WTO Non-Discrimination Principles analysis


WTO Non-Discrimination Principles. 1

Most Favoured Nation (MFN) treatment. 1

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National Treatment. 3

Exceptions to the principles of non-discrimination. 4

Implications to trading opportunities of developing countries. 6

References. 6

WTO Non-Discrimination Principles

Non-discrimination is one of the key policies of World Trade Organization (WTO) and thus, it is embodied in its law. There are two main principles of non-discrimination in WTO law namely; Most Favoured Nation treatment (MFN) and national treatment (WTO, 2011). In simple terms, the principle of MFN prohibits a contracting party from discriminating between contracting parties while the national treatment prohibits a contracting party from discriminating against contracting parties.

Most Favoured Nation (MFN) treatment

According to Article 1 of the General Agreement on Tariffs and Trade (GATT), MFN treatment means that any advantage that is granted by a member state to the products of another trading partner should be accorded unconditionally to the products of any other member country, (Jackson , 1990, p.26). It is therefore applied in solving disputes in which certain moves by a contracting party to lower trade barriers discriminates between contracting parties. A good example this situation is the Indonesia-autos dispute that occurred as a result of certain measures affecting automobile industry applied by Indonesia in 1996, (Ortino, F., (2004, p. 127).

Specifically, Indonesia came up with a policy that allowed certain motor-vehicle industries (which it deemed to be compliant with local content requirement) to import parts and components of cars into the country free of duty. Also, based on compliance with local content requirement, Indonesia gave an import relief to domestic car producing industries parts and components of car and also an exemption on sales tax. On top of that, Indonesia came up with a policy which provided car industries located in foreign countries but owned by Indonesian nationals with ‘pioneer’ benefits as long as they complied with local content requirement. This led to claims filed by Japan, the United States and European community, alleging that the trade measures undertaken by Indonesia were meant to create favourable conditions for an Indonesian national car project called ‘Timor’ in which Indonesian government wanted to create a joint venture between a domestic entity and a Korean car company called Kia. Thus, the complainants argued that these measures violated Articles 1, 3 and 10 of the GATT, 1994, article 2(1) of the TRIMS and several articles of the TRIPS and SCM agreements.

In a report adopted on 23 July 1998, the WTO Panel confirmed the validity of the allegations and emphasized that the measures accorded Korean company a favourable treatment which was not accorded to the other parties, (Stoll & Schorkopf, 2006. P.55). In this regard, the panel concluded that the trade measures taken by Indonesia were inconsistent with Articles 1 and 3(2) of the GATT, 1994Article 2(1) of the TRIMS agreement and Article 5© of the SCM. All these agreements are handled together by WTO and embody the principle of MFN. Generally, this case reinforces the range of roles played by the principle of MFN in liberalization of multilateral trade among the WTO members.

According to Bossche, MFN helps to reinforce multilateral trade liberalization rules by raising the cost of a nation of defecting from a trade regime that it has committed itself to (Bossche, 2005, p.307). Usually, a discriminatory trade policy is objected by foreign investors and this increases political cost. Therefore, if a member state wants to put trade barriers, it has do so to all WTO members. Further, according to Stoll & Schorkopf, the standard of MFN reduces negotiation cost basically because the results a negotiation between two parties extend to all other members, (Stoll, P. & Schorkopf, 2006. P.55). Moreover, this principle ensures stability and manageability of world trade system and prevents it from breaking into different bilateral trade agreements. Finally, this standard helps to minimize the impact of the differences in power between member states such that newcomers and small members can also benefit from the concessions.

National Treatment

The principle of national treatment is contained in article 3 of GATT rules and its purpose is to supplement MFN treatment in the internal commerce of importing countries, (Charnovitz et al, 2005, p. 95). This standard requires that once imported goods have entered into the domestic market country, they must not be treated less favourable way than the equivalent domestically produced products. Thus, this principle safeguards against situations in which a member state may discriminate against other parties, (Hoekman, B and Kostecki , 2001, p.309). A good example for this is the Korea – Measures Affecting Imports of Fresh, Chilled, and Frozen Beef case, WT/DS161/AB/R, (Guzmán, & Sykes, 2007, p. 28). In this case, the Korean state trading agency in charge of beef imports came up with measures which led to suspension of tenders for beef from foreign countries in 1990. On top of that, the agency suspended sale of imported beef from its stock for a certain period of time. Consequently, Australia filed accusations against Korea of violating the national treatment principle by exceeding domestic support for local products against imports.

In a report adopted 10 January 2001, the appellate body found that Korean measures led to a reduction in competitiveness of imported beef reflected by a reduction in the number of shops specializing in selling imported beef from about4500 to approximately 5000 in a period of eight years. In this regard, the appellate body concluded that the measures taken by Korean violated article 3(4) of the GATT which stipulates that imported products should not be accorded less favourable treatment than that accorded to similar domestically produced goods, (WTO, 2004). This case demonstrates that the principle of National treatment is an important guard against circumstances in which products enter a market of a foreign country but are subjected to special charges, taxes or administrative practices not subjected to similar local products rendering them to become uncompetitive. This principle was developed due to the fact that some countries adopt development policies that aim at promoting some domestic industries, enterprises or some sectors of the economy, (Macrory, & Appleto , 2005, p. 2175). It gives greater certainty to foreign investors regarding the regulations in which must operate.

Exceptions to the principles of non-discrimination

The WTO agreements provide certain exceptions to the principles of MFN and National treatment. To start with, countries forming trade regimes such as PTA, EU and COMESA among others are exempted from complying with the principle of MFN, but under certain specific conditions, (WTO, 2004). Article XXIV of the GATT, 1994 allows regional integration as an exception to the MFN but under condition that all trade barriers must be eliminated for all trade within a region and must not be more restrictive or higher than they were before establishment of regional integration.  Also, member states are allowed not to comply with the principle of MFN in cases of Generalized Systems of Preferences (GSP), (WTO, 2004). This is a system which allows lower tariff rates to products originating from developing nations than required under the principle of MFN and aims at promoting such countries to increase earnings from exports and hence promote their development. A good example of this is the British Commonwealths. As well, article 1(4) of the GATT, 1994 allows for continuation of historical preferences between member countries which are in contrast with the principle of MFN but which existed before signing the agreement, (Weiss, F., Denters, E. & Waart, 1998, p. 460).

Under the GATS and TRIPS agreements members are allowed to deviate from the MFN standard but in certain cases described in details in certain specific annexes of the agreements. Article 2(3) of the GATS requires that all exemptions for a period of 5 years be reviewed and further stipulates that such exemptions should be valid for only a period of 10 years, and in any case, “they shall be subject to negotiation in subsequent trade liberalization rounds”, (Dunkley, 2004, p.191). Hoekman and Kostecki (as cited in Dunkley, 2004, p.192) describe one exception to the principle of national treatment. According to Article 3(8) of the GATT, 1994, the principle of national treatment does not apply to legal norms “governing the procurement by government agencies of products purchased for governmental purposes and not with a view to commercial resale or with a view to use in the production of goods for commercial sale” There are also general exceptions which do not only apply to MFN/NT, but they affect the whole GATT agreement. The most common of these allow members to derogate from the provisions of the agreement on then grounds of national security, public health, environmental protection and orders and morals, (Dunkley, 2004, p.192).

Implications to trading opportunities of developing countries

There are several implications associated with the two principles of non-discrimination and their exceptions on trading opportunities of developing countries. First, they make it possible for developing nations to import and export goods in accordance with the principle of comparative advantage, (Guzmán, & Sykes, 2007, p. 30). This leads to increased efficiency in trade reflected by increased returns and opportunities for development. Secondly, these principles lead to increased stabilization of free trading system. Precisely, as Guzmán & Sykes note, they increase “risk of the introduction of trade restrictions becoming a political issue, raises the costs”, (Guzmán, & Sykes, 2007, p. 30). This increases predictability which makes trade and investment more favourable, to developing nations.  Finally, WTO agreements allow for special assistance and trade concessions for developing nations, (WTO, 2004). That way, they create trading opportunities for developing nations.


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