Preferential trade arrangements and the erosion of the WTO's MFN principle.
Author | Maruyama, Warren H. |
Position | Most favored nation |
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INTRODUCTION II. THE MFN PRINCIPLE III. GENERAL AGREEMENT ON TARIFFS AND TRADE 1994 IV. INTERPRETATION OF ARTICLE XXIV BY GATT AND THE WTO V. GATT AND WTO FTA REVIEW PROCESSES VI. WTO DISPUTES INVOLVING ARTICLE XXIV VII. A DE FACTO TRUCE VIII. RECENT PROLIFERATION OF FTAS IX. IMPLICATIONS FOR THE GLOBAL TRADING SYSTEM X. CHALLENGE FOR THE WTO XI. WTO DISPUTE SETTLEMENT XII. WORKING PARTY PROCESS XIII. DOHA ROUND XIV. U.S. TRADE POLICY XV. CONCLUSION I. INTRODUCTION
In The Wealth of Nations, eminent economist Adam Smith, in a voice that despite the passage of over two centuries still drips with contempt, observed that the efforts of international trade negotiators do not "belong so much to the science of a legislator, whose deliberations ought to be governed by general principles which are always the same, as to the skill of that insidious and crafty animal, vulgarly called a statesman or politician whose councils are directed by the momentary fluctuations of affairs." (1)
But these momentary fluctuations of affairs are one of the charms of trade law, which unlike some other aspects of the legal profession, does not consist of going through endless boxes of discovery documents for cases that never go to trial, or fashioning ever more intricate financial transactions and securities for Wall Street financial barons to sell to aging retirees and gullible small town mayors. Instead, trade law is a changing and curious mixture of U.S. law, international law, economics, international diplomacy, negotiating strategies, and vulgar politics.
The topic of this symposium is the erosion of the World Trade Organization's (WTO) most favored nation (MFN) principle, but more broadly it is an opportunity to explore what has led to the current proliferation of free trade agreements (FTAs); what this trend is doing to the multilateral trading system; and what if anything can be done to turn back the clock. And while there may be a legal dimension to any solutions, the answers lie equally in the spheres of politics, trade policy, and international negotiations.
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THE MFN PRINCIPLE
The unconditional most favored nation principle is one of the cornerstones of the multilateral trading system. The concept of most favored nation dates back to Renaissance commercial treaties. (2) MFN has been part of U.S. commercial policy since the early days after independence. The first U.S. commercial treaty, which was signed with France on February 6, 1778, stated in Article III that if either the United States or France should grant a commercial concession to a third party, the other "shall enjoy the same favor, freely, if the concession was freely made, or on allowing the same concession, if the concession was conditional." (3) In his Farewell Address, President George Washington declared: "Harmony, liberal intercourse with all nations are recommended by policy, humanity, and interest. But even our commercial policy should hold an equal and impartial hand: neither seeking nor granting exclusive favors or preferences...." (4) In the eighteenth and nineteenth centuries, U.S. support for MFN reflected a sense by many Americans that U.S. merchants were disadvantaged by discriminatory colonial preferences erected by the major European powers. (5) Accordingly, in 1843, Secretary of State Daniel Webster instructed the new U.S. Envoy to China, Caleb Cushing, that: "[Y]ou will signify, in decided terms and a positive manner, that the government of the United States would find it impossible to remain on terms of friendship and regard with the Emperor, if greater privileges or commercial facilities should be allowed to the subjects of any other government than should be granted to the citizens of the United States." (6) U.S. MFN rights with China were secured in the Treaty of 1844. (7) MFN was one of the core tenets of the U.S. "Open Door" Policy of the late nineteenth and early twentieth centuries, (8) and the third of President Wilson's Fourteen Points in his proposal for the formation of the League of Nations after World War I. (9) As Secretary of State Charles Evans Hughes stated in 1922:
We are not seeking spheres of special political and economic influence, and endeavoring to control others for our aggrandizement. We are not seeking special privileges anywhere at the expense of others. Our policies are simple and can be directly stated. We wish to protect the just and equal rights of Americans everywhere in the world. We wish to maintain equality of commercial opportunity, and as we call it, the open door. (10) The Reciprocal Trade Agreements Act of 1934, which launched modern U.S. commercial policy, specifically directed the President to negotiate reductions in U.S. tariffs on an unconditional MFN basis. (11) And as countries gathered in the aftermath of World War II to design a new global economic architecture, one priority was addressing the pre-war spread of preferential arrangements, import quotas, bilateral clearing arrangements, and other discriminatory departures from the MFN principle. (12)
In essence, unconditional MFN is the principle of non-discrimination--that all trade benefits must be extended immediately and unconditionally to all trading partners. (13) Its corollary is the national treatment principle, which requires that imports be treated in the same way as domestic goods. Together these principles are foundations of the multilateral global trading system set out in the WTO. According to economists, MFN maximizes the benefits of trade. (14) More broadly, it reflects the post-World War II ideal of an open, non-discriminatory, rules-based global trading system.
Today, the MFN principle is under assault. In the past decade, there has been an explosion of free trade agreements, so that a substantial portion of global trade flows now takes place under preferential arrangements that result in lower rates of duty for selected trading partners than the MFN rates set out in a country's WTO tariff schedule. These FTAs have been accompanied by a similar expansion of unilateral preference programs by many advanced industrialized countries. These preferences are aimed at helping selected developing countries expand their exports by exempting certain goods from import duties, or by giving such goods a lower, preferential rate of duty. (15) Together, FTAs and preferences have contributed to a system that Professor Bhagwati has called a "spaghetti bowl" where trade flows are shaped not by comparative advantage, but by various non-MFN preferential trading arrangements and rules of origin. (16)
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GENERAL AGREEMENT ON TARIFFS AND TRADE 1994
In WTO system, the MFN principle is embodied in the General Agreement on Tariffs and Trade (GATT), Article I. GATT contains numerous, well-known exceptions to MFN, such as antidumping, safeguards, and national security exceptions. But our focus here is on the exception for customs unions and FTAs, which is set out in Article XXIV of GATT. (17)
Article XXIV governs 3 types of arrangements:
Customs Unions: A customs union is designed to eliminate internal barriers to trade between parties and is characterized by adoption of a Common External Tariff (CET), so that all participants in the customs union impose the same tariffs on imports from third-party countries. Free Trade Agreements: An FTA results in the elimination of internal barriers to trade between parties. Unlike a customs union, however, each party maintains its own tariff schedule for imports from third-party countries. Accordingly, these rates can differ. Interim Agreements: Article XXIV permits "interim agreements" designed to lead to a customs union or FTA over a "reasonable period of time." Article XXIV was the subject of protracted discussion during the preparatory conferences at which GATT and the proposed International Trade Organization (ITO) Charter were debated and drafted. At the outset, even the United States, which put together the initial drafts and was a longstanding proponent of unconditional MFN, recognized that there would have to be at least a limited exception for customs unions. (18) At the early drafting sessions, delegates from other countries pushed for more flexibility for "interim agreements" and for recognition of the role of FTAs. Ultimately, these suggestions were adopted in the final articles that became GATT. As a result, Article XXIV seeks to strike a balance between limiting the scope for discriminatory preferential arrangements, while leaving adequate room for legitimate customs unions and FTAs. (19)
Reflecting the compromises that went into its drafting, Article XXIV contains a mixture of declarations, procedures, and substantive requirements. Paragraph 4 sets out the general desirability of increasing trade through economic integration, as long as the purpose of such customs unions or FTAs is to facilitate trade, as opposed to raising barriers to other WTO members. This paragraph represents a broad statement of purpose that, under Vienna Convention rules, should be used in interpreting the rest of the article. As the WTO Appellate Body stated in the Turkey-Textiles case, "Paragraph 4 contains purposive, not operative language. It does not set forth a separate obligation itself, but rather ... informs the other relevant paragraphs of Article XXIV...." (20)
The substantive provisions of Article XXIV are set out in paragraphs 5 through 9. The chapeau to paragraph 5 clarifies that GATT rules are not intended to prevent the formation of customs unions and FTAs. However, under subparagraph 5(a), for a customs union, the general incidence of duties and other trade restrictions in each of parties on other WTO members cannot be higher after formation of the customs union than before its formation. In other words, a customs union cannot lead to a general increase in average tariff levels. The requirement for FTAs under subparagraph 5(b) is even stricter: each FTA participant's duties and other regulations of...
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