FTAs: "Forward Most-Favoured-Nation" treatment on the table in India-US negotiations

Reuters reported last week that India may be considering offering a “forward most-favoured-nation” (MFN) clause in the trade agreement it is negotiating with the United States. This was rightly described as “rare”, with very few trade agreements containing an MFN clause in their goods chapters (as opposed to in services and investment chapters where these are more common).

A quick aside on terminology - MFN basically means the parties agree to will provide goods from each other with the ‘best’ treatment that they provide to goods from any other country. So if, for example, India lowered its tariffs on natural gas from Oman, it would also need to apply the same (or lower) tariffs on natural gas from the United States. 

MFN has been described as the cornerstone of the World Trade Organization (WTO) and is found in the General Agreement on Tariffs and Trade (GATT) as well the General Agreement on Trade in Services (GATS). There is a slight irony here, as India was previously reported as being potentially willing to ignore these WTO rules around MFN to reach a sectoral deal with the United States. 

As for the the ‘forward’ part of the reference to MFN, I take this to mean that the proposed clause would exclude preferential treatment offered under existing trade agreements. For example, preferences India has given Australia or the United Arab Emirates could be excluded from what India has to provide to the US. Even on this model, though, there are differences of views as to whether this should exclude future preferences granted to existing trade agreement partners - such as if Australia and India completed their Comprehensive Economic Cooperation Agreement negotiations and included additional tariff commitments in it. 

My impression was that goods MFN provisions outside of the GATT were very rare - having previously only seen a broad (i.e. all products), goods MFN clause in the Pacific Agreement on Closer Economic Relations Plus (PACER Plus). And even then, PACER Plus’s MFN clauses only applies to “duties and charges” and not to other other forms of treatment.

Chapter 2, Article 3(2) of PACER Plus is the relevant provision and it reads as follows:¹

2. With respect to the levels of all duties and charges referred to in paragraph 1, any advantage granted to any good of any country or territory, other than in respect of a preference in force under a regional trade agreement on the date referred to in Article 8.1 of Chapter 15 (Final Provisions), shall be accorded immediately and unconditionally to all like goods originating in the territories of all other Parties except where:

(a) (i) the advantage granted is accorded pursuant to Decision 36 of Annex F of the WTO Hong Kong Ministerial Declaration of 2005 on Measures in Favour of Least-Developed Countries and related WTO Decisions on duty-free and quota-free access for products originating in Least-Developed Countries; and (ii) the treatment of such goods pursuant to the Decisions referred to in subparagraph (a)(i) is in conformity with those Decisions;

(b) the advantage granted is in respect of a preference in force pursuant to a regional trade agreement exclusively involving Pacific Island countries and territories; or

(c) the advantage granted is in respect of a preference in force pursuant to a regional trade agreement exclusively involving developing countries to which at least one Party is a party and other parties are non-Parties, where: (i) each such non-Party accounts for not more than 1 per cent of world merchandise exports; and (ii) all non-Parties that are party to the regional trade agreement together account for not more than 4 per cent of world merchandise exports; measured as of the date of entry into force of the regional trade agreement for each such Party and as of the date of accession of a new party to it.

3. Paragraph 2 shall not require such advantage to be accorded in respect of a preference in force or implemented after the date referred to in Article 8.1 of Chapter 15 (Final Provisions) by the Federated States of Micronesia, the Republic of the Marshall Islands or Palau which is extended to the United States of America in respect of:

(a) a regional trade agreement with another non-Party pursuant to the most-favoured-nation clause in such countries’ respective Compacts of Free Association or successor agreements, where the regional trade agreement concerned fulfils the requirements of paragraph 2(b) or 2(c); or

(b) a regional trade agreement established under such countries’ respective Compacts of Free Association or successor agreements.²

From the bolded text you can see that this provision excludes preferential treatment under existing “regional trade agreement[s]”.³ It also provides exceptions for, among other things, preferences given in favour of least-developed countries, under trade agreements involving just Pacific Island countries (past and future), and certain agreements involving just developing countries.

Doing a quick search of Legal.TINA, I discovered that there are some other agreements that include a goods MFN provision out there, including the:

• Eurasian Economic Union - Iran Free Trade Agreement (see Article 2.1);

• Eurasian Economic Union - Viet Nam Free Trade Agreement (see Article 2.1); and

• United States - Vietnam Agreement on Trade Relations (see Article 1).

However, each of these agreements all appear to entirely exclude treatment accorded to other countries pursuant to trade agreements (both existing agreements and any future ones). For example, the US-Vietnam Agreement excludes “advantages accorded by either Party by virtue of such Party's full membership in a customs union or free trade area” (see Article 1(3)(A)).

For WTO Members,⁴ excluding preferences under all future trade agreements from an MFN provision severely limits its value. All WTO Members are subject to an MFN obligation under the GATT, subject to allowances for customs unions and free trade agreements. So a MFN provision in a trade agreement between WTO Members would only duplicate the existing obligation the parties already have to each other under the GATT (and indeed neither party could provide preferences to third parties outside of a trade agreement without breaching their GATT obligations).

With the state of the WTO at the moment, including its dispute settlement body, duplicating the GATT’s MFN obligation is not of zero value. However, it is still quite different to the PACER Plus style of MFN, which does pick up treatment given under future trade agreements the parties enter into.⁵

Others have also pointed out a couple of other MFN and MFN-adjacent provisions:

• Under the Australia-India Economic Cooperation and Trade Agreement there is a side letter under which India commits to providing Australian wine with MFN treatment with respect to customs duties and charges (without any carve-out for past or future trade agreements); and

• Under the European Union-Japan Free Trade Agreement, Article 2.8(4) obliges the parties to commence a review of their tariff commitments if either party enters into a future trade agreement that provides more favourable treatment to certain goods. There is similar language in the EU’s agreements with Vietnam (Article 2.11(3)).

However, I still haven’t seen anything as broad as the PACER Plus example and indeed none as broad as the GATT version of MFN - which covers a much broader range of treatment than just customs duties and charges.

I welcome contributions of examples I’ve missed!

1. See also Article 6 which applies MFN to “internal taxes, other internal charges and laws, regulations and requirements affecting matters within the scope of Article III of GATT 1994”.

2. Footnotes removed and emphasis added.

3. This is defined to capture agreements that are captured by Article XXIV of the GATT and Article V of the GATS, which allow WTO Members to provide preferential treatment in the context of free trade agreements or customs unions that meet certain requirements (e.g. covering ‘substantially all trade’).

4. Noting that not all of the countries party to these three agreements are WTO Members.

5. Although Australia and New Zealand already both provide zero tariffs on all products from PACER Plus parties, so the benefits are primarily in favour of Australia and New Zealand rather than the Pacific Island parties.