (Ad Article) have equivalent legal status
in that both are treaty language which was negotiated and agreed at the same time. The Ad Article
does not replace or modify the language contained in Article III:2, second sentence, but, in fact,
clarifies its meaning. Accordingly, the language of the second sentence and the Ad Article must be
read together in order to give them their proper meaning. Further the following three issues need
to be answered to determine whether a dispute is covered by Article III:2, second sentence or not-
• the imported products and the domestic products are ‘directly competitive or substitutable
products’ which are in competition with each other,
• the directly competitive or substitutable imported and domestic products are not similarly taxed;
and
• the dissimilar taxation of the directly competitive or substitutable imported domestic products is
applied so as to afford protection to domestic production.
114.Article III:2, second sentence read with the Ad Article, contemplates a ‘broader category of
products’ than Article III:2, first sentence. It covers directly competitive or substitutable products.
In the Japan-Alcoholic case the Panel emphasized that besides the physical characteristics, common
end uses and tariff classifications, the market place and elasticity of substitution must also be
identified before goods are considered as directly competitive or substitutable.
115.The Appellate Body further held that in order to determine whether there is a violation of Article
III:2, second sentence, it must also be found that the products at issue are not similarly taxed. As
opposed to Article III:2, first sentence, which provides that even the slightest tax difference suffices

28 | P a g e
 for a finding of WTO-inconsistency, Article III:2, second sentence, provides that the tax differential
has to be more than de minimis in order to support a conclusion that the internal tax imposed on
imported products is WTO-inconsistent.
116.It is important to note that if the imported and domestic products are ‘not similarly taxed’, then a
further inquiry must be made in order to determine whether the tax measure has been taken ‘so as
to afford protection to domestic production’.

c) Article III-3 (regulatory measures)

117.For a violation of Article III: 4 to be established, the following three elements must be satisfied-
 that the imported and the domestic products at issue are ‘like products’,
 that measure at issue is a law, regulation, or requirement affecting their internal sale, offering for
sale, purchase, transportation, distribution or use,
 and imported products are accorded ‘less favourable’ treatment than that accorded to like products
118.A determination of ‘likeness’ in Article III:4 is fundamentally a determination about the nature and
extent of competitiveness between and among products. The scope of ‘like’ in Article III:4 is
broader than the scope of ‘like’ in Article III:2, first sentence, but is not broader than the combined
Article III:221. To arrive at a decision whether the product is a ‘like product’ for the purposes of
Article III: 4, besides all pertinent evidence, four criteria22 may be used:
 The properties, nature and quality of the products;
 Their end use;
 Consumer tastes and habits; and
 Tariff classification of the products.
119.The scope of application of Article III:4 has been interpreted broadly. The use of the term
“affecting” has been interpreted to mean that Article III:4 should cover not only laws and
regulations which directly govern the conditions of sale or purchase but also any laws and
regulations which might adversely modify the conditions of competition between the domestic and
imported products in the internal markets. Moreover, it has been found that Article III:4 covers
procedural laws, regulations and requirements as well as substantive laws, regulations and
requirements23.
120.‘Treatment no less favourable’ call for effective equality of opportunities for imported products in
respect of the application of laws, regulations and requirements affecting the internal sale, offering
for sale, purchase, transportation, distribution or use of products.
121.In Korea – Various Measures on Beef24, a dispute concerning a dual retail distribution system for
the sale of beef under which imported beef was, inter alia, to be sold in specialised stores selling
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 only imported beef or in separate sections of supermarkets, the Appellate Body stressed that formal
different treatment of imported products did not necessarily constitute less favourable treatment
while the absence of formal difference in treatment did not necessarily mean that there was no less
favourable treatment.

EXCEPTION TO NTP

122.Just like the exception to the MFN principles NTP also has various exceptions which provide the
nation from following the NTP blindly and grants any of the nations the power to refuse on
implementing such principles on their trade. The provisions under Article XX on general exceptions,
Article XXI on security exceptions, also apply to the national treatment rule. Further, the specific
exceptions to the principle are stated briefly below- Some specific exceptions which deal with the
national treatment principle can be summarized as follows:

 Government Procurement (Article III:8A)- It explains a concept or principle that when government
agencies hire or purchase any imported goods for their benefit or for government purpose, then the
domestic government can give preference to domestic products over imported products, it is also
considered that the purpose of government procurement should only be subjected to government
use and not for commercial utility.

 Subsidies to Domestic Producers (Article III:8B)- Governments have the power and can provide
subsidies even including subsidies to domestic manufacturers for aiding those manufacturers from
a tax benefit and can impose some restrictions on the kind of trade or business they can carry for
the purpose of exempting from tax. And such subsidies granted by domestic government are not
considered necessarily be legal by GATT/ WTO members. And also in the Tokyo and Uruguay
Rounds, a provision for the additional subsidy was introduced and now Subsidies and
Countervailing Measures are dealt with SCM Agreement.

 Internal Maximum Price Control Measures (Article III:9)

 Cinematograph Films (Articles III:10 and IV of the GATT 1994)- A wide concept of discrimination
between international and nation fils are discussed under this article which says that the possibility
of giving preferences to products emerging from the national movie industry can be granted and it
will not be covered under NTP. National preferences are governed by the provisions of Article IV,
and the domestic country can impose internal quantitative regulations in “screen quotas”.

EXCEPTIONS TO THE NATIONAL TREATMENT PRINCIPLES UNDER GATS

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123. Article XIV of the GATS allows member states to take measures contrary to the agreement on grounds of
public morals or public order, protection of human and plant life e.t.c. Furthermore, Article XV also allows
states to deviate from the provisions of the agreement on security grounds.

EXCEPTIONS TO THE NATIONAL TREATMENT PRINCIPLE UNDER TRIPS

124.Article 3(2) of the TRIPS permits member states to derogate from the national treatment principle
in matters that relates to judicial and administrative procedures, including the designation of an
address for service or the appointment of an agent within the jurisdiction of a Member, only where
such exceptions are necessary to secure compliance with laws and regulations which are not
inconsistent with the provisions of this Agreement and where such practices are not applied in a
manner which would constitute a disguised restriction on trade.
125.As noted under the MFN principle, the national treatment provisions in the World Intellectual
Property Organisation conventions are incorporated by reference in TRIPS. There are several
relatively complex exceptions from national treatment in the various WIPO conventions, and these
are largely incorporated in TRIPS, for example, under article 6 of the Berne Convention 1971,
where any country outside the Union fails to protect in an adequate manner the works of authors
who are nationals of one of the countries of the Union, the latter country may restrict the protection
given to the works of authors who are, at the date of the first publication thereof, nationals of the
other country and are not habitually resident in one of the countries of the Union.

CONCLUSION

126.In a nutshell, the Most-Favored Nation (MFN) Treatment obligation and the National Treatment
obligation are two main principles of non-discrimination which is a key concept in WTO Law and
policy and are both core provisions of the GATT and the GATS. In simple terms, the MFN
treatment obligation principle prohibits a country from discriminating between other countries
while the National Treatment obligation principle prohibits a country from discriminating against
other countries. These principles of non-discrimination apply with respect to the GATT, as well
as the GATS. Furthermore, the main purpose of the MFN treatment obligation of ARTICLE I of
the GATT 1994 is to ensure equality of opportunity to import from, or to export to, all WTO
Members.

127. On the other hand, under the National treatment obligation, if a Member State grants a particular
right, benefit or privilege to its own citizens, it must grant such advantages to the citizens of other
States while they are in that country. In the event of International agreements, a State must provide
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 equal treatment to these citizens of other States that are signatories taking part in the agreement.
However, while the National treatment obligation is generally viewed as a commendable principle,
in practice it equally may mean that a State can deprive foreigners of anything of which it deprives
its own citizens i.e. since the principle purpose here is equal treatment. Moreover, National
treatment obligation principle only seems to apply once a product, service or service provider has
entered the market. Therefore, charging customs duty on an import is not a violation of National
treatment even if locally produced goods are not charged an equivalent tax.

BIBLIOGRAPHY

BOOKS
1. Jackson, .J. and Others, Legal Principles of International Economic Relations (3rd Edition, West
Publishers 1995)
2. Lester, .S, Mercurio, .B. and Davies, .A, ‘World Trade Law: Text, Materials and Commentary’
(2nd Edition, Hart Publishing 2012).
3. Van Den Bossche, .P, ‘The Law and Policy of the WTO (2nd Edition, Cambridge 2011).
4. Wouters, .J and De Meester, .B, ‘The World Trade Organization: A Legal and Institutional Analysis
(Intersentia 2007).

CASES
1. Canada-Autos, Canada- Certain Measures Affecting the Automotive Industry, WT/DS139/AB/R,
WT/DS142/AB/R, (19 June 2000)
2. Canada-Periodicals, Canada- Certain Measures concerning Periodicals, WT/DS31/R, (30 July
1997),WT/DS31/AB/R, DSR 1997: 1
3. EC- Bananas III, EC- Regime for the Importation, Sale and Distribution of Bananas, Complaint
by Ecuador, WT/DS27/R/ECU, (25 September 1997), WT/DS27/AB/R, DSR 1997: III
4. EEC- Imports of Beef, EEC Community- Imports of Beef from Canada, (10 March 1981), BISD
28S/92
5. EC- Asbestos, European Communities- Measures affecting Asbestos and Asbestos containing
products, WT/DS135/AB/R (12 March 2001)
6. EC- Measures Affecting Differential and Favorable treatment of coffee

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 7. Japan- Alcoholic Beverages II, Japan- Taxes on Alcoholic Beverages, WT/DS58/R, WT/DS10/R,
WT/DS11/R, (1 November 1996), WT/DS58/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, DSR
1996: 1
8. Korea- Beef, Korea- Measures Affecting Imports of Fresh Chilled and Frozen Beef,
WT/DS161/AB/R and WT/DS169/AB/R (11 December 2000)
9. United States-Gambling, United States- Measures Affecting the Cross-Border Supply of Gambling
and Betting Services, WT/DS285/AB/R, (14 March 2006)
10. US-Shrimp, United States- Import Prohibition of Certain Shrimp Products, WT/DS58/R,
(6 November 1998), WT/DS58/AB/R, DSR 1998: VII

INTERNATIONAL LEGISLATIONS
1. GATS 1994
2. GATTS 1994

JOURNALS
1. Adlung, .R, et al,”Turning Hills into Mountains? Current Commitments under the GATS and
Prospects for Change” Journal of World Trade (2005) 39(6)
2. Collins, .D, “Canada’s Prohibition of Automated Bank Machine Withdrawal Charges as a
Violation of the WTO GATS” Manchester Journal of International Economic Law (2009) Vol.4,
No.3
3. Krueger, .A, “Trade in services in the Asia-Pacific Region.” (University of Chicago Press 2003)
Vol.11
4. Leroux, .E,”Eleven Years of GATS Case Law: What Have We Learned?” Journal of International
Economic Law (2007), 10(4)
5. Saner, .R, “Negotiating Trade in Educational Services within the WTO/GATS context.”
Aussenwirtschaft (2003), Vol.59 : 278
6. Trachtman, .J,”A Comparative Analysis of GATS and GATT: A Trade in Services Departure from
GATT’s MFN Principle and the Effect on National Treatment and Market Access.” Legal and
Institutional Aspects of International Trade (October 2001)

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