This paper analyzes the erosion of the Most-Favored-Nation (MFN) principle within the World Trade Organization framework, drawing on arguments presented in the Sutherland Report's Chapter II. The paper traces how MFN's original intent — to prevent discriminatory trade practices among member states — has been steadily undermined by built-in exceptions and the proliferation of Regional Trade Agreements (RTAs). Key exceptions discussed include balance-of-payments provisions, security exemptions, and RTA carve-outs. The paper argues that the growing dominance of RTAs, exemplified by agreements such as NAFTA and AFTA, conflicts with the foundational non-discrimination principle, raising questions about the future viability of MFN as a governing rule in international trade.
The WTO agreements provide for Most-Favored-Nation (MFN) treatment with the intention of multilateralizing and liberalizing trade through the enhancement and promotion of service and trade equality among World Trade Organization member states. More specifically, the MFN principle means that "under the WTO agreements, countries cannot normally discriminate between their trading partners" (WTO, 2019). As the WTO further specifies, no special favors should be extended to any party that are not equally accessible to all other WTO members. Such favors include, but are not limited to, lower customs duty rates for certain products.
It should, however, be noted that this original intention no longer appears fully operational, due in part to the incorporation of factors that conflict with the purpose of the MFN treatment provision in WTO agreements. The burden of the Sutherland Report's Chapter II is precisely "the erosion of the unconditional most-favored-nation (MFN) principle and the resulting grief to the world trading system" (McKinney and Gardner, 2008, p. 215). It is therefore important to assess the assertions voiced in that chapter.
Under GATT, the MFN treatment has in some quarters been regarded as a critical safeguard against services and trade discrimination, given that the obligation effectively discourages countries from engaging in discriminatory practices against one another. However, as the Sutherland Report points out, "decades after the founding of the GATT, MFN is no longer the rule; it is almost the exception…" (Addo, 2014, p. 182). The emasculation of the MFN treatment obligation began with moves to protect various factors seen to be in conflict with trade liberalization, including societal interests and values. Accordingly, insertions were made in GATT as exceptions, permitting states in certain special circumstances to adopt inconsistent measures.
Some of the main MFN treatment exceptions relate to balance-of-payments (BOP), regional trade agreements (RTAs), and national security (Cohn, 2008). When it comes to RTA exceptions, departure from MFN principles is justified when there is a need to extend preferential treatment to service suppliers or goods originating from trading partners within a free trade area or customs union (Cohn, 2008). In such cases, that preferential treatment need not be replicated for all WTO member states. Balance-of-payments exceptions, on the other hand, grant justification to adopt protective measures in order to safeguard a member's BOP position and external financial standing (Cohn, 2008). Security exceptions permit deviation from the MFN treatment obligation when there is a need to safeguard critical national security elements, even where the measures adopted are restrictive to trade in goods (Cohn, 2008). In certain exceptional circumstances, temporary waivers may also be granted when member states authorize them.
In addition to the exceptions highlighted above, various other factors have contributed to the further marginalization of the MFN treatment obligation. The creation of free trade areas and customs unions as a consequence of RTA proliferation significantly contributes to a marked pullback from MFN treatment. Trost (2008) argues that "one of the problems that the rush to enter in RTAs has created is the undermining of the WTO as a trade regulating body whose purpose was to promote global stability" (p. 71). In essence, RTAs result in the exclusion of non-member countries from the preferential treatment that RTA members enjoy.
"RTAs undermine WTO non-discrimination principle"
In this final analysis, it is important to note that with special reference to trade diversion or creation, regional integration as an attempt to multilateralize or liberalize trade is likely to continue being a contentious issue. This is especially true when it comes to finding common ground between the rights of WTO member states to trade and the benefits of regional trade agreements. At present, the future of the MFN trade obligation is uncertain in light of the growing disuse of its provisions. This concern is echoed in the Sutherland Report, which asserts that, among other things, "decades after the founding of the GATT, MFN is no longer the rule; it is almost the exception…" (Addo, 2014, p. 182).
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