Introduction
In the past two years, India has experienced several implications of Most Favoured Nation treatment (‘MFN’), which is covered under Article I of GATT 1994.[1] As per this, ‘any advantage, favor, privilege or immunity’ granted by one member for products originating or destined for any country must be granted to all contracting parties. Classifications made for particular products need to be based exclusively on their characteristics, rather than characteristics of the country they originate from. This article analyses the issue with MFN regarding developing nations and a suggestion to get a step closer to resolving the environment and trade tussle.
The Exceptional Exemption
India revoked Pakistan’s MFN status in 2019,[2] and the United States of America terminated India’s preferential trade status under the Generalized System of Preference trade programme in 2020.[3] The former was more symbolic and political, with little to no adverse impact on India.[4] Contrarily, the latter adversely impacted India’s economy, and several sectors like stone, plaster and cement saw an immediate decrease in exports.[5] GATT 1994 has an Enabling Clause for developing countries like India, under GATT Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries.[6] Members are encouraged to accord favourable treatment to developing countries without abrogating Article I of GATT 1994, or having any expectation of reciprocity.[7] Even though the United States conveniently forego the latter, this is a testament to how much developing nations like India depend on developed nations like the United States of America for their preferential treatment to boost exports.[8] Thus, while developing countries benefit from favourable treatment, they need to understand that they cannot be overly reliant on it. This becomes even more important for developing countries like India who are either on the brink of becoming developed nations or are planning to cross that threshold soon. A short-sighted reliance on special treatment under the World Trade Organization (‘WTO’) provisions without planning for an independently sustainable model is a major fallacy that India is now realizing and correcting. The Make in India movement is a step in the right direction regarding this aspect.
The Enabling Clause has further problems. For far longer than required, special and differential treatment has been provided to countries[9] like China,[10] Singapore,[11] and South Korea,[12] even though their status as developing nations has been contentious for a long time. Assessing their actual status is beyond the scope of this article. However, this reflects that there are foundational issues within MFN, and like many WTO laws, this provides a convenient loophole. Developed nations have to extend favours to nations who do not need it, and developing nations have to treat them at par even though they may not truly qualify. That is, of course, unless countries take a similar approach to that of the 45th President of the United States of America, Donald Trump, and revoke benefits without paying heed to the law.
Thus, while MFN tries to extend substantive equality to all nations, its misuse is prevalent. It has also become a more political than an economic tactic. Sometimes developing nations do not retaliate even if they are not granted the agreed-upon concessions to continue good relations with other countries,[13] and avoid arduous and expensive dispute resolution mechanisms.
The Environmental Conundrum
Another contentious and much-discussed facet of WTO is its correlation with the environment. For instance, a Multilateral Environmental Agreement could authorize trade in specific products between some parties and ban trade with others.[14] This would violate MFN. This complexity was highlighted in the Chile – Swordfish dispute, but no jurisprudence conclusively decides the relationship between trade and environmental rules.[15]
Some scholars argue that as per the Preamble to the WTO Agreement,[16] WTO does emphasize environmental protection and sustainable development,[17] but it also surreptitiously clarifies that trade is supreme. The Preamble states that environment needs to be preserved in a manner consistent with ‘needs and concerns at different levels of economic development’.[18] Thus, in a tussle between trade and the environment, nations are to reinforce trade. Notably, it is a myth that trade and environment are antithetical to each other.[19] A sustainable approach to trade will further economic interests of the world.[20] The United Nations has propagated several sustainable development goals which, if successfully incorporated, will help further social, environmental and economic goals.[21] Corporations need resources from the environment to manufacture and further trade. Their employees depend on the environment for basic sustenance. Thus, deterioration in the environment and exploitation of natural resources will adversely impact trade in the long run. Resources may be accessible for a few more years, but it is predicted that their overuse will deplete them into nothingness in a few more decades.[22] It is imperative to understand that companies and nations are eternal, so theoretically their interests need to be safeguarded for all eternity. Governments need to let go of their tunnel vision approach and take concrete steps to ensure a sustainable model of trade. An innovative institutional reform on the global level is required to find a realistic solution that furthers trade without impeding environmental concerns.[23]
One way to encourage better environmental practices in trade is to allow an exception within MFN. In Canada – Certain Measures Affecting the Automotive Industry (2000),the Panel interpreted ‘unconditionally’ to mean that extension of an advantage is not subjected to conditions relating to the situation or the conduct of exporting country.[24] Moreover, as per the traditional view, non-product related process and production methods are not relevant in determining whether a product is ‘like’ or not.[25] Therefore, products produced in an unsustainable manner cannot be given less preferential treatment than others.[26] However, if countries are extended lower tariff rates, duties, etc. on the condition that their products are environmental friendly, or produced in a sustainable way, they will be incentivized to undertake sustainable production methods. Thus, an origin-based discrimination and relaxation of ‘unconditionally’ under Article I of GATT 1994 may be most efficient in this instance. The other exceptions for developing and underdeveloped countries, anti-dumping duties, countervailing duties, etc., may still stand, but all nations can be allowed an exemption or relaxation under this. Doing an empirical study on this aspect is beyond the scope of this article, but this idea holds merit. Several corporations and investment funds have seen a sharp increase in their turnover by using socially responsible and green investing methods.[27] It is possible that a similar profitable effect will be reflected on a macro level. This will not be a barrier to trade, rather it will increase knowledge sharing amongst countries, and incorporate other sectors and sciences into international trade.[28] A well thought out exception embedded into MFN, geared towards sustainable development, can be a steppingstone to alleviate environmental concerns regarding the global economy and trade practices.
This article has been authored by Muskaan Gupta, Fourth-year student at Jindal Global Law School, Sonipat.
[1] General Agreement on Tariffs and Trade (15 April 1994), Marrakesh Agreement Establishing the WTO, Annex 1A [Hereinafter, “GATT 1994”].
[2] Press Information Bureau, Government of India, Suspension of LoC Trade between J&K and PoJK (2019), https://pib.gov.in/PressReleseDetail.aspx?PRID=1570898.
[3] Office of the United States Trade Representative, United States Will Terminate GSP Designation of India and Turkey (2019), https://ustr.gov/about-us/policy-offices/press-office/press-releases/2019/march/united-states-will-terminate-gsp.
[4] T.C.A. Sharad Raghavan, What is Most Favoured Nation status?, The Hindu, February 16, 2019, https://www.thehindu.com/news/national/what-is-most-favoured-nation-status/article26283898.ece; Satya Sontanam SLate, All you wanted to know about MFN status, The Hindu BusinessLine, March 11, 2019, https://www.thehindubusinessline.com/opinion/columns/slate/all-you-wanted-to-know-aboutep/article26501686.ece.
[5] Shriya Chauhan, Understanding the Impact of GSP Withdrawal on India’s Top Exports to the US (August 20202), https://www.orfonline.org/research/understanding-the-impact-of-gsp-withdrawal-on-indias-top-exports-to-the-us/.
[6] GATT Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries, L/4903, dated 28 November 1979, BISD 26S/203.
[7] Peter van den Bossche & Werner Zdouc, The Law and Policy of the World Trade Organization: Text, Cases, and Materials 694 (Third edition ed. 2013).
[8] Shriya Chauhan, supra note 4.
[9] World Trade Organization, Who are the developing countries in the WTO?, Development: Definition , https://www.wto.org/english/tratop_e/devel_e/d1who_e.htm.
[10] Phillipe Benoit & Kevin Tu, Is China Still a Developing Country? And Why It Matters for Energy and Climate, Columbia Centre on Global Energy Policy (2020), https://www.energypolicy.columbia.edu/research/report/china-still-developing-country-and-why-it-matters-energy-and-climate#:~:text=China%3A%20The%20Developing%20Country%20Argument,criteria%20used%20by%20development%20organizations.
[11] Prashanth Perumal J., Explained: Is the World Trade Organization becoming a new battlefront?, The Hindu, August 25, 2019, https://www.thehindu.com/business/Economy/is-the-wto-becoming-a-new-battlefront/article29247151.ece.
[12] South Korea has reneged its status as a developing county; Jane Chung & Joori Roh, South Korea to give up developing country status in WTO talks, Reuters, October 25, 2019, https://www.reuters.com/article/us-southkorea-trade-wto-idUSKBN1X401W.
[13] Shriya Chauhan, supra note 4.
[14] World Trade Organization, The Doha mandate on multilateral environmental agreements (MEAs), Environment: Negotiations , https://www.wto.org/english/tratop_e/envir_e/envir_neg_mea_e.htm.
[15] Id.; Bossche and Zdouc, supra note 5 at 110.
[16] WTO Agreement: Marrakesh Agreement Establishing the World Trade Organization (15 April 1994).
[17] Bossche and Zdouc, supra note 5 at 199.
[18] WTO Agreement, supra note 16.
[19] United Nations, The EU-UN Partnership on Land, Natural Resources and Conflict Prevention, https://www.un.org/en/land-natural-resources-conflict/renewable-resources.shtml; Patrick Collinson, Ethical investments are outperforming traditional funds, The Guardian, June 13, 2020, https://www.theguardian.com/money/2020/jun/13/ethical-investments-are-outperforming-traditional-funds.
[20] Fiona Macmillan, WTO and the environment (2001).
[21] UNDP, Sustainable Development Goals, https://www.undp.org/content/undp/en/home/sustainable-development-goals.html.
[22] UNEP, UN calls for urgent rethink as resource use skyrockets (2019), https://www.unep.org/news-and-stories/press-release/un-calls-urgent-rethink-resource-use-skyrockets.
[23] Gouranga G. Das, Trade, Environment and Adjustments: Contemporary Themes, 55 Foreign Trade Review 271–276 (2020); Hashim Zameer et al., Analyzing the association between innovation, economic growth, and environment: divulging the importance of FDI and trade openness in India, 27 Environmental Science and Pollution Research 29539–29553 (2020).
[24] Canada – Certain Measures Affecting the Automotive Industry, Report of the Panel, WT/DS139/R (adopted 19 June 2000).
[25] Bossche and Zdouc, supra note 5 at 691–692.
[26] Id. at 692.
[27] Shamika Ravi & et al., The Promise of Impact Investing in India (2019), https://www.brookings.edu/wp-content/uploads/2019/07/The-promise-of-impact-investing-in-India.pdf; Patrick Collinson, supra note 15; Kurt A. Desender et al., Corporate social responsibility and cost of financing—The importance of the international corporate governance system, 28 Corp Govern Int Rev 207–234 (2020).
[28] Ma-Lin Song, Shao-Peng Cao & Shu-Hong Wang, The impact of knowledge trade on sustainable development and environment-biased technical progress, 144 Technological Forecasting and Social Change 512–523 (2019).
Picture Source: World Finance
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