The Principles of World Trading System – Explained!

Trade without Discrimination:

For almost fifty years, key provisions of GATT outlawed discrimination among members and between imported and domestically produced merchandise.

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According to Article I, the famous “most-favoured-nation” (MFN) clause, members are bound to grant to the products of the other members, treatment no less favourable than that accorded to the products of any other country.

Thus, no country is to give special trading advantages to another or to discriminate against it: all are on an equal basis and all share the benefits of any moves towards lower trade barriers.

Apart from the revised GATT (known as “GATT 1994”), several other WTO agreements contain important provisions relating to MFN and national treatment.

That on Trade-Related Aspect of Intellectual Property Rights (TRIPS) contains, with some exceptions, MFN and national treatment requirements relating to the provision of intellectual property protection by WTO members.

The General Agreement on Trade in Services (GATS) requires members to offer MFN treatment to services and service suppliers of other members. However, it permits listed exemptions to be MFN obligation covering specific measures for which WTO members are unable to offer such treatment initially.

Where such exemptions are taken, they are to be reviewed after 5 years and should not be maintained for more than 10 years.

On the other hand, national treatment is only an obligation in the GATS where members explicitly undertake to accord it for particular services or service activities. This means that national treatment is often the result of negotiations among members.

The Principles:

The trading system should be

i. Without discrimination a country should not discriminate between its trading partners (they are all, equally, granted “most-favoured ­nation” or MFN status); and it should not discriminate between its own and foreign products, services or nationals (they are given “na­tional treatment”)

ii. Freer with barriers coming down through negotiation

iii. Predictable foreign companies, investors and governments should be confident that trade barriers (including tariffs, non-tariff barriers and other measures) should not be raised arbitrarily; more and more tariff rates and market-opening commitments are “bound” in WTO

iv. More competitive by discouraging “unfair” practices such as export subsidies and dumping products as below cost to gain market share

v. More beneficial for less developed countries by giving them more time to adjust, greater flexibility and special privileges

Why is it called “most-favoured?”

The name sounds like a contradiction. It suggests some kind of special treatment for one particular country, but in the WTO, it actually means nondiscrimination treating virtually everyone equal.

What happens under the WTO is this. Each member treats all the other members equally as “most-favoured” trading partners. If a country improves the benefits that it gives to one trading partner, it has to give the same “best” treatment to all the other WTO members, so that they all remain “most- favoured”.

Most-favoured nation (MFN) status did not always mean equal treatment. In the 19th Century, when a number of early bilateral MFN treaties were signed, being in an exclusive club because only a few countries enjoyed the privilege.

Now, when most countries are in the WTO, the MFN club is no longer exclusive. The MFN principle ensures that each country treats its over-100 fellow-members equally.

But there are some exceptions other WTO agreements with non-discrimination provisions include those on rules of origin, pre-shipment inspection, trade-related investment measures and the application of sanitary and phytol sanitary measures.

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