The Least Favoured Nation: BREXIT and the WTO’s Most Favoured Nation Principle

Written by Annika Murison, a guest writer.
Edited by Santa Walker.

With BREXIT on the horizon for the UK, the trade realities of the decision are beginning to materialise. To exit the European Union (EU) for reasons of sovereignty is incongruent with the multilateral trade system in which the EU and the UK exist. 

The EU is a customs union, which is an exception to one of the founding principles of the World Trade Organisation (WTO). The principle of non-discrimination, known as the Most Favoured Nation principle (MFN), is set out in Article I:1 of the General Agreement on Tariffs and Trade (GATT) 1994. The exception covers free trade areas and customs unions under Article XXIV of the GATT 1947 and is designed specifically to permit the formation of customs unions to establish preferential trade agreements to those party to it. The UK will now be traded with on the terms of the MFN principle under WTO law.

However, scholarly opinion and WTO experts have for a long time noted that the non-discrimination principle is flawed in its implementation, in part because of exceptions such as the EU and other customs unions which fundamentally undermine it, as these permit discrimination in trading between different countries. The Sutherland Report laid the predicament bare stating that “MFN is no longer the rule; it is almost the exception.”[1] The economist Jadish Baghwatti has already termed MFN the ‘least-favoured nation’ principle as the majority of trading states use MFN for their least privileged trade partners and create free trade agreements with the others.[2] With BREXIT, the UK has lost its favourable trading position with the EU and will not be adequately protected by the MFN principle.

The MFN principle is further undermined, as states can be excluded from the provisions of the WTO covered agreements since the application of MFN under GATT is done by the separate covered agreements applicable to those areas. In some contexts discriminatory action is permitted, for instance Article 5 (2)(b) Agreements on Safeguards.[3] It is obscure how Article I:1 would apply to agreements that are not part of the WTO covered agreements.[4] This was manifested in the Tokyo Round of WTO negotiating rounds, which concluded on ‘Codes’ but not all GATT members were party to those Codes.[5] Would they receive the benefit of the Code as part of the MFN in GATT I:1? Applying this to WTO “plurilateral agreements,” the scholar Van den Bosche argues that although in principle they can receive the benefit, it would nullify the point of being a party to a plurilateral agreement.[6] Therefore, it is unlikely that the UK would benefit from any EU plurilateral agreements despite the wider WTO implications.

It is greatly ironic that it was the UK that insisted upon the inclusion of exceptions to non-discrimination in trade in the GATT 1947, and that it is now also one of the first nations to leave such a preferential trade agreement. The reasoning behind including the exceptions was so that Britain could preserve their foreign export markets with the British Imperial Preference System, for a period after World War II. The inclusion of preferential trade agreements in the GATT 1947 was strongly objected to by the US, as it detrimentally undermines the core principle of non-discrimination of the GATT and now WTO system.

“Containers” by Jim Bahn is licensed under CC BY 2.0

The lasting legacy of the British Imperial Preference System has resulted in trade flows influenced by non-MFN preferential trade agreements and rules of origin rather than by comparative advantage as there has been a substantial increase in free trade agreements. This means that instead of global trade flows occurring under the MFN rates established in a state’s WTO tariff schedule, they now take place under preferential trade agreements that have lower rates of duty for selected trading partners. Along with the free trade agreements, there has also been a significant increase in unilateral preference programmes undertaken by a large proportion of advanced industrialized countries. The intention behind this is to enable selected developing countries to expand their exports by certain goods being exempted from import duties or by having a lower preferential rate of duty. 

This does mean that developing and least developed countries get discriminatory treatment in preferential treatment agreements as set out in the The Enabling Clause. However, as established in EC- Tariff Preferences,[7] it is not binding and is at best a ‘gentleman’s agreement’[8] at the discretion of the states giving the preference. Furthermore, scholars are critical of the MFN principle: Hudec writes that WTO member developing countries may be at a greater disadvantage when subject to the MFN principle because they are unable to protect their infant industries due to the general exceptions offered by Article XXIV and XX.[9] Ogbonna’s argument is that, in international trade, a state must reach an economic threshold before it can be competitive.[10] This supports Horscroft’s view based on economic models and empirical evidence, that trade is not feasible when the costs of being small are considered.[11] Otherwise they are better off not being a part of the GATT, and the economic argument that there are ‘fundamental efficiency enhancing properties to trade agreements having MFN’ will not be able to be realized.[12] Gatsois notes that MFN is only justified when it has positive effects on world production[13] and currently the world income distribution effect favours developed countries as developing countries’ exports are uncompetitive at MFN tariff rates, notably due to additional transport costs and a lack of economies of scale in their small markets. Ultimately, the WTO has failed developing countries.[14] Perhaps more effort should be placed on removing trade barriers for developing countries directly instead of preferential treatment.[15]

Photo by Lucas van Oort on Unsplash

However, it is unlikely that BREXIT will highlight the cracks in the system. As the UK is a developed country, they already have spawning trade deals, most notably to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and CANZUK with Australia, New Zealand and Canada. The UK has already signed a free trade area with Japan in October 2020. Yet these trade deals are to countries that only deal with a fraction of what the UK exports to the EU. These trade deals will not suppress the full impact of what a grave mistake it was to leave the EU. Furthermore, the bigger picture of a successful multilateral trading system has been obscured by free trade agreements, preferential trade agreements and regional trade agreements. The acclaimed international economics scholar, Matsushita, states that the only hope for the future is when these agreements become proliferated to such an extent that the GATT is irrelevant and a new GATT system be put in place to regulate them.[16]

Claims made by BREXIT politicians to regain sovereignty failed to recognise the context the UK trades in. We cannot ‘regain sovereignty’ when we are party to the WTO and leaving the WTO is out of the question. BREXIT has highlighted that the UK has relinquished an advantage in being in a customs union for a false and misguided claim to sovereignty. The UK exports to these countries is but a fraction of UK exports to the EU. Therefore, it has been a grave mistake to not benefit from the free trade area of the EU.

[1] ‘The Future of the WTO’, Report by the Consultative Board to Director-General Supachai Panitchpakdi, WTO, 2004 (‘Sutherland Report’) para. 60.

[2] i.b.i.d.

[3] Donald McRae, ‘MFN in the GATT and the WTO’ (2012) 7 Asian J WTO & Int’l Health L & Pol’y 19

[4] i.b.i.d.

[5] i.b.i.d.

[6] i.b.i.d.

[7] EC – Tariff Preferences Panel Report, WT/DS246/R and Appellate Report WT/DS246/AB/R adopted 20 April 2004

[8] i.b.i.d.

[9] Joseph Ogbonna, A Legal Analysis of the Application of Articles I and III of the GATT 1994 on the Economic Development of ECOWAS Member States’ (DPhil thesis, Brunel Law School 2012) 83

[10] i.b.i.d.

[11] Michael J. Trebilcock and Robert Howse, The Regulation of International Trade, (London: Routledge, 2013) 59

[12] Ogbonna (n.9 ) 83

[13] Trebilcock and Howse (n.11) 59

[14] Aurelie Walker, ‘The WTO Has Failed Developing Nations | Aurelie Walker’ (the Guardian, 2020) <,trade%20negotiation%20agenda%20was%20proposed.&text=But%20the%20WTO%20membership%20has,the%20promised%20pro%2Ddevelopment%20changes.&gt; accessed 17 November 2020.

[15] William J Davey, Non-Discrimination In The World Trade Organization (Hague Academy of International Law 2012) 153

[16] Mitsuo Matsushita and others, The World Trade Organization: Law, Practice, And Policy (Oxford University Press 2015) 158.

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