Non-Discrimination Principle:

MFN and National Treatment

in the GATT, 1994.

Introduction
Non-discrimination is a fundamental principle of the World Trade
Organization (WTO) and is embodied in the:

 Most Favoured Nation Treatment; and,

 National Treatment.
We can see different multilateral rules and principles which were set up in
1947 to govern International trade relating to goods between member
nations of GATT, 1947. After the great development in the Uruguay Round
which leads the Marrakesh Agreement and established the World Trade
Organisation on 1 January 1995, the basic principle of non-discrimination
principle formed in 1947 is consistently same to the latest organisation
between member nations. The only things which are amended in these
principles were the scope otherwise the objective of these principles is the
same as of framed in 1947.

Article I and Article III of the GATT 1994, deals with Most Favoured Nation
Principle and National Treatment Principle respectively. With further
development in the scope of these principles, now these principles not only
deal with the trade in goods practices rather now they also govern the trade
in services and trade in IPR.

The MFN Principle

A most-favoured-nation (MFN) principle explains the concept where a
country has to grant some privileges related in a trade agreement to any of
the member nations of the World Trade Organization. The concept not only
ends here, but the main principle of the MFN principle is also that if any
privileges are granted to any member nation by another member nation of
the WTO then the same privilege of like products has to be given to all the
other member nations of the WTO. The main objective of these principles is
to promote trade and provide equal opportunity to get the best benefits of
any member nation’s resources.

Illustration- If India grants special treatment to Germany, that goods

imported especially related to motor vehicle industry from Germany to India
will have no import duty of trade tariff and in the manner, Germany excludes
India from trade tariffs and import duty about thee the goods imported to
Germany from India. Then according to the MFN principles, both Germany &
India are violating the MFN principles of GATT, 1994 and both the country
has to avail the same benefit or privilege to all the member nations of the
GATT 1994. Which means India should privilege every member nation in
excluding trade tariff of goods related to motor vehicles and the same
privileges have to be granted by Germany to all the other member nations of
GATT 1994.

Article I:1 of the GATT, 1994 (MFN PRINCIPLE)- With respect to customs

duties and charges of any kind imposed on or in connection with importation
or exportation or imposed on the international transfer of payments for
imports or exports, and with respect to the method of levying such duties
and charges, and with respect to all rules and formalities in connection with
importation and exportation, and with respect to all matters referred to in
paragraphs 2 and 4 of Article III, any advantage, favour, privilege or
immunity granted by any contracting party to any product originating in or
destined for any other country shall be accorded immediately and
unconditionally to the like product originating in or destined for the territories
of all other CONTRACTING PARTIES.

Interpretation of ArticleI:1 of the GATT 1994

(MFN Principle)
Rationale Behind The MFN Principle. The MFN principle works to:

 Maximize efficiency.
 Minimize transaction costs.
 Promote further reciprocal liberalization- This benefits particularly small
developing countries, which benefit from the most favoured treatment
provided to other Members.
 Minimize the costs of trade negotiations.
Scope of Application of the MFN Rule: De Jure& De
Facto DISCRIMINATION

The MFN principle of GATT has interpreted that a measure may be

discriminatory not only in law (de jure) but also in fact (de facto). De jure
means when the extra advantage or benefit is given to any of the nation or
member nation which can be recognised by the legal value or through legal
instruments and that too without extending such advantage of like products
to all WTO Members. When the discrimination cannot be recognised directly
through words or face of the legal instrument, then it can still be de facto,
and discriminatory. De facto discrimination occurs when there can or cannot
be an issue of a legal instrument but the discrimination can be found in the
material facts. To establish de facto discrimination, all the facts relating to
the application of the measure must be reviewed.

Illustration- If India a WTO Member, frame a policy which has different tax
policies like a bike which are manufactured automatically or through robotic
plants will be taxed 10% of their marketing value and on the other end the
bikes which are manufactured manually or through manpower will attract 7%
tax of their marketing value. In this scenario, the countries which use
capital-intensive techniques for manufacturing bike will have an advantage of
3% compared to those countries which utilise capital intensive techniques.
Therefore in this case both the tax slabs has different perspective for taxing
the bikes and the discrimination cannot be found through de jure aspect as
both the manufacturing are of different nature but the discrimination can be
recognised capital-intensive concept of de jure and it can be easily
understood that the discrimination is recognised by considering facts of the
case and not only by the considering legal aspects.

The MFN Principle: Three-Tier Test or The Essentials Considering MFN

principles-

One needs to check these three elements to find an inconsistency with MFN
principles:

 Any advantage or favour or privilege or immunity covered by Article I:1

of the GATT 1994; and
 Like products; and,
 The advantage issued to a specific nation is not granted immediately
and unconditionally to the like products of every member nation.
Article I:1 covers a broad range of measures in relation to
exportation and importation as well as internal measures. Such
measures include the following:

 Customs duties;
 Any kind of charges imposed on importation or exportation;
 Any kind of charges imposed in connection with importation or
exportation;
 Any charges imposed on the international transfer of payments for
imports and exports;
  The method of levying such duties and charges;
 All rules and formalities in connection with importation and
exportation;
 Internal taxes or other internal charges (covered in Article III.2);
 All laws, regulations and requirements affecting the internal sale,
offering for sale, purchase, transportation, distribution or use of any
product (covered in Article III.4).
Like Products

The concept was coined and explained by the Appellate Body in EC –

Bananas III, which explains that “like products” should be treated equally,
irrespective of their origin. Which means that products which are not “like
products” does not come under the restrictive principle of MFN and may be
treated differently.

With the development in GATT/WTO the different cases have set up four
criteria or essential under Article I:1, which are to be fulfilled to determining
whether the imported and domestic products are “like products“, those are:

1. The product’s end uses.

2. Consumers’ tastes and habits.
3. The product’s nature, properties and quality (physical characteristics).
4. The customs classification of the products.
Understanding the Three Tier Test of MFN Principles.

Analysis of “Like Products” under Article I:1 of GATT 1994.

The concept of “like products” has been interpreted by GATT in the Spanish
Coffee case, where the GATT Panel concluded that various types of unroasted
coffee cannot be classified differently and comes under the same category
which makes all the type of coffee a like product. The Panel applied the test
of recognising ‘Like Products’ and categorised all the types of unroasted
coffees as like product. When the panel recognised it as a like product, the
panel explained that there could be no chances of imposing tariff differently
as all the types of coffee are Like Product. The Panel also examined the
matter that being unroasted coffee ‘beans’ of different physical
characteristics but the blends of that coffee are its end-use, and it is
universally seen that the end product which is blend can only be used for the
purpose of drinking. The Panel in its conclusion noted that no different tariff
policy can be adopted as the different types of coffee come under the ambit
of Article I: 1 of GATT which is ‘Like Product’.

         
Analysis of ‘The advantage issued to a specific nation, is not granted
immediately and unconditionally to the like products of every
member nation’.

The third test in the three-tier test is the granting of the advantage
“immediately and unconditionally to all other member nations”. This means
that once a WTO Member has granted an advantage or any privilege to
imports from any country, then that WTO member must immediately and
unconditionally grant that advantage to all the other member nations with
respect to imports of all the like products from all WTO Members.

In Indonesia – Autos case, the main issue was that Indonesia has framed
a few policies which classified the tariff rate of manufacturing automobile. In
this case, the Panel held that according to MFN principle the right of Members
cannot be made conditional on any criteria and making such conditional
policy violates the principle laid down in the provisions of Article I:1 of GATT
1994.

Exceptions
Exceptions of GATT 1994 Principles

Unlike any other law GATT 1994 also has some exceptions and a number of
exceptions specifically provided in various provisions of GATT/ WTO which
allow WTO Members not to follow every provision laid down under GATT/
WTO, including the MFN & National Treatment principles. Some of the of
GATT/ WTO which powers any member nations not to be consistent with
GATT/ WTO rules are General Exceptions explained under Article XX, Security
Exceptions explained under Article XXI, Balance of Payment & Temporary
Quantitative Restrictions explained under Article XII, XVIII(B), XIV, General
Exception of Waivers explained under Article IX(3) apart from these there
are other provisions also which deals with exceptions related to special and
differential treatment.

Exceptions of MFN Principles

As we discussed above that there are various provision dealing with the
GATT/ WTO agreement exceptions, as like them, MFN principles also have
their own exceptions which are importantly classified under two categories
i.e., Regional Integrations (It is a process in which neighbouring nations
come into an agreement to integrate their cooperation through common
rules) and Enabling Clause(It means certain trade preference for developing
and least developing nations), other than two exceptions discussed above
there are few more exceptions of MFN principles which are:
  Historical Preferences (Article I:2 GATT 1994)- We can easily
understand with the words when the trading nations are favouring any
trade preference to any nations from many years then such trade
benefits doesn’t come under the trade preference restriction of MFN
principles and hence becomes an exception to MFN principles.

 Frontier Traffic (Article XXIV:3 GATT 1994)- Frontier Traffic means

certain trade advantages to adjacent or neighbouring countries/
nations. Unlike historical preferences, the economic impact of this
exception is very limited.
Illustration– MFN Principle For Goods

CASE- Let us assume that India, Canada and Thailand are WTO Members.
Where India is a developed nation and classifies all the beverages under the
same tariff of 10% of their manufacturing/ production cost. With the change
in the internal government of India, the new India government framed new
policies and rules related to import and sale of all the beverages. The new
government classified beverages as per the level of preservative (all types of
natural preservatives) added in it. According to present policies India framed
different customs duties/ import duties to beverages drink: A 10% import
duty proportionate on beverages with a level of preservatives below 15% and
12 % import duty proportionate on beverages with a level of preservatives
above 15%.

India applies new import duties all countries, except to Thailand, and
charged only 5% import duty proportionate on beverages with a level of
preservatives 15%; and 7% import duty proportionate on beverages with a
level of preservatives above 15%.

India is not capable or efficient in producing the best quality beverages for
their people and due to such reasons, it imports all such products from many
WTO Members. However, the beverages are imported from both the country
Canada and Thailand. Canada believes that India’s new laws and policies
violate the MFN principle.

According to the MFN Principles Canada, may complain and argue on

the following basis:

 The MFN Principle- According to the MFN principle India has to give

immediately and unconditionally, all the advantages that it has to
Thailand. As the act of India violates the MFN principle and according to
the three-tier test of MFN, India has discriminated against other
nations as India didn’t follow Article I:1 of GATT 1994.
 Like Products- India may argue that beverages with different levels of
preservatives are not ”like products” but within Article I:1 with the
same physical characteristics, end-uses, these beverages are assumed
by consumers as like products.
  De Facto & De Jure Discrimination- India might claim there is no
discrimination between like products, but instead applies to different
categories of products. But according to the essentials of Like Products,
it can be easily assumed that the beverages with different categories
cover both de jure & de facto discrimination, hence India is liable for
such discriminations to other member nations.
 Exception- India can only argue upon raising other points regarding
the preferential treatment provided under the GATT exception justified
by Article XXIV, which enables GATT/ WTO Members to set apart from
the MFN principle and form customs unions and free trade areas
subject to certain conditions.

The National Treatment Principle

Introduction

The NTP prohibits any of the member nations from favouring or giving any
advantages or raising any benefits to their domestic products/ goods over
imported products of other member nations. Article III of GATT
1994 specifically deals with NTP and explains the secondary need of NTP
after MFN principles to fight against any discrimination of imported products.
NTP has been well defined under paragraph 1, 2 & 4 of Article III and 2nd
sentence of Article III. NTP deals with the products of any member imported
by any other member shall not be treated less favourable than that to like
products of national or domestic product in respect of all laws, regulations,
requirements affecting their internal sale etc., which means the domestic
country should not make any rules or law which protects its domestic
products over imported products. So reading NTP with MFN gives a brief
difference between both of the principles that one deals with protectionism
and MFN deals with favourable treatment to all nations.

Reasons Behind NTP

The main reason why GATT/ WTO drafter has proposed NTP was after
imposing so much restriction with regard to MFN principles, the drafter
considered that the member nation can discriminate the imported product
indirectly and to prevent such indirect acts of member nations NTP was
introduced to prevent and restrict the domestic government from imposing
any internal regulation that may create scope for discrimination to imported
products over domestic product.

Illustration- Let’s assume that India is manufacturing a certain mobile

phone for Rs. 10k and on the other hand China is manufacturing a certain
mobile phone with the same configurations and quality for just Rs.7k. In that
case, being both the countries a member nation of GATT/ WTO, India can’t
impose any restrictions on exporting Chinese Mobile phones from China to
India, but India may impose certain heavy taxes to protect its domestic
market. To protect such measures the drafter of GATT/ WTO introduced NTP
which prohibit any member nation from doing such activities.

Now it can be assumed that the main purpose of Article III of the GATT 1994
was to prohibit or limit the use of trade-restricting by requiring non-
discriminatory treatment between imported and domestic goods.

For better understanding, we may classify NTP into 3 different

categories:

 To avoid protectionism measure by the domestic country.

 To maintain equality between imported and domestic products.
 To protect the imported products from unjust tariffs.
Scope of NTP

Just like the MFN principle, the scope of the NTP also covers the scope of de
jure and de facto discrimination of imported products. A stance is de
jure discriminatory when discrimination can clearly be seen between
imported and domestic like products in term of a legal manner. And when the
discrimination is very much clear on the face of a legal instrument that it
doesn’t have any complexity to understand, then it can be de facto
discrimination. The most important part of NTP is that it only applies to
internal measures, and it does not at the border on imported goods.

Illustration- Let’s assume a case when India imposes a 10% tariff on

importing automatic machines and but on the other hand India only imposes
7% tariff on Indian manufacturer of automatic machines. Then it can be
clearly seen that India is discriminating against imported products and
protecting its domestic products. And any tariffs imposed on imported
products collected at the time of importation in the country are not
considered as against the NTP, as Article III only deals with internal taxes
which are discriminating against imported products over domestic products.

In Argentina – Hides and Leather, the Panel expressed that VAT of Argentina
was an internal measure or internal tax and comes under Article III:2 of
WTO.

Interpretation of Article III

Article III:1 General Obligation- It talks about the general obligation of
Article III and lays tells about the concept of NTP that how it works and what
the essentials of it.
Article III:2 Internal Taxation- It tells about the non- discriminatory
principle through internal taxation.

1. Article III:2 – First Sentence (Two-Tier Test)

This part of Article III gives a platform for testing if the action of importing
nation is discriminatory, for testing such action a two-tier test has to be
passed to check the consistency of importing nation with NTP which are:

 If the imported and domestic products are like products- It explains the
consistency of ‘Like Product’ essentials with domestic & imported
products. And explains a condition if both domestic and imported
products are ‘Like Product.
 If the imported products are taxed in excess of the domestic products.-
It explains the condition when the imported products are taxed
excessively compared to like domestic products.
Here in the NTP the definition and essentials of ‘Like Products’ are the same
as discussed in MFN principles.

2. Article III:2 – Second Sentence

It has another test of checking if the action of importing country is against
NTP or not. Therefore, if there is no violation of Article III:2, first sentence,
and if can still be considered that there is an infringement of Article III:2,
then another three-tier test of the second sentence can be applied.

Three – Tier test prescribed under Article III:2 of 2nd sentences:

 If the imported and domestic products are directly competitive or

substitutive- This means if domestic and imported products are directly
or closely competitive or substitutive like tea- coffee, roasted-
unroasted coffee etc.
 If the domestic and imported products are not similarly taxed or if the
imported products are taxed excessively over domestic product- This
means if the importing country is imposing more taxes on imported
products and less tax on domestic products.
 If the importing nation is doing anything which causes protectionism of
their domestic products over imported products- This means a
condition when the domestic government is trying to protect their
domestic product by implementing certain rules and regulations in any
manner.

3. Article III:4 (Internal Laws, Regulations and Requirements

Related to Internal Sale, Transportation, Distribution or
Use)- This article is again providing another platform to test if the
importing country is violating any NTP and if such violation can’t be
tested by either of the two tests explained above then, the test
 expressed in this article can help to test if any nation is violating NTP.
The test follows three conditions which are:

 The imported and domestic products at issue are like products.

 The measure at issue is a law, regulation, or requirement affecting
their internal sale, offering for sale, purchase, transportation,
distribution, or use- It means that if the importing country is using any
of such measures to protect its domestic products by using its intern
power of imposing new rules and regulations etc.
 The imported products are afforded less favourable treatment than
domestic products- It is a condition when the government is trying to
market its domestic product and doing unfavourable practices in
providing less favourable treatment to imported goods.

Exception to NTP
Just like the exception to the MFN principles NTP also has various exceptions
which provide the nation from following the NTP blindly and grants any of the
nations the power to refuse on implementing such principles on their trade.
Some specific exceptions which deal with the national treatment principle can
be summarized as follows:

 Government Procurement (Article III:8A)- It explains a concept or

principle that when government agencies hire or purchase any
imported goods for their benefit or for government purpose, then the
domestic government can give preference to domestic products over
imported products, it is also considered that the purpose of
government procurement should only be subjected to government use
and not for commercial utility.
 Subsidies to Domestic Producers (Article III:8B)- Governments have
the power and can provide subsidies even including subsidies to
domestic manufacturers for aiding those manufacturers from a tax
benefit and can impose some restrictions on the kind of trade or
business they can carry for the purpose of exempting from tax. And
such subsidies granted by domestic government are not considered
necessarily be legal by GATT/ WTO members. And also in the Tokyo
and Uruguay Rounds, a provision for the additional subsidy was
introduced and now Subsidies and Countervailing Measures are dealt
with SCM Agreement.
 Internal Maximum Price Control Measures (Article III:9)
 Cinematograph Films (Articles III:10 and IV of the GATT 1994)- A wide
concept of discrimination between international and nation fils are
discussed under this article which says that the possibility of giving
preferences to products emerging from the national movie industry can
be granted and it will not be covered under NTP. National preferences
 are governed by the provisions of Article IV, and the domestic country
can impose internal quantitative regulations in “screen quotas”.
Illustration- National Treatment For Goods

Scenario- Let us assume that India and Canada are WTO Members.

Recently, India has come up with new regulation which imposes a tax of 20
% on cars with fuel efficiency below 14 Km/L and a sales tax of 7% on cars
with fuel above 14 Km/L.

Cars with fuel efficiency below 14 Km/L are also restricted to advertising
their product. Canada is the leading car exporter to India. All cars
manufactured in Canada are with fuel efficiency below 14 Km/L. India is the
major producer of cars with fuel efficiency above 14 Km/L. Canada believes
that India’s regulation violates the national treatment principle under the
WTO.

Proposed Advice

 Canada’s argument could be as follows: With the application of the

1st principle which is MFN principles, does not have any much
relevance according to the case and also that the MFN principles don’t
cover the case issues. So here NTP will be introduced and their
application will definitely make some relevance in solving the issues of
the illustration.
The NTP prohibits any of the member nations from favouring or giving any
advantages or raising any benefits to their domestic products/ goods over
imported products of other member nations.

 Internal Taxation – Article III:2 with respect to the sales tax, Canada
can invoke Article III:2, which covers internal taxation. Canada can
argue that the action by the Indian government can be easily be seen
that it is de facto discriminatory. Where de facto discrimination relates
to awarding protection to domestic products by imposing such different
tax and it is very much visible that both the cars- India & Canada
Originated are completely like products and hence any discrimination in
like products satisfies the need of NTP. Therefore, India is liable for
doing prohibited acts under agreements of GATT/ WTO.

 Two–tier test under Article III:2 first sentence

 The domestic cars/ Indian cars with fuel efficiency equal or above 14
Km/L and imported cars with fuel efficiency below 14 Km/L are “like”
products; and

 The imported cars are taxed in excess of domestic cars with respect to
fuel efficiency and classified the same products in different stages. To
prove ‘Like Product’ Canada might argue that cars have the same end-
 uses, same physical characteristics, and the end user has the only
possibility.

 Three –tier test under Article III:2, second sentence- If Canada

fails to prove the fact that different classification of cars with respect to
fuel mileage is also ‘Like Product’ as per the provisions of Article III: 2-
first sentence. Canada still has a chance to approach the Panel/ Dispute
Resolution Body under the same provision by the second sentence and
argue that both the products are “directly competitive or substitutable”
products (which are also considered as ”like” products). If Canada
challenges India, then it would have to establish a three-tier test of the
second sentence that:

 Imported and domestic cars with different fuel efficiency are directly
competitive or substitutable products;

 The domestic and imported are discriminated in terms of imposing

difference taxes or the imported cars are taxed higher than the
domestic cars;

 The different tax policy adopted by the Indian government has some
effects, and such effects end up awarding protection to domestic
products/ cars.

 Advertising ban – Article III:4, with respect to the ban on

advertising, Canada can apply principles of Article III:4, and the three-
tier test of this article covers the aspects of the internal regulation. To
substantiate the arguments Canada has to make consistency with the
actions of the Indian government and the principles of the article which
are-
1) The measures adopted by the Indian government by imposing different or
new laws, regulations, or any such actions which affect the internal sale of
the imported products/ cars;

2) Canada has to prove that both imported and domestic products are “like
products” as discussed above; and

3) That Indian is treating less favourable to imported products as compared

to domestic products. Canada can uphold its previous arguments that
because of cause in internal policies which cause a ban on advertisement,
and such actions affect the sale of cars in India. Therefore, Indian is treating
less favourably to imported products/ cars than their domestic cars as the
ban on advertising is only subjected to imported cars.

Indo- Pak MFN Case Study

Indian being a vast economy with cheap labour facility and Pakistan a
country of very cheap labour, where hiring labour is way too cheap than any
other developed nations, and because of such reasons both India and
Pakistan have great trade potentials. With respect to it, India has given MFN
status to Pakistan much early which was just after the establishment of WTO
i.e., 1996. But the main problem is Pakistan didn’t give the same status to
India although Pakistan has initiated many debates still Pakistan is incapable
of granting MFN status to India.

Pakistan explained two reasons why it didn’t give MFN status to India which
were-

 Since Pakistan has a trade deficit with India, granting MFN status to
India may increase trade deficit to higher levels as India is a net
exporter country to Pakistan.
 Since India & Pakistan has never shared friendly relations with each
other and granting such status to India may bring internal political
threat/ risk.
Pakistan has to consider new concept which is almost equal to MFN status
that is Non- Discriminatory Market Access, but as Pakistan did earlier, it
recalled the same action first Islamabad promised to India in giving NDMA
status and again Pakistan left taking no execution on their promise. But it
was the first time when India has taken strict action against Pakistan and has
withdrawn the MFN status given to Pakistan in 1996 after the Pulwama
terrorist attack who was responsible for 40 innocent killings of Indian
Soldiers and such withdrawal actually means withdrawing lower import
duties. Hence, the present condition grants power to India that it can
increase the tariff rates on imports to any extent from Pakistan. In respect of
excising the new powers, the government has increased tariff rates to 200%.