The most-favored nation rule in principle and practice: Discrimination in the GATT

Abstract

The conflicts of interest that prevailed between the great powers in the wake of the First World War eviscerated their ability to respond collectively to the advent of the Great Depression. Instead, each turned to discriminatory trade barriers and trade blocs to try to revive domestic output. Persuaded that trade discrimination exacerbated the political tensions that erupted in World War II, policy makers constructed a postwar economic order that institutionalized nondiscrimination. Thus, Article 1 of the charter of the General Agreement on Tariffs and Trade (GATT) mandates most-favored nation (MFN) treatment. We argue here that the MFN clause itself encouraged the adoption of practices and policies that actually recreated discrimination. In particular, we argue, developing countries, long regarded as victims of discrimination, institutionalized it in their negotiations with each other. We examine two developing country PTAs that included about 80 percent of all developing-country GATT members by output (the Global System of Trade Preferences and the Protocol Relating to Trade Negotiations). We show that as in the GATT writ large, their patterns of tariff cuts and trade expansion were highly skewed toward a small number of their largest members. In trying to avoid discrimination, policy makers actually encouraged its de facto adoption.