GENEVA, July 25 — The shift is happening inside the fine print of global trade law. Most favoured nation, the non‑discrimination rule that has underpinned international commerce for centuries, is facing a new legal frontier: whether its clauses in bilateral investment treaties cover only substantive rules or also procedural protections. Trade lawyers are watching this space closely, because the answer could reshape how countries treat foreign investors.
Most favoured nation, or MFN, is a core principle in international economic relations. It requires that any trade advantage—lower tariffs, higher import quotas—granted to one WTO member must be extended to all other members.
This non‑discrimination rule is enshrined in the General Agreement on Tariffs and Trade (GATT) and carried forward by the World Trade Organization since 1995. It prevents a country from treating one trading partner less favourably than another.
A Centuries-Old Concept
MFN clauses appeared as early as the 17th century. The Treaty of Madrid (1667) between Spain and England and the 1778 US–France trade treaty are early examples. The Jay Treaty (1794) granted MFN from the United States to Britain.
The Joseon–United States Treaty of 1882 compelled Korea to grant MFN to the United States. By the mid‑19th century, MFN was heavily used in European, Latin American, and Japanese trade treaties.
After World War II, the GATT framework shifted from bilateral to multilateral tariff negotiations, ultimately leading to the WTO in 1995. Today, WTO members are required to grant each other MFN status. A MFN clause is also included in most bilateral investment treaties concluded since WWII between capital‑exporting and capital‑importing countries.
The Trend Underneath
What’s changing is the scope of that clause. The ongoing legal debate asks whether MFN in investment treaties covers only substantive protections—like fair treatment—or also procedural ones, such as access to arbitration. That distinction matters because it determines how much leverage a foreign investor can claim from the most favourable terms another country has offered to a third party.
Exceptions to MFN allow preferential treatment for developing countries, regional free trade areas, and customs unions. Together with the principle of national treatment, MFN is one of the cornerstones of WTO trade law.
Trade experts identify several benefits of MFN. It increases trade creation and decreases trade diversion by ensuring imports come from the most efficient supplier. It allows smaller countries to benefit from advantages larger countries grant each other.
And it reduces transaction costs and simplifies trade rules.
What to Watch
Violation of the MFN principle—such as discriminatory tariff hikes—undermines the WTO’s non‑discrimination foundation and can lead to disputes before the WTO’s dispute settlement body. With the legal debate on investment treaty coverage unresolved, the trend underneath is clear: the oldest rule in trade is being tested on new ground. Watch this space.
