Junior Researcher, Energy Law
Liberal trade has faced growing resentment from several directions in recent years. The decision by the United Kingdom to withdraw from the European Union following a 2016 referendum has affected both businesses and individuals. On the other side of the Atlantic, the 2016 election of President Trump was built on a campaign of protectionism and threats to multilateral trading rules. Disrupting the international trading system in order to realise an “America first” policy or to cast of the shackles of the European Union raise concerns and questions. In addition to creating economic benefits, trade on multilateral terms has for centuries been recognized as a key tool for maintaining peaceful relations between nations. If multilateralism fails, how will this impact geopolitics? Some exceptions, such as those allowing for closer cooperation without infringing on the multilateral rights, are sanctioned by the multilateral rules of the WTO and their use is on the rise. Is an increase in the use of exceptions to multilateralism a cause for concern?
The reduction of tariffs has been achieved through several rounds of negotiations under auspices of the General Agreement on Tariffs and Trade (GATT) in the wake of the Second World War. The outcome these means that trade in goods today is nearly tariff free. A key ingredient for the success of the GATT negotiations was the Most-Favoured Nation (MFN) clause, through which tariff concessions negotiated between some Members were multilateralized to all on a non-discriminator basis. In tandem with trade liberalization the global economy witnessed rapid growth of income, creating wealth for those taking part in the process. The driver of this growth has been argued to have been the virtuous cycle in which tariff cuts led to increased trade, which in turn led to more income which yet again enabled tariff cuts. Today, the MFN clause remains a cornerstone of the World Trade Organization Agreements (WTO) with only few exceptions to it.
Preferential Trade Agreements, such as the European Union, NAFTA or the CETA, that offer deeper liberalization to its Members, but do not raise tariffs or other barriers to trade vis-à-vis those WTO Members that are not part of the pact, form the most important exception to the MFN obligation. In general, the preconditions for deviations from the MFN principle are threefold: transparency (the requirement to notify), commitment to regional trade liberalization (the requirement that PTA´s cover all trade between parties) and neutrality in relation to non-parties. The number of PTA´s has grown rapidly in the past decades, leading to concerns on the erosion of multilateralism. This echoes also the broader discussion on the fragmentation of international law, ongoing for more than a century.
The positive economic effects that can be achieved through liberal trading policies have been evident in both Great Britain in the 19th century as well as the United State in the 20th century. The repeal of the Corn Laws in 1846 ended a period of mercantilism in place since 1815 and pushed Great Britain into prosperity by embracing free trade, even on unilateral terms. The underlying theory was and remains that gains can be made by specializing in the production of certain products and then exchanging these for products that others produced efficiently. Free trade would eventually lead to an efficient outcome as nations produced those goods which they could produce most efficiently. With its bet on free trade, Great Britain would be the leading economic power of the 19th century.
Successful post-war settlements, at least since the 1648 Peace of Westphalia, have specifically recognized the relevance liberal trade has for the maintenance of peaceful relations. Are the mostly peaceful relations since the Second World War under threat from the rattling of trade sabres? While it is unlikely that neither the protectionist policies of the United States or the withdrawal of the United Kingdom from the EU will have any imminent effect on peaceful relations between nations, the stakes are high. Throughout recent history, liberal trade has functioned as an assurance against armed conflict and, conversely protectionism has preluded conflict.
A recent investigation on the effect of aluminium and steel imports (Section 232 investigation) on the US economy concluded that these have a negative effect on the National Security and can therefore be “adjusted”. Against a backdrop of several options to protect the domestic industries, President Trump chose to raise duties on imports from all countries including Canada and the European Union. Calls for retaliation were immediate, reflecting the conception that the measures of the United States are unjustified.
National Security exceptions are found in most trade agreements, including the WTO agreements. The US seems to have prepared to make use of this exception by broadening the traditional interpretation of national security beyond national defence to include also economic security in the aluminium and steel investigation. The apparent reason behind this interpretation is an attempt to rely on a little used MFN exception of the GATT (Article XXI) that allows WTO Members to take `any action which it considers necessary for the protection of its essential security interests`. While there are qualifications for the use of Article XXI, it is in effect self-judging it suffices that the measures taken are considered necessary by the state taking them. Invoking this article without due cause could be the straw that breaks the camel´s back, undermining the effectiveness of the multilateral framework and causing other nations to retaliate by also invoking Article XXI to justify their trade restrictive measures.
The “political trilemma” is how the economist Dani Rodrik has described the problem facing international economic integration. Nations have to make a choice between two of three lines of policy: international economic integration, the nation-state and mass politics. Should international economic integration be maintained, either the nation-state or mass politics have to be sacrificed. With both America and the United Kingdom choosing the nation-state and mass politics over integration, only time will tell if history will repeat itself with trade protectionism flowing into geopolitical tensions.
Deeper commitment to free trade without diminishing the rights of WTO Members is at the core of the Preferential Trade Agreement exceptions to MFN treatment. Negotiation with fewer nations enables faster decision making and makes it possible to overcome the foot-dragger effect which the consensus based rules of the WTO can have. Consequently, PTA can be seen as a building block as opposed to a stumbling block for multilateralism. Moves toward unilateralism as witnessed in the US aluminium and steel investigation, on the other hand can be considered conflicting with multilateralism. It remains to be seen if trade-politics convert to geo-politics and, more ominously, trade wars morph into real wars.
This blog is based on the author’s recent publication ´Back to the future: MFN treatment in an era of protectionism´ in the Nordic Journal of International Law. This publication reviews the development of the Most-Favoured Nation clause in light of historical events and analyses its importance in trading relations today.