Most-Favored Nation Principle Research Articles

Reevaluating the Most Favored-Nation Treatment: Addressing Challenges in Modern Trade

As global trade continues to evolve, the foundational principles that govern international commerce are increasingly scrutinized. The Most Favored-Nation (MFN) principle, a cornerstone of the World Trade Organization (WTO), was designed to foster fairness by mandating equal trade concessions for all members, thereby ensuring non-discriminatory trading behaviors. This research paper focused on the challenges of the Most Favored-Nation (MFN) principle within the World Trade Organization (WTO), a clause that mandates equal trade concessions for all members, ensuring non-discrimination. The research question investigates whether the MFN principle effectively promotes fairness in international trade or if it unintentionally exacerbates economic inequalities, particularly for developing countries. Findings reveal that MFN clauses often reduce market competition and lead to higher prices, while also disadvantaging developing countries that struggle to compete with developed nations. The paper underscores the need for MFN principle reform, such as advocating for differential pricing strategies for enhancing economic competition, setting exceptions for the poorest countries to implement tailored trade policies, and empowering these nations to challenge unfair practices by richer countries. These reforms aim to create a fairer and more balanced global trade system that supports inclusive economic growth for the whole world.

Quantitative Analysis of Multiparty Tariff Negotiations

We develop a model of international tariff negotiations to study the design of the institutional rules of the GATT/WTO. A key principle of the GATT/WTO is its most‐favored‐nation (MFN) requirement of nondiscrimination, a principle that has long been criticized for inviting free‐riding behavior. We embed a multisector model of international trade into a model of interconnected bilateral negotiations over tariffs and assess the value of the MFN principle. Using 1990 trade flows and tariff outcomes from the Uruguay Round of GATT/WTO negotiations, we estimate the model and use it to simulate what would happen if the MFN requirement were abandoned and countries negotiated over discriminatory tariffs. We find that if tariff bargaining in the Uruguay Round had proceeded without the MFN requirement, it would have wiped out the world real income gains that MFN tariff bargaining in the Uruguay Round produced and would have instead led to a small reduction in world real income relative to the 1990 status quo.

The MFN Principle at Peril in Investment Treaties - with Particular References to Ansung Housing and Beijing Urban Construction

Purpose - This paper investigates the theories and practices of Most-Favored-Nation (MFN) clauses. The MFN clause became a controversial issue during the past two decades, especially in the context of investment arbitration. This paper aims to clarify a reasonable way to apply MFN clauses. It in particular focuses on the territoriality requirements and the scope of investment activity which are common features included in most of investment treaties. Design/methodology - This paper analyses two investment arbitration cases, Ansung Housing and Beijing Urban Construction. Through the case study, this paper reveals limitations of the currently dominant views on the operation of MFN clauses. It then tries to reconstruct the system of MFN application within the relevant arbitration principles. Findings - Tribunals of recent investment arbitration as represented in the two cases above employed strict literal interpretation of the treaty provisions, especially of the phrase “in its territory”. This paper finds a more functional interpretation is appropriate and consistent with theories of public international law and developments of global economy. Originality/value - Existing studies either stuck to literal interpretation or suggested more flexible interpretation of the phrase “in its territory” without full explanation. This paper tries to fill the gap in the existing discussion by analyzing legal foundations and theoretical structure for an effective interpretation of MFN clauses.

The role of the most favored nation principle of the GATT/WTO in the New Trade model

AbstractI study the impact of the most favored nation (MFN) principle of the GATT/WTO on bilateral trade agreements in the New Trade model. The paper offers four main predictions. First, a bilateral trade agreement without external tariff adjustments hurts the outside country, while a bilateral trade agreement under MFN benefits the outside country. Second, the MFN principle may cause a free‐rider problem. Third, a Pareto‐improving bilateral trade agreement under MFN does not exist if initial tariffs and the elasticity of substitution are sufficiently low. This suggests that the MFN principle may prevent bilateral trade agreements in the future when tariffs are already low and that the definition of “like products” in the MFN rule is welfare improving only if it covers only goods that are closely substituted. Fourth, in the future when tariffs are low, multilateral negotiations and preferential trade areas will become more desirable. Using a calibrated 10‐region 33‐industry model, I show that around 30% of bilateral trade agreements that would be agreed upon in the absence of the MFN rule could not be agreed upon if the MFN rule is imposed.

The Application of the MFN Principle into 'the Over Top Companies' in Investment Activities of Indonesia

The Most-Favored-Nation (MFN) principle is one of international consensuses, especially for countries registered as members of the World Trade Organization (WTO). The principle is related to investment and international trade within the framework of economic liberalization. At its core, the MFN principle ensures equitable treatment of all parties economically active within a country. Recently, in Indonesia, the Over Top company conducted business activities without paying taxes to the government. The case of the Over Top company highlights an unfair business situation in Indonesia, enabled by the Indonesian government through a poorly established monitoring system and codification of laws. This study argues that the absence of taxation, regulation, and fraud laws for the Over Top Companies in Indonesia, and the Indonesian government is responsible for the enforcement and maintenance of tax laws and the MFN principle for all entities conducting business in the state.
 Keywords: MFN Principle, Over Top Companies, Investment in Indonesia.

Legal analysis of regional trade agreements within the framework of the World Trade Organization

Legal analysis of regional trade agreements within the framework of the World Trade Organization The number of regional trade agreements grew substantially from the first half of the 1990s to the 2000s. The purpose of the regional trade agreements is to facilitate trade between the constituent territories and not to hinder the trade of other members of the territories. WTO agreements, provide exceptions to the adoption of contrary-measures to WTO rules and principles regarding regional trade. It should be noted that any measure taken without due observance of the terms is contrary to the provisions of the WTO, especially the Most-Favored Nation Principle. The formation of regional trade agreements requires the observance of standards for domestic and foreign trade between the constituent members. There are however certain ambiguities in relation to some of the concepts and terminologies used in the relevant provisions of the GATT and the GATS, which have been somewhat clarified in the panels and Appellate Body jurisprudence.

VARYING APPLICATION OF MOST-FAVOURED-NATION PRINCIPLE IN INTERNATIONAL INVESTMENT TREATY

<p>The aim of this study is to provide an academic framing of the philosophical foundation of the Most-favored-nation principle (MFN) in international investment law. The MFN principle is one of the most important principles in international law. In international investment law, MFN principle serves as a mechanism to create conditions in which foreign investors from many countries have equal opportunities to compete fairly in host country.</p><p> </p>

The Role of MFN of GATT/WTO in the 'New Trade' Model

In this paper, I extend Ossa (2011) to study the impact of the Most-Favored-Nation principle (MFN) of GATT/WTO on the characterization of Pareto-improving bilateral trade agreements. The paper offers four main model predictions. First, I characterize bilateral trade agreements with third-country tariff adjustments that improve the welfare of negotiating countries while preserving the welfare of the outside country unchanged. Second, MFN guarantees that a bilateral trade agreement always improves the welfare of outside country and potentially causes a free- rider problem. Third, MFN can be too restrictive and prevent possible Pareto-improving trade agreements if initial tariffs are generally low. Lastly, this paper suggests a reason of why free trade agreements (FTAs) are more desirable than bilateral trade agreements under MFN, when current tariffs are sufficiently low. I quantify the firm-delocation effects and welfare changes in three counterfactual situations: (i) a bilateral trade agreement without third-country tariff adjustments, (ii) a bilateral trade agreement under MFN, and (iii) moving to a global free-trade economy. The quantitative results support the model predictions.

AN ANALYSIS OF THE METHOD OF DISPUTE SETTLEMENT IN ENERGY CHARTER TREATY COMPARED WITH WORLD TRADE ORGANIZATION

The present study by applying an analytical-descriptive method has analyzed the method of dispute settlement in energy charter treaty compared with world trade organization. The research findings show that the trial process of dispute settlement in energy charter treaty which is derived from GAT and World Trade Organization dispute settlement the process is shorter and faster because of the lack of revision foundation and mostly follow a diplomatic procedure (rather than legal solutions). The other legal advantage of the energy charter treaty is the support of foreign investor that in contrast to the supportive rules of the World Trade Organization, the energy charter treaty allows freedom of action to the host countries in terms of selecting the investor and arranging the intended framework and conditions and after the investment applythe ruling principles of the World Trade Organization such as the most-favored nation principle of national treatment table etc. The system of dispute settlement in the energy charter treaty is mainly on the basis of arbitration and the players of the energy subdivisions are mainly private foundations. In contrast to the World Trade Organization whose judicial system is exclusively assigned to verify the state or regional organizations’ cases the dispute settlement system of the energy charter treaty by the generalization of its dispute settlement rules (that are inspired from the World Trade Organization) verify the cases about investor and the host state.

The 'Most Favored Nation' Clause under Multilateral vs Multiple Bilateral Trade Agreements

This paper examines how the welfare implication of the most-favored-nation (MFN) principle has changed as the trade agreement mode has shifted from the one-shot-multilateral-trade-agreement to sequential-bilateral-trade-agreements.'' In particular, it emphasizes that the MFN principle works as 'passive constraints' in the former but 'active commitments' in the latter. It demonstrates that under the latter, (i) the importing country strategically takes a cost-efficient country as the first (second) trading partner when the MFN principle is (is not) embedded, and (ii) embedding the MFN clause improves both trade surplus of the importing country and world economy. That the MFN principle is utilized as a commitment device to encourage production by the cost-efficient country causes a reversal of the welfare implication in the previous literature.

A Comparative Analysis of GATS and GATT: A Trade in Services Departure from GATT’s MFN Principle and the Affect on National Treatment and Market Access

In the formative stages of the GATS many key concepts were directly transferred from the GATT to GATS. The framing of GATS clearly exhibits a certain element of the Most-Favored Nation (MFN) treatment principle descending directly from GATT but also displays striking differences. The framers of GATS deliberately altered MFN from its origins in GATT to make it applicable to trade in services. In addition, the GATS does take other voluntary measures not included in the GATT and debatably, not inherent to the execution of GATS. This paper will examine the MFN treatment principle in terms of the GATT and GATS followed by its comparative applications in international law. In addition, further analysis that will bring to light a cascading effect of MFN on other keystone principles found in Part II such as National Treatment, Market Access, and Additional Scheduled Exemptions to MFN commitments.

Backward stealing and forward manipulation in the WTO

Motivated by the structure of WTO negotiations, we analyze a bargaining environment in which negotiations proceed bilaterally and sequentially under the most-favored-nation (MFN) principle. We identify backward-stealing and forward-manipulation problems that arise when governments bargain under the MFN principle in a sequential fashion. We show that these problems impede governments from achieving the multilateral efficiency frontier unless further rules of negotiation are imposed. We identify the WTO nullification-or-impairment and renegotiation provisions and its reciprocity norm as rules that are capable of providing solutions to these problems. In this way, we suggest that WTO rules can facilitate the negotiation of efficient multilateral trade agreements in a world in which the addition of new and economically significant countries to the world trading system is an ongoing process.

Sustaining multilateral cooperation among asymmetric countries: Does MFN help?

The most favored nation (MFN) clause is widely understood to be the central pillar of the global multilateral trading system. Does the MFN principle of non-discrimination facilitate multilateral cooperation? Using a repeated game approach, we address this question in an oligopolistic three country model of intraindustry trade where production costs differ across countries. The analysis delivers two main results. First, both under MFN and tariff discrimination the incentive constraint of the high cost country determines whether or not free trade is sustainable. Second, the high cost country is more willing to cooperate multilaterally under MFN relative to tariff discrimination.

GAME‐THEORETIC ANALYSIS OF CHINA's WTO ACCESSION

Abstract. This paper studies the determination of split of total surplus among the negotiating parties (member countries and the acceding country) in a WTO accession negotiation using a sequential bargaining model. In particular, we are interested in the effect of the most‐favored‐nation (MFN) principle on the negotiation outcome. The MFN principle says that any tariff reduction offered by the applicant for accession has to be automatically granted to all existing members. The model suggests that it is quite plausible that China's share of surplus is more when MFN is in place.

Shifting Comparative Advantage and Accession in the WTO

Motivated by the structure of WTO negotiations, we analyze a bargaining environment in which negotiations proceed bilaterally and sequentially under the most-favored-nation (MFN) principle. We identify backward-stealing and forward-manipulation problems that arise when governments bargain under the MFN principle in a sequential fashion. We show that these problems impede governments from achieving the multilateral efficiency frontier unless further rules of negotiation are imposed. We identify the WTO reciprocity norm and renegotiation provisions as rules that are capable of providing solutions to these problems. In this way, we suggest that WTO rules can facilitate the negotiation of efficient multilateral trade agreements in a world in which the addition of new and economically significant countries to the world trading system is an ongoing process.