The Most Favored Nation__ Principle

THE MOST FAVORED NATION PRINCIPLE

A.

INTRODUCTION

Origin of the Most-Favored Nation (MFN) Principle

Excerpt from an OECD working paper on international investment

/dataoecd/21/37/

MFN treatment has been a central pillar of trade policy for centuries. It can be traced back to the

twelfth

century,

although

the

phrase

seems

to

have

first

appeared

in

the

seventeenth

century.

MFN treaty clauses spread with the growth of commerce in the fifteenth and sixteenth centuries.

The

United

States

included

an

MFN

clause

in

its

first

treaty,

a

1778

treaty

with

France. In

the

1800s and 1900s the MFN clause was included frequently

in various treaties,

particularly

in the

Friendship,

Commerce,

and

Navigation

treaties.

MFN

treatment

was

made

one

of

the

core

obligations

of commercial

policy

under

the

Havana

Charter

where

Members

were to

undertake

the

obligation

“to

give

due

regard

to

the

desirability

of

avoiding

discrimination

as

between foreign investo

rs”. The

inclusion

of MFN clauses became a general practice in the

numerous

bilateral,

regional

and

multilateral

investment-related

agreements

which

were

concluded

after

the

Charter

failed

to

come

into

force

in

1950.

Its

importance

for

international

economic

relations

is underscored

by

the

fact

that

the

MFN

treatment

provisions

of the

GATT

(Article

I

General

Most-

Favoured-Nation

Treatment

)

and

the

GATS

(Article

II

Most-Favoured-Nation

Treatment

) provide that this obligation shall be accorded

“im

mediately

and

unconditionally

”

(although

in

the

case

of

the

GATS,

a

member

may

maintain

a

measure

inconsistent

with this obligation

provided that such measure is listed in, and meets the conditions

of, the Annex on Article II Exemptions).

B. SPANISH COFFEE

The

following

two

panel

reports

date

from

the

1980s

and

are

among

the

relatively

few

MFN

disputes. Compare

the following two GATT panel reports and consider how to legally reconcile

them.

Focus in particular on the expressly and implicitly applied criteria for the determination

of likeness and keep in mind the economic rationale for the MFN obligation.

Once

again

try

to

understand

the

market:

What

was

Spain

’

s

rationale

for

introducing

a

differentiation in their tariff between mild and other coffees?

Lawyering Exercise: If at the time Spanish Coffee was decided there had been an Appellate Body

and

you

were

Spa

in’s

legal

counsel

--

how

would

you

have

phrased

the

appeal

to

show

that

“mi

l

d”

coffee and

“

unwashed Arab

ica”

are not like products?

/engli sh/tratop_e/dispu_e/gt47ds_

27 April 1981

SPAIN - TARIFF TREATMENT OF UNROASTED COFFEE

1

Report of the Panel adopted on 11 June 1981 (L/5135 - 28S/102)

I.

Introduction

1.1

In

a

communication

dated

13 September 1979

and

circulated

to

contracting

parties,

Brazil informed that a new Spanish law had introduced certain modifications in the tariff treatment

applied

to

imports

of

unroasted

coffee,

according

to

which

imports

into

Spain

of

unroasted

non-decaffeinated

Arabica

and

Robusta

coffees

(tariff

No.

09.01A)

were

now

subject

to

a tariff

treatment

less

favourable

than

that accorded

to

coffee.

Prior

to

this

new

law

there

had

been

no

differentiation

in

the

tariff

treatment

applied by Spain to imports of unroasted

coffee. As a main supplier of coffee to Spain, Brazil was

concerned

with

the

discriminatory

character

of

the

new

tariff

rates

and

had

requested

Article

XXII:1 consultations with Spain (L/4832).

(…)

II.

Factual aspects

2.1

The

following

is

a

brief

description

of

factual

aspects

of

the

matter

under

dispute

as

the

Panel understood them.

2.2

On 8 July 1979, the Spanish authorities

enacted the Royal Decree No. 1764/79

(B.O.E. of

20

July)

by

which

the

tariff

treatment

and

the

sub-tariff

classification

applied

to

imports

of

unroasted,

non-decaffeinated

coffee

(ex.

CCCN

09.01)

were

modified

and

amended, effective by 1 March 1980.

Imports of unroasted coffee, which prior to this last date

entered

Spain's

customs territory

under

one

and

the

same

designation,

was

sub-divided

into

five

tariff lines to which

duty rates applied as follows:

Table 1

Spain's present tariff treatment for unroasted non-decaffeinated coffee beans

(Royal Decree 1764/79 - Tariff No. 09.01. A.1a)

Product description

1.

2.

3.

4.

Columbian mild

Other mild

Unwashed Arabica

Robusta

Duty rate

Free

Free

7 per cent ad. val.

7 per cent ad. val.

2.3

Prior to the Royal Decree 1764/79, imports of unroasted coffee into Spain were subject to a

customs

duty

of

25

per

cent

ad

valorem

1

,

which

was

subsequently

reduced

to

22.5 per

cent. In 1975, by Decree- Law 13/75 of 17 November of that year, Spain exempted

1

Decree 999/60 of 30 May 1960.

2

imports

of

certain food products, including unroasted coffee, from customs duties when they were

imported under the State-trading system.

2.4

Ever

since Spain acceded

to GATT,

customs

duties

on raw coffee were never

bound,

and,

therefore, not included in Schedule XLV of Spanish concessions in GATT.

2.5

On

the

same

date,

8

July

1979,

the

Spanish

authorities

also

published

the

Royal

Decree

1765/79 which provided that as from 1 March 1980 imports of unroasted coffee would cease to be

under

State-trading

and

would

begin

to

be

marketed

by

private

entities.

Prior

to

that,

imports

of unroasted

coffee

into

Spain

were

the

monopoly

of

the

Office

of

the

General

Commissioner

for Supply and Transport (CAT) which also had exclusive responsibility for domestic supply.

2.6

Under the State-trading ré

gime and intervention in the domestic market, the use of blends was

prohibited in Spain and coffee was obligatorily marketed under the designations Superior, Regular

and Popular,

which largely

corresponded

to the types

Arabica

and Robusta,

respectively.

The CAT also maintained a system of maximum authorized prices for each of these

types of coffee.

2.7

On 30 November 1979, a Ministerial Order (Ministry of Trade and Tourism) did away with

the

requirement

to

market

coffee

under

the

designations

Superior,

Regular

and

Popular.

Confirming this removal of obligatory designations, the Resolution of the same Ministry's General

Directorate

of

Domestic

Trade,

of

8

February

1980,

indicated

a

single

maximum

price

for

the

domestic sale of these products without distinction as to type.

2.8

This latter resolution

having also been superseded,

the Panel further understood

that, at the

present time,

domestic coffee prices were free in the Spanish market

2.9

Spain's

imports

of

raw

coffee

clearly

showed

a

rising

trend

over

the

period

1967-1979

having increased two-fold by volume, and ten-fold by value.

3

Table 2

Spain's Imports of Raw Coffee

(Tariff No. 09.01.A.1 and Statistical No. 09.01.01)

Year

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

Metric tons

42,215

49,075

61,877

78,963

66,353

80,239

73,464

84,898

75,788

91,698

77,479

Million pts.

2,378

2,997

3,767

5,747

4,916

5,786

5,789

7,215

6,325

13,765

31,693

Main suppliers

Colombia,

Brazil,

Mexico,

Angola

Colombia,

Brazil, Angola,

Mexico Colombia,

Brazil, Angola,

Mexico

Colombia,

Brazil,

Angola,

Uganda

Colombia, Brazil, Angola, Mexico

Colombia, Brazil, Angola, Equatorial Guinea

Brazil,

Colombia,

Angola,

Mexico

Colombia,

Brazil,

Angola,

Mexico

Colombia,

Angola,

Ivory

Coast,

Brazil

Brazil,

Ivory

Coast,

Uganda,

Colombia

Brazil,

Ivory

Coast,

Colombia,

Uganda

Colombia,

Brazil,

El

Salvador,

Ivory

Coast

Colombia, Uganda, Brazil, Ivory Coast

Source:

Foreign Trade Statistics of Spain - General Directorate of Customs.

Note:

The

above

figures

cover

only

imports

into

the

Peninsula

and

the

Balearic

Islands

and

exclude imports into Free Zones.

2.10

The

increases

in

value

and

volume

were

not

parallel,

owing

not

only

to

international

market fluctuations

but also to differences

in the composition

of the Spanish imports, in terms of

types of coffee.

While

varying,

the main

suppliers

always

included

both

Brazil

and Colombia,

although neither was always the principal supplier.

2.11

Spain's

imports

of

unroasted

coffee

from

Brazil

were

constituted

of

almost

entirely

Arabica

and they

evolved

in most recent

times

as shown

by

Table 3.

Table 3

Spain's Imports of Raw Coffee (metric tons)

1976

1977

1978

1979

March- September

1980

Total

of which from Brazil:

% of total

Source:

see Table 2.

91,698

40,672

44.35

77,749

24,946

32.08

83,226

18,137

21.69

99,621

18,573

18.64

74,668

21,004

28.13

4

III.

Main arguments

Article I:1

3.1

The

representative

of Brazil

argued

that

by

introducing

a 7 per

cent

tariff

rate

on imports

of

unroasted,

non- decaffeinated

coffee

of

the

Arabica

and

Robusta

groups,

while

affording

duty-free

treatment

to

coffee

of

other

groups,

the

new

Spanish

tariff

ré

gime

was

discriminatory

against

Brazil,

which

exports

mainly

Arabica

but

also

Robusta coffee, and therefore was in violation of Article I:1 of the General Agreement, according

to which:

any

advantage,

favour,

privilege

or

immunity

granted

by

any

contracting

party

to

any

product

originating

in

...

any

other

country

shall

be

accorded

immediately

and

unconditionally to the like product originating in ... the territories

of all other contracting parties.

3.2

In this connection,

he noted that, as did Spain herself under her previous tariff ré

gime, no

other contracting party discriminated in its customs tariff as between

of coffee.

3.3

The representative

of Spain,

stressed

that no contracting

party

was obliged

to retain

either

its tariff

structure,

or

its

duties,

applicable

to

the

importation

of

products

which

have

not

been

bound. He recalled that the Brussels nomenclature adopted by Spain did specify tariff headings but

left

it

to

each

country

to

establish,

if

it

is

so

wished,

sub-headings

within

these

headings.

Accordingly,

the

Spanish

authorities

had

the

right

to

establish

within

a

given

heading

the

sub- divisions

which

were

most

suited

to

the

characteristics

of

Spain's

foreign

trade,

while

respecting,

as

Spain

has

done

on many occasions, the bound duties previously negotiated.

1

The

classification

criterion

adopted

was

based

on

classifications

made

by

international

organizations,

specifically the International Coffee Organization (ICO).

3.4

In order to ascertain the coverage of Article I:1 it was necessary, in the view of the Spanish

representative,

to

consider

two

aspects

in

detail:

(a)

meaning

of

the

term

products

consequence

of

the new

structure

of heading

No. 09.01.A.1

of the Spanish

tariff.

The

Spanish

authorities

continued

to hold that, in their judgment,

the provisions

of the Royal Decree 1764/79

were

fully

compatible

with

the

obligations

assumed

by

Spain

under

the

General

Agreement,

and

in

particular

Article I:1 thereof.

“

Like produc

ts”

3.5

Recalling that in some past GATT cases it had been suggested that

1

In

this respect,

the representative

of Brazil requested

the Panel to take note of the oral recognition made by

the Spanish representative in the course of the first hearing of the Panel that Article I of GATT applied equally to

bound and unbound tariff items.

These authorities furnished photocopies of importing licences in Spain, issued after 1 March 1980, which evidenced

that the new tariff classification was applied according to the nature of products, and completely independently of the

country of origin.

In particular, these licences evidenced that Brazilian

free of duty.

5

the products falling within the same tariff heading, the representative

of Spain did not agree with

that opinion.

In his view, this interpretation

could lead to serious mistakes,

given that products

falling within one and the same tariff heading could be unlike and clearly different, as for example:

(i) in the case of all the residual tariff headings (

covering

a large

number

of

heterogeneous

products,

and

(ii)

headings

including

homogeneous

products

where

in

many instances

these

were

not

products

(i.e.

CCCN

heading

No.

15.07

including

all

kinds

of vegetable oils; CCCN heading No. 22.05 including all wines, etc.).

3.6

The Spanish representative pointed out that qualitative differences did exist between various

types

of

coffee

considering

both

technico-agronomic,

economic

and

commercial

criteria.

He

argued

that

Robusta

coffee

bean

was

morphologically

different

from

the

Arabica

coffee

bean,

having a different chemical composition and yielding a neutral beverage that was lacking in aroma

and was richer in soluble solids than the beverage made from Arabica coffee.

3.7

Although both

Spanish

representative

further

argued

that

differences

in

quality

also

existed

between

them,

as

a

result

of

climatic

and

growing

conditions

as

well

as

methods

of

cultivation

and

above

all

the

preparation

because

aroma

and

taste,

essential

features

in

determining

trade

and

consumption

of

these products,were completely different in

Different

quotations in international trade and commodity markets were due to these factors.

3.8

As

distinctive

markets

existed

for

the

various

types

of

unroasted

coffee,

the

Spanish representative was of the view that such various types of coffee could not be regarded

as

This

was

particularly

evident

in

the

Spanish

market

where,

for

historical

reasons, consumers' preference for the various types of coffee was well established, in

contrast with other markets in which the use of blends was more generalized.

When referring to

the increasing market share of blends outside Spain, he argued that the existence of blends proved

that the various types of coffee were not the same products.

3.9

For his part, the representative of Brazil argued that coffee was one single product and that,

therefore, for the purpose of Article I:1 of the GATT, must be considered a

He

further argued that in the specific case of

the same species

of plant,

and often

from the same variety

of tree.

He also stated that,

in such

cases,

the

product

could

be

extracted

from

the

same

individual

tree,

and

the

classification

as

3.10 He pointed out, therefore, that existing differences between

were

essentially

of

an

organoleptic

nature

(taste,

aroma,

body,

etc.)

resulting

from

geographical

conditions and, principally, from the distinct methods of preparation of the beans.

3.11

He

stated

that

the

classification

presently

used

by

Spain

for

tariff

purposes

had

been

introduced

by

the

International

Coffee

Organization

in

1965/66,

when

the

Council

of

the

Organization decided to create groupings of coffee-producing countries as part of a system for the

limited adjustment of export quotas in response to changes in an indicator price of

Arabicas

He further

stated

that the composition

of each

grouping

6

depended upon political decisions

taken

yearly

by

the

Council

of

the

Organization,

according

to

which

each

exporting country

was

placed

in

the

group

corresponding

to

the

kind

of

coffee

constituting

the

greater

part of its production.

He stressed

that since 1972 these

groupings

had

only served a statistical purpose.

3.12 He argued that, from the point of view of the consumer, virtually all coffee, either roasted or

soluble, was sold today in the form of blends, combining in varying proportions coffee belonging to

different groups.

Moreover, in everyday language, the terms type, quality, and growth were used

interchangeably

to indicate

specific

grades of coffee, for instance

Colombian

Mams, El Salvador

Central

Standard,

Paranà

4,

Angola

Ambriz

2AA,

etc.

In

his

view,

this

was

the

only characterization

really

meaningful

for trading purposes,

since

no

roaster

did

buy

a

mild

or

Arabica

as

such,

but

rather

well- known

grades,

priced

according

to

the beverage they could provide.

3.13 He further stated that with respect to its end use, coffee was a well determined and one single

product, generally intended for drinking as a beverage.

Differentiation made in the Spanish tariff

3.14 Explaining the economic reasons beyond the differentiation introduced in the Spanish tariff by

the

Royal

Decree

No.

1764/79,

the

representative

of

Spain

said

that

the

lower

customs

duty

applicable

to

coffee

imported

into

Spain

reflected

the

Spanish

Government's deep concern over the possible impact on prices of measures to return coffee to the

private

sector

and

afford greater

trade

liberalization.

In

this

connection,

he

noted

that

coffee

accounted for more than 2 per cent

in

the

Spanish

consumer

price

index.

He

also

said

that

in

the

previous

trade

system

of

State- trading

in

which

a

nil

tariff

duty

existed

since

1975,

nevertheless

the

difference

between

import

prices

and

selling

prices

to

roasters

(

de

cesió

n

in

practice

constituted

an

implicit

tariff

affecting

all

imports

of

coffee.

This

implicit

tariff was higher than the tariff duties effectively applied since March 1980.

3.15 Having

recalled

that

a

very

high

proportion

of

coffee

was

consumed

in

the

Spanish

market,

he

noted

that

this

very

high

proportion

of

in

Spanish

consumption

had

been maintained

by keeping

artificially

low the retail price of

coffee

through the operation of the previously existing system of authorized prices.

3.16 In view of the foregoing, he indicated that his authorities had considered that the only way of

reconciling

consumers'

preference

for

coffee

and

the

transfer

of

the

coffee

trade

to

the

private

sector

was

to

establish

different

rates

of

custom

duty,

with

a

zero

duty

on

the

most expensive coffee, i.e.

In so doing, his authorities

had not

at any time given any thought to which countries were producing the different types of coffee.

In

fact, different types or groups of coffee were often grown in one and the same country and more

than thirty countries were producing both Robusta and

3.17 Finally,

the

Spanish

representative

stressed

the

transitional

character

of

the

coffee

import ré

gime actually applied by his country.

He said that his authorities ultimately aimed, in the

shortest possible time, at introducing in respect of coffee a system of automatic licensing and free

7