Tuesday, September 27, 2022

Most-Favoured Nation: Renaissance or Requiem

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DIPLOMAT MAGAZINE “For diplomats, by diplomats” Reaching out the world from the European Union First diplomatic publication based in The Netherlands. Founded by members of the diplomatic corps on June 19th, 2013. "Diplomat Magazine is inspiring diplomats, civil servants and academics to contribute to a free flow of ideas through an extremely rich diplomatic life, full of exclusive events and cultural exchanges, as well as by exposing profound ideas and political debates in our printed and online editions." Dr. Mayelinne De Lara, Publisher

By Philip Kariam

Preferential treatment among trading partners was once a potent tool in the sovereign toolbox. With the raising of tariffs during the Great Depression, policies like the British Empire’s system of Imperial Preferences, which reduced tariffs for members of the Commonwealth, gave an appreciable advantage to certain countries while disadvantaging others. By the end of the Second World War, the desire to reduce trade frictions and end favouritism culminated in the negotiation of the General Agreement on Tariffs and Trade (GATT 1947), which, in large part, sought to put an end to trade preferences through the most-favoured nation (MFN) obligation.

MFN remains one of international trade law’s core principles. It has, moreover, experienced a kind of rebirth in the public discourse stemming from recent events in Ukraine, with several states revoking MFN as a sanctioning tool. On the one hand, this invocation of MFN suggests that it continues to play an important role in the international arena; on the other, it adds to an already significant list of MFN’s exceptions. Whether it is experiencing a renaissance or requiem, however, understanding MFN continues to be essential for understanding trade relations.

MFN in the context of international trade law

To do so, it is helpful to begin with the framework of rules within which MFN sits –international trade law and the World Trade Organization (WTO) agreements.

Modern international trade law developed on the foundation of the GATT 1947 and evolved through a series of negotiations culminating in the Uruguay Round, which established the WTO in 1994. Today, the WTO has 164 member states and covers almost all aspects of global trade.

The WTO consists of several agreements – to which all WTO members are a party – related to trade in goods and services, intellectual property, and trade remedies (i.e., anti-dumping and countervailing duties), among many other areas. The WTO also provides a forum for trade negotiations and a state-to-state dispute settlement mechanism.

What do these agreements actually do? In brief, they set out a series of rules governing trade between states. These rules are a mix of substantive law – e.g., the non-discrimination obligations and bound tariff rates – and oversight over domestic trade-related procedures – e.g., rules for dumping and subsidy investigations undertaken by domestic authorities.

A cornerstone principle…

MFN is one such rule. More than that, it is a core tenet of the WTO that pervades several of its agreements. It has been described as a “cornerstone of the GATT” and “one of the pillars of the WTO trading system”.

But it isn’t, as it sounds, about choosing favourites. To the contrary, MFN is a non-discrimination obligation, a requirement to accord the same treatment to all trading partners. As set out in the GATT, MFN means that any “advantage, favour, privilege or immunity” provided to the goods originating in one WTO member must be given “immediately and unconditionally” to like goods originating in another WTO member.

Applied to tariffs, MFN means that like goods must be subject to the same duty rate, regardless of their country of origin. Thus, apples imported from Italy are subject to the same duties as apples from Chile; bicycles from Taiwan the same duties as bicycles from France, and so on. Legal disputes occur on issues such as whether two products are truly “like” one another (query whether Fuji apples are “like” Granny Smiths).

… with many exceptions

Like most legal rules, MFN has exceptions. The most significant of which is free trade agreements (FTAs) – e.g., the USMCA or the CPTPP – which have proliferated since the formation of the WTO. Despite providing better treatment to their members than the WTO agreements, FTAs are permitted under the GATT. Why? Because they contribute to the overall goal of lowering trade barriers. As of March 2022, no less than 354 FTAs were in force.

The WTO also permits members to deviate from MFN if, for example, their actions are necessary to protect human, animal or plant life, or are related to the conservation of exhaustible natural resources (to name just two of ten such exceptions). A WTO member may also take action it considers necessary for the protection of its “essential security interests”, even if that action violates MFN – e.g., the US’s recent national security tariffs on steel and aluminum.

Anti-dumping and countervailing duties – which may be applied to specific countries where dumped or subsidized goods are found to originate – are yet other deviations from MFN permitted by the WTO.

If these exceptions seem significant, it is because they are. The expansion of FTAs alone has prompted some observers to regard MFN as the exception rather than the rule.

When nations fall out of favour

Nevertheless, MFN has gained a certain prominence of late stemming from Russia’s invasion of Ukraine.

On March 3, 2022, Canada ventured into the avant-garde by revoking Russia’s and Belarus’ MFN status, triggering the “general tariff” for goods from these countries (while Belarus is not a WTO member, it was granted MFN status under Canadian law). On April 8, the US followed suit, suspending “normal trade relations” (i.e., MFN) with Russia and Belarus. Japan, the EU and UK have also announced intentions to revoke Russia’s MFN status.

This means that Russia and Belarus will face non-MFN tariffs (for Canada, this is generally on the order of between 30-35%) on all of their exports to these countries. For countries such as Canada and the US that have coupled MFN revocation with an outright ban on some of Russia’s most valuable exports (including petroleum), its real economic impact may be limited. Yet, because of MFN’s position at the centre of the WTO, its revocation sends a strong message – there has been a fundamental break from “normal trade relations” between these parties.

Renaissance and requiem?

Though embattled by exceptions and deviations, the invocation of MFN as a kind of “big gun” sanctioning tool underlines its continued relevance for global trade. It demonstrates that MFN remains enmeshed in the WTO and international trade law, so much that it is a synonym for “normal trade relations”. At the same time, it provides further evidence of a willingness to deviate from MFN in order to achieve policy objectives, an apparent turn, in spirit, to the pre-GATT 1947 era when preferences were bestowed upon favoured countries. The relevance of MFN may only prevail so long as countries continue to value equitable treatment and reducing trade barriers above other considerations. For better or worse, this remains to be seen.

About the author:

Philip Kariam

Philip Kariam is an associate at McMillan LLP, where he practices international trade and investment law. His experience includes working as international trade counsel for the Province of Ontario and as a legal consultant for the World Bank.

He holds an LL.M from Georgetown University, a Master of International Affairs from Sciences Po, a JD from Osgoode Hall Law School, and a BASc from the University of Waterloo.

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