The Most-Favoured Nation Treatment Principle - Essay Example

?International Economic Law Introduction The principles of Most Favoured Nation (MFN) and National Treatment (NT) are some of the basic principled and guidelines of the World Trade Organization (WTO). For it member states, a correct interpretation and application of these two principles is of utmost importance to safeguard the rights and sovereign interests of the nation and the global economy. This paper discusses these two concepts in critical detail. Most Favoured Nation (MFN) The Most-Favoured Nation treatment principle is one of the most primary principles developed by the World Trade Organization (WTO). Countries that obtain the MFN status have the benefit of trade advantages by nations providing this treatment1. These trade advantages encompass benefits like larger import quotas or lower tariffs and import duties. A country designated with the MFN status must be treated on an equal platform as any other country that has been awarded the MFN status by the nation granting this special status. The MFN treatment principle is important in the context of the WTO whose members have pledged to award MFN statuses to each other. There are also certain exceptions like designating free trade sectors on a regional basis and providing additional benefits to the developing nations. Under the MFN system stipulated by the WTO, a member nation that grants the most-favoured status to a non-member state for a particular product is obliged to provide the same benefits to other members of the WTO2. Thus, the WTO ensures that trade benefits are provided to all members as well as non-members on an equitable basis. The notion of a Most-Favoured Nation has existed since medieval times where smaller versions of such agreements have existed since the 15th Century. However, the expansion of MFN status in international trade began to develop during the 18th century3. Before the General Agreement on Tariffs and Trade (GATT), the MFN treatment could be found only among Bilateral Investment Treaties (BITs) which indeed aided in liberalizing international trade. MFNs also find mention in the ‘Fourteen points’ laid out by United States (US) President Woodrow Wilson in 1918 which called for the liberalization and equality of trade conditions among nations4. Features of the MFN principle The MFN treatment principle has numerous economic effects that are elaborated below. Advantages to International Trade The most important benefit of the MFN principle is that it allows nations to import goods from the most cost-effective and efficient producer without disrupting the notion of comparative advantage5. For instance, a country can import products from the best supplier from different countries based on cost, quality and efficiency thereby improving its economic efficiency. However this efficiency is distorted if the importing nation imposes a higher tariff on imports from the efficient supplier, prompting the importer to prefer products of the next best supplier (from a different country) at lower tariffs. This results in a trade imbalance which reduces the economic benefit to the importing nation besides disrupting global economic efficiency6. The provision of the MFN status in this context to all the countries implies that the importing country will levy equal tariffs on all exporting nations resulting in the procurement of goods from the most efficient supplier. Thus, the primary objective of the MFN treatment principle is to improve the efficiency of international trade. Free Trade System As mentioned above, the equal treatment of nations based on the MFN treatment principle accords the most liberal business environment that allows WTO member states to cut costs in negotiation and monitoring trade agreements. In simpler words, the MFN treatment has resulted in the reduction of costs associated with the maintenance and functioning of the free trade system7. Equal treatment for imports from all member countries also means that costs associated with ascertaining the originating port or country are also reduced thereby contributing to better economic efficiency. Treatment of smaller nations The MFN principle has accorded equal rights and treatment to all nations irrespective of size or economic might. Smaller nations now enjoy similar benefits that larger countries have traditionally accorded to each other. Equal status also provides additional strength to smaller states on the negotiating table besides allocating more transparency and consistency to international trade laws8. MFN treatment also provides measures for preventing protectionist policies among nations during times of economic crisis to overcome any disruption of the international trade system. Investment Arbitration There have been several questions on whether investors can seek the expansion of basic treaties based on inherent clauses on MFN treatment. Several cases such as RosInvestCo UK Ltd v Russian Federation (2007) suggest that subtle differences in the wordings of MFN clauses have led to an inadequate implementation of general international law as stipulated by the Vienna convention on the Law of Treaties (Article 31(3)(c))9. Such cases have provided a perception that no school of thought can claim success in terms of adherents. The RosInvestCo UK Ltd v Russian Federation (2007) is particularly known for resulting in a consensus among legitimate users of the investment treaty system that no question can be formulated in general terms and that there exists a premium on certainty in resolving disputes among investors and member states. Thus, broader scrutiny is required in this scenario as it results in litigation over the extent and scope of claims. While MFN clauses allow member states to regulate their global investment obligations in an independent manner, very little work has been expended towards determining or understanding the manner in which these clauses apply within an international investment framework10. Instead, such analyses have been carried out on a case by case basis through arbitral tribunals. This approach has resulted in multiple interpretations of a given MFN clause based on the context within which it was applied without any consideration for broader implementation in an international context. Although MFN clauses are often an integral part of investment agreements among nations, their language and content can vary significantly leading to differences that can affect the course of international trade and operations. This calls for some enhanced attention to each MFN clause in order to determine its operation on a more general basis. It also implies that member states can alter the language of the MFN clause they wish to incorporate into their trade agreements depending on individual preferences and constraints11. For instance, the German model BIT (Article 4(4)) provides a general and unqualified MFN clause that reads12: “Investors of either Contracting State shall enjoy most-favoured-nation treatment in the territory of the other Contracting State in respect of the matters provided for in this Article.” In contrast, the BIT between the United Kingdom (UK) and Argentina (Article 3(2)) clearly specifies the categories of rights in which the MFN clause is applicable13: “Neither Contracting Party shall in its territory subject investors of the other Contracting Party, as regards their management, maintenance, use, enjoyment or disposal of their investments, to treatment less favorable than that which it accords to its own investors or to investors of a third State.” National Treatment Principle National Treatment (NT) has been incorporated across all domains by the WTO and appears under Article 3 of the GATT and Article 17 of the General Agreement on Trade in Services. The provisions under NT encompass every policy area of government and applied to all 147 members of the organization14. The rules specified under NT apply to the sales and logistics of imported goods and services. National treatment pertains to the treatment of foreigners in the same way as the nation treats its own citizens. Under its provisions, when a state grants any right or benefit to its citizens, it must also extend these privileges to other nationals who reside in the country. In the framework of international treaties and agreements, national treatment symbolizes the equal treatment of foreigners on par with citizens. For example, tariffs on imported and locally manufactured goods should be equal and no discrimination should be made against foreign goods once they arrive into the market. However, the scope of national treatment of rights and privileges in civil society was traditionally limited which improved with frequent exchanges among countries15. This has led to the emergence of universal agreement to certain basic rules under national treatment besides improving the prospects for foreign investment. Besides granting equal rights to foreigners in investment and business activities, national treatment also extends towards ensuring similar rights to foreign nationals within the legal framework of the host nation. National treatment is thus a general principle that depends on a member state’s domestic legal system and international treaties besides being intricately associated with the economic interests and security of its citizens. As such, each nation has adopted national treatment using a different approach. Generally speaking, the UK is a developed country that is capital exporting as well as importing. The investment climate in the nation is based on fair competition where the national treatment adopted is focused towards developing efficient market mechanisms and high levels of economic activity. The evolution of national treatment has however followed a rather cautious pattern by focusing on foreign investment to explain the development of economic policies and explain the role of national treatment in formulating various restrictions16. While it is difficult to satisfy all stakeholders, the general principle of national treatment has been difficult to implement on a broader scale. The formulation of the GATS in 1994 paved the way for the international adoption of national treatment in multilateral treaties thereby signifying its importance in international investment. MFN and NT are two of the most important principles of the WTO. However, the MFN is relatively easier to understand and implement than NT although the latter is of great significance in safeguarding the economic interests of a nation. Both the treatments are based on non-discrimination and aim to achieve the common goal of minimizing any barriers to free trade and economic liberalization17. The purpose of MFN is to ensure equal treatment among different countries and the grant of similar privileges to all trade partners. However, the purpose of national treatment is to uphold the interests of foreign and domestic producers and protect intellectual property. Limitations Members of the WTO can restrict the impact of GATS on their independence by segregating some policy areas for national control rather than international regulation. Such reservations are allowed when these policy areas are liberalized voluntarily by the government and include commitments like providing a free access to markets and remove any restrictions on foreign manufacturers. For example, the UK government can restrict the flow of public funds to NHS (National Health Service) providers using these voluntary limitations18. Furthermore, these limitations can also be applied across all services within the industry. Such a strategy is aimed at securing public utilities within these important industries. However, the complex laws that govern such treatment are themselves vulnerable to varying legal interpretation. It is not clear whether these horizontal limitations protect health care that is not supported through public funds. As such, the UK government’s commitment in 1995 to liberalize health services as per WTO regulations may have different implications than those conceived originally. Prior to 1995, most of the NHS providers were publicly funded although there has been a growing room for the private sector ever since19. However, the UK has not restricted its free trade commitments (unlike other members of the European Commission) through national treatment limitations that could prevent foreign investors from competing against health services funded through public means. This has curtailed the government’s ability to prevent access of public funds to the private sector20. Conclusion The preceding sections have discussed some of the important characteristics of Most Favoured Nation and National treatment principles. The MFN treatment builds over bilateral treaties and follows the concepts of reciprocity and non-discrimination as aid out by the WTO and GATT. Thus, MFN stimulates the development of multilateral reciprocal relationships and ensures that similar privileges are extended to the entire group of participating nations. National treatment, on the other hand, is GATS-specific treatment that is only applicable within industries that enjoy liberalization commitments. The members of the WTO can nevertheless limit the effects of national treatment by imposing limitations. References 1. Blustein (2009), Misadventures of the most favored nations: clashing egos, inflated ambitions, and the great shambles of the world trade system. PublicAffairs. 2. Bossche (2008), The Law and Policy of the World Trade Organisation: Text, Cases, and Materials. Cambridge University Press. 3. Braithwaite (2006), Global business regulation. Cambridge University Press. 4. Bungenberg (2009), Economic Law as an Economic Good: Its Rule Function and Its Tool Function in the Competition of Systems. European Law Publications. 5. Carvalho (2010), Semiotics of International Law: Trade and Translation. New York: Springer. 6. Eleanor (2006), New developments in UK and EU competition policy. Chicago: Edward Elgar. 7. Herrmann (2010), European Yearbook of International Economic Law 2011. New York: Springer. 8. Horn (2004), Arbitrating foreign investment disputes. Kluwer Law International. 9. Hu (2001), Legal and policy issues of the trade and economic relations between China and the EEC: a comparative study. Kluwer Law International. 10. Matsushita (2003), The World Trade Organisation: Law, Practice, and Policy. Oxford University Press. 11. Meessen (2004), Economic law in globalizing markets. Kluwer Law International. 12. Morgan (2006), New developments in UK and EU competition policy. Chicago: Edward Elgar. 13. Newcombe (2009), Law and practice of investment treaties: standards of treatment. London: Barnes & Noble. 14. Parr (2005), UK merger control: law and practice. Sweet & Maxwell. 15. Stevens (2005), Bilateral investment treaties. New York: Martinus Nijhoff Publishers. 16. Sykes (2007), Research handbook in international economic law. Chicago: Edward Elgar. 17. Weiler (2005), International investment law and arbitration: leading cases from the ICSID, NAFTA, bilateral treaties and customary international law. London: Cameron May. 18. Weiss (2008), International economic law with a human face. New York: Martinus Nijhoff Publishers. Read More