Recently, there has been an on-going debate in the media about the potentially disastrous implications of the MFN provision in the CARIFORUM/EC Economic Partnership Agreement.

The major criticism raised is that the EPA MFN clause severely undermines the Enabling Clause, intended to promote trade by developing countries, and south/south trade because it creates a disincentive for the Caribbean to negotiate agreements with other developing countries that might include more favourable market access conditions than those which would be enjoyed by the EU under the EPA. Critics, therefore, conclude that the MFN Clause restricts the region's policy space. We believe that it is now necessary to clarify some points as follows:
What is the MFN Principle?

The Most Favoured Nation (MFN) principle is one of the oldest principles of international trade law pre-dating, by centuries, the 1947 General Agreement on Tariffs and Trade (GATT). MFN is a reciprocal privilege awarded by one nation to another in international trade. The receiving nation is provided with a guarantee that it will receive all trade advantages, such as lower tariffs or easier access for its services suppliers, which its trading partner may grant to any third country in the future. In essence, MFN status ensures that a trading partner will not be treated worse than third countries in subsequent trade agreements. The MFN is the principle of non-discrimination now enshrined in Article 1 of the GATT 1994 which states:

".any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties."

In the context of the WTO, the MFN Clause grants any concession or privilege given by one country or customs territory to another, unconditionally to all other WTO Members. Therefore, non-discrimination is one of the basic principles of the WTO and of international trade.

What is the Enabling Clause?

At the end of the Tokyo Round of trade negotiations in 1979, the GATT Contracting Parties adopted the Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries (commonly known as the Enabling Clause). The Enabling Clause was adopted with the intent of granting, on a permanent basis, preferential treatment to developing countries under the Generalised System of Preferences (GSP) and among developing countries in whatever trade arrangements they choose to negotiate among themselves. Paragraph 2(c) of the Enabling Clause, provides for developing countries to negotiate free trade agreements (FTAs) among themselves in order to promote south/south trade and recognises other forms of preferential trade arrangements among developing countries. Developing countries negotiating under this provision would be able to apply the provisions of GATT Article XXIV, dealing with free trade agreements and customs unions, in a more flexible manner. This provision provides, in the context of special and differential treatment, for:
"Regional or global arrangements entered into amongst less-developed contracting parties for mutual reduction or elimination of tariffs and, in accordance with criteria or conditions which may be prescribed by the Contracting Parties for the mutual reduction or elimination of non-tariff measures on products imported from one another."

The provisions of GATT Article XXIV to be applied with greater flexibility, i.e. in a more limited manner, under the Enabling Clause include:

1 Lower thresholds to determine 'Substantially all trade' ie the percentage of tariff lines or goods trade to be liberalised by the parties;

2 Elimination of duties and other restrictive regulations of commerce; and

3 The length of the transition period.

Since 1979, about 26 trade arrangements have been notified to the WTO under the Enabling Clause of a total 364 free trade agreements notified to the GATT/WTO. Twenty (20) or more FTAs among developing countries have been notified under Article XXIV. In fact, it should be noted that Caricom, established in 1973, was notified under Article XXIV of GATT and no action has ever been taken to have it transferred to the Enabling Clause.
The Enabling Clause remains part of the WTO's legal framework and is still available to developing countries, if they wish to use it.
MFN and Free Trade Agreements (FTAs)

A free trade agreement (FTA) is a preferential arrangement (a discriminatory trade measure) among a limited number of countries or customs territories which takes liberalisation beyond the level existing in the WTO, ie it is said to be 'WTO plus'. Such arrangements negotiated and notified under Article XXIV of GATT 1994 or the Enabling Clause are exemptions from the MFN principle of GATT Article I. FTAs negotiated and notified under Article XXIV of the GATT can be among developed countries; developed and developing countries, or among developing countries, if they so agree. The recently concluded CARIFORUM-EC EPA is one such example of an FTA between developed and developing countries.

In order to protect the interests of either party or parties, a free trade agreement can itself contain an MFN provision which has unconditional or conditional obligations. Therefore, should one of the parties conclude a similar trade agreement with a third country on better terms, the MFN provision will kick-in to ensure that the other party to the first agreement will not be treated worse than the third country in the new agreement.

Examples of MFN provisions in FTAs abound. The North American Free Trade Agreement (NAFTA) and other US trade agreements with countries such as Australia, the CAFTA-DR, Chile, Jordan, Morocco and Singapore all contain MFN provisions (particularly with respect to investors and investments). The EU tends to include clauses stating that the Parties shall review the respective trade agreement after a specified period of time with a view to further deepening liberalisation and reducing or eliminating remaining restrictions on a mutually advantageous basis. Given the major developed countries' interests in services and investments, their MFN provisions in trade agreements are trending towards those areas.

The MFN Clause and the Cotonou Agreement
The ACP/EU Cotonou Agreement concluded in 2000 included a limited MFN Declaration carried over from previous Lomé Conventions. This MFN provision only kicked-in if the ACP countries granted more favourable treatment to other developed States, which the EC would have typically perceived as its competitors.

Declaration XXXI of the Cotonou Agreement stated that:
"..the ACP States shall grant the Community treatment no less favourable than that which they grant to developed States under trade agreements where those States do not grant the ACP States greater preferences than those granted by the Community."

The MFN Clause and the EPA

Today, the EC's perception of who its competitors are has changed. It is no longer just developed countries, but also the major developing countries such as Brazil, China, India and, to some extent, South Africa. Trade and investment between these countries and the ACP have been gradually increasing.

The EC was keen to bring the MFN Declaration of the Cotonou Agreement into the EPA and extend it to include these more advanced developing countries. Article 19 of the EPA, the MFN clause, was included in the Agreement after long and difficult negotiations as CARIFORUM had reservations about retaining the text and extending it to the more advanced developing countries.

Article 19 actually states:

"More favourable treatment resulting from free trade agreements
1 With respect to matters covered by this Chapter, the EC Party shall accord to the CARIFORUM States any more favourable treatment applicable as a result of the EC Party becoming party to a free trade agreement with third parties after the signature of this Agreement.

2 With respect to matters covered by this Chapter, the CARIFORUM States or any Signatory CARIFORUM State shall accord to the EC Party any more favourable treatment applicable as a result of the CARIFORUM States or any Signatory CARIFORUM State becoming party to a free trade agreement with any major trading economy after the signature of this Agreement.

3 The provisions of this chapter shall not be so construed as to oblige the EC Party or any Signatory CARIFORUM State extend reciprocally any preferential treatment applicable as a result of the EC Party or any Signatory CARIFORUM State being party to a free trade agreement with third parties on the date of signature of this Agreement.

4 For the purposes of this article, 'major trading economy' means any developed country, or any country or territory accounting for a share of world merchandise exports above one per cent in the year before the entry into force of the free trade agreement referred to in paragraph 2, or any group of countries acting individually, collectively or through an free trade agreement accounting collectively for a share of world merchandise exports above 1.5 per cent in the year before the entry into force of the free trade agreement referred to in paragraph 2.

5 Where any Signatory CARIFORUM State becomes party to a free trade agreement with a third party referred to in paragraph 2 and such a free trade agreement provides for more favourable treatment to such third party than that granted by the Signatory CARIFORUM State to the EC Party pursuant to this Agreement, the Parties shall enter into consultations. The Parties may decide whether the concerned Signatory CARIFORUM State may deny the more favourable treatment contained in the free trade agreement to the EC Party. The Joint CARIFORUM-EC Council may adopt any necessary measures to adopt the provisions of this Agreement."

A reading of this Article will reveal that the EPA has conditional MFN obligations as it applies only to major trading economies with a share of world merchandise exports above 1% per annum. Therefore, this does not prevent CARIFORUM from giving more favourable treatment to countries trading below this level. Moreover, it does not prevent CARIFORUM/Caricom from negotiating FTAs with advanced developing countries and offering them levels of concessions similar to that accorded to the EC. The MFN obligation in the EPA applies to both the EC and CARIFORUM. Therefore, CARIFORUM also stands to benefit from being extended future trade concessions by the EC should the latter grant third countries better access than it gave to CARIFORUM. Furthermore, the MFN treatment is not automatic as paragraph 5 provides for the parties to enter into consultations in order to decide on its application.
Will the MFN Clause of the EPA undermine the Enabling Clause?

In the WTO, countries such as Brazil have expressed concern about the MFN Clause in the EPA and its implications for the Enabling Clause. These countries have requested that the matter be considered in the General Council of the WTO.
There have been Legal Opinions from various sources which have stated that the MFN Clause of the EPA may or may not affect trade agreements negotiated under the Enabling Clause.

The matter of the relationship between the EPA MFN Clause and the Enabling Clause remains on the agenda of the General Council and will no doubt be aired when the EPA is notified to the WTO and reviewed in the Committee on Regional Trade Agreements (CRTA).

It is hoped that through this article we have been able to clarify issues related to the MFN in the EPA and its relationship the Enabling Clause.

Dr Kenneth Baugh is Jamaica's deputy prime minister and minister of foreign affairs and foreign trade

This is the century for the person of colour — Judge Joe Brown

The future shines for Chyna

Dr Donna Hope, hopes for the best of Sting