Global trade’s golden rule: Non-discrimination

In life we are taught, “Do unto others as you would have them do unto you.” In trade, we are taught the golden rule of non-discrimination.

A Solid Foundation

Contemporary trade policy owes its roots to the core group of countries that voluntarily entered into a General Agreement on Tariffs and Trade in 1947 (GATT). On the heels of World War II, they believed that strong economic ties among nations would support global stability, peace, and prosperity. And they believed that adherence to a common set of disciplines on government behavior as it relates to trade would reap benefits for the members of their respective societies while enabling nations to rebuild their economies. Today they are joined by a total of 164 Members (as of July 2016) in the WTO, the institution under which the GATT was subsumed on January 1, 1995.

In Word and Deed

Non-discrimination isn’t just a founding principle, it’s an obligation. There are two basic rules of non-discrimination in WTO law: “national treatment” and “most-favored nation treatment”. As with any area of law, there’s a rich history of interpretation of these requirements as countries challenge each other in dispute settlement and case law is established. At their core, here’s what they require.

National Treatment

National treatment applies to internal measures like taxation and regulation and requires that governments not afford an advantage to domestic producers relative to foreign producers. (We don’t like it when other governments discriminate against our producers.)

The obligation applies to all traded goods as well as traded services and service suppliers, whether the discrimination occurs as a matter of law or has a discriminatory effect – once the product, service, or service supplier has entered the market.

Given the vast amount of national regulation in each country, it’s not always easy to prevent discrimination when developing laws and regulations and it’s not always easy to prove that an imported product is “like” the domestic product and should be treated no less favorably (for example, are Japanese shochu and Russian vodka “like” products?). The overarching goal is to avoid protectionism and offer everyone an expectation of equal competitive conditions.

Most-Favored Nation: “MFN”

MFN treatment basically requires that governments not discriminate between importing countries by treating the products of Country A better or worse than those from Country B. The obligation is embedded in a variety of multilateral trade agreements and applies to border measures as well as internal measures.

In a simple example, assume South Korea applies a regular customs duties of five percent to cell phones. If so, then South Korea must apply five percent to all cell phones imported by any other WTO member, regardless of whether it came from China or Finland. In other words, the MFN treatment obligation guarantees the best treatment that a WTO Member accords to the goods (or services or IP right holders) of any other country.

Are There Exceptions?

Yes. For example, WTO members can be excused from the principle of MFN when they enter into free trade agreements with one (“bilateral”) or more countries (“regional”). By definition, these agreements violate the MFN principle because countries offer free trade agreement partners preferential tariffs (usually zero). That’s okay under the WTO exception as long as the parties to the free trade agreement eliminate barriers to substantially all trade between them, and don’t erect new barriers to trade with countries that are not part of the agreement.

The WTO Agreement contains other requirements for these exceptions, which we will cover in another Essential. But it’s important to know that bilateral trade deals (like a potential US-UK agreement) and regional deals (like NAFTA) are exceptions to global trade rules. They establish more favorable trade terms among the parties to the agreement than they extend to other WTO members.

Will the United States and China Play Nice?

What if the United States and China focus less on the WTO? It’s a question at the heart of a broader debate over whether to emphasize multilateral negotiations in the WTO versus encouraging more bilateral or regional trade negotiations. Regardless of whether the United States puts its focus on bilateral agreements as the Trump Administration has stated, or whether China forges ahead with the RCEP* regional deal, non-discrimination among all WTO members will remain a bedrock of the global trading system.

*RCEP is the “mega-regional” trade deal called the Regional Comprehensive Economic Partnership which is being negotiated between the 10 ASEAN (Association of South-East Asian Nations) governments and their six FTA partners: Australia, China, India, Japan, New Zealand and South Korea.

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