The Most-Favored-Nation Clause: An Analysis With Particular Reference to Recent Treaty Practice and Tariffs 9780231895590

Table of contents :
Preface
Contents
I. Introduction
II. Nature of the Most-Favored-Nation Clause
III. Appearance of the Most-Favored-Nation Clause in Treaties
IV. The Scope, Interpretation, and Meaning of Most-Favored-Nation Clauses
V. A Modern Definition, Classification, and Analysis
VI. A Modern Definition, Classification, and Analysis (Continued)
VII. Limitations on Most-Favored-Nation Treatment
VIII. Limitations on Most-Favored-Nation Treatment (Continued)
IX. Exceptions to the Most-Favored-Nation Clause
X. Evaluation and Criticism of the Most- Favored-Nation Clause
XI. Evaluation and Criticism of the Most-Favored- Nation Clause (Continued)
XII. Summary and Conclusion
Selected Bibliography

Citation preview

The Most-Favored-Nation Clause

The Most-Favored-Nation Clause AN ANALYSIS WITH PARTICULAR REFERENCE TO RECENT TREATY PRACTICE AND TARIFFS

RICHARD CARLTON SNYDER Assistant Professor of Politics, Princeton University

KING'S CROWN PRESS Columbia Unlmr$lty. New York 194«

Copyright RICHARD

1948

by

CARLTON

SNYDER

P r i n t e d in the U n i t e d S t a t e s of by Edwards

KING S CROWN is o d i v i s i o n of C o l u m b i a

America

Brothers, A n n A r b o r , M i c h .

University

PRESS

Press o r g a n i z e d

for the

purpose

o f m a k i n g c e r t a i n s c h o l a r l y m a t e r i o l a v a i l a b l e at m i n i m u m cost. T o w a r d thot e n d , the p u b l i s h e r s h a v e a d o p t e d e v e r y r e a s o n a b l e e c o n o m y e x c e p t such os w o u l d substantially

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by

format.

the a u t h o r ,

University

Press.

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without

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the u s u a l

presented editorial

DEDICATED TO MY MOTHER AND FATHER IN GRATEFUL TOKEN OF THEIR UNQUESTIONING LOYALTY AND UNFAILING SUPPORT WITHOUT WHICH MY ROAD WOULD HAVE BEEN TOILSOME INDEED.

Preface The pretensions of this work are modest; it Is ail Introductory analysis of the most-favored-natlon clause. The supporting material 13 drawn primarily from recent treaty practice covering the period 1919 to 1939; emphasis is upon tariffs, although other subjects embraced by the clause are Included. This study Is n o t Intended to be an historical account of the development of the most-favored-natlon clause; the author intends to prepare such an historical work as a sequel to the present one. Frequent and important references are made to the most-favored-natlon policy of the U n i t e d States, but no systematic attempt has been made to duplicate or Improve upon the studies of several competent writers who have devoted themselves to American practice in the past decade. It must be admitted that the present analysis has a strong legal flavor, being, of course, based upon the scope and intent of the most-favored-natlon clause as expressed in treaty provisions; however, the author has tried all the w a y through, and particularly in Chapters V I I I , X, and XII, to show clearly that the clause does not function In a vacuum, but is related to a complex of factors. General descriptions of the clause in the English language are few and fragmentary; French and Germ a n studies are not only more numerous but more comprehensive. A l l existing studies w h i c h have come to the author's attention are out of date. The analysis to follow attempts to synthesize the outstanding secondary materials, to provide a new methodology for the definition and classification of forms of the clause, and to take Into consideration new developments. Perhaps such a presentation will contribute in a small way to filling the sizeable void In the literature of an important subject. I must thank Professor Nathaniel Peffer, under whose guidance this study was prepared, for his gentle prodding, patience, and critical acumen. To Dr. M i c h a e l Florlnsky of the Department of Economics, Columbia University, I owe my original Interest In the subject; his friendly and valuable advice have continued. I am

Viii

THE MOST-FAVORED-NATION CLAUSE

Indebted also to Professors Philip Jessup and Arthur Nussbaum for many improvements in the manuscript. My good friend, Fritz Stern, of the staff of the College of Pharmacy, Columbia University, laboriously checked many of the notes. There are no vords to acknowledge the helpfulness of m y wife. R.C.S. Princeton, New Jersey June 18, 1947

Contents Chapter I - Introduction

1

Chapter II - Nature of the Most-Favored-Natlon Clause..9 A . Definition and Purpose B. Most-Favored-Nation Treatment and National Treatment C. Legal Nature of the Most-Favored-Nation Clause 1. Juridlclal Character of Parties to the Clause 2. Specific Legal Nature of the Clause Chapter III - Appearance of the Most-Favored-Nation Clause In Treaties A . Nature of Treaties of Commerce B. The Most-Favored-Nation Clause In Commercial Treatles-The Classical Analysis 1. Basic Functions of the Clause (a) Positive or Negative (b) Mutual or Unilateral (c) Limited or Unlimited (d) Conditional or Unconditional 2. Classification and Explanation of Various Resulting Forms (a) Non-treaty Form (b) Treaty Form (c) Vague and Precise Forms

16

Chapter IV - The Scope, Interpretation, and Meaning of Most-Favored-Nation Clauses 33 A. The Scope of Most-Favored-Nation Treatment B. The Interpretation of Most-Favored-Nation Clauses C. Concept of the Most-Favored-Nation Clause Chapter V - A M o d e r n Definition, Classification, and Analysis A. Basic Forms of the Most-Favored-Nation Clause 1. The Simple Form 2. The Conditional Form 3. The Complex Clause (a) Less Detailed (b) More Detailed B. Variations in Wordings and Subject Matter of Most-Favored-Nation Clauses

50

X

THE MOST-FAVORED-NATION CLAUSE Chapter V I - A M o d e r n Definition, Classification, and Analysis - Continued 78 A . Delineating Clauses B. Customs Formalities, etc. C. Equivalents of Most-Favored-Natlon Treatment D. Contingent Clauses E. The Clause a n d Recent Trade Practices F. Miscellaneous Clauses G. Protective Clauses 1. Insuring the W i d e s t Application, of Equality of Treatment 2. Preventing Disadvantageous Results from the A p p l i c a t i o n of Mo3t-Favored-Nation Treatment Chapter V I I - Limitations on Most-Favored-Nation Treatment A . Direct Limitations B. Indirect Limitations 1. Sanitary Provisions 2. Refinement of Tariff Classification 3. Penalty Duties 4. Countervailing Duties Chapter V I I I - Limitations on Most-Favored-Natlon Treatment - Continued A . Recent Trade Practices and Commercial Policy B. Non-Tariff Trade Controls 1. Import Quotas 2. Exchange Control 3. Clearing Agreements 4. Import Monopolies C. Commercial Policy 1. Bilateralism a n d Reciprocity 2. Preferences and Regional Agreements D. Summary

106

1}1

Chapter IX - Exceptions to the Most-Favored-Natlon Clause 156 A . The Frontier Traffic Clause B . The Customs U n i o n Clause C. Exceptions Relating to Domestic Laws a n d Regulations D. Sanitary Restrictions E. Other International Agreements as a Source of Exceptions F. Colonies, Protectorates, Mandates, a n d Possessions G. Coastal Trade Clause

CONTENTS

xi

H. "Particular Nations" Exception Clause I. Miscellaneous Exceptions Chapter X - Evaluation and Criticism of the MostPa vored-Nation Clause A. Some Arguments Considered 1. The Clause Versus Regional Agreements 2. The "Excessive Liberality" of the Clause 3. The Restrictive Nature of the Clause The Most-Favored-Nation Clause and High Tariffs 5. The Most-Favored-Nation Clause and Tariff Bargaining B. The Most-Favored-Nation Clause and Tariff Structures

186

Chapter XI - Evaluation and Criticism of the MostFavored-Nation Clause - Continued 211 A. The Conditional and Unconditional Forms of the Most-Favored-Nation Clause B. The Most-Favored-Nation Clause and Quantitative Restrictions on Trade Chapter XII - Summary and Conclusion

23^

Selected Bibliography

251

I Introduction

i IT IS IMPORTANT at the outset that the reader have a clear understanding of the historical factors which are responsible for the origin and development of the mostfavored-nation clause. While there was trade among ancient civilized peoples, there was little organized exchange in the modern sense of the word, nor was that- trade one of the vital factors in the lives of most human beings. With some exceptions it did not consist of the exchange of surplus production, but was rather the means of acquiring luxuries. Furthermore, groups of people were usually independent of one another economically. Trade grew considerably during the Greek and Roman Periods, but because the commercial centers were at the same time centers of far-flung empires (Syracuse, Carthage, and Athens, for example), business interests did not particularly fear "foreign competition"; nor was there "protectionism" of the kind which developed after the Medieval Period.^ In the Middle Ages, the real control of trade rested with local guilds and corporations - largely because of the lack of effective centralization. Trade was fundamentally "local." In general the economic system of the sixteenth and early seventeenth centuries was also a simple one, and the bulk of the world's population, as in earlier days, lived in small agricultural villages. Artisans and craftsmen, the only groups interested in an extensive sale of wares, were decidedly in the minority. Local needs and local markets were therefore the chief concern. Traders and products of 1. Clive Da.y, A History of Commerce (New York, 1911»-, revised* p . 20.

2

THE MOST-FAVORED-NATION CLAUSE

other communities were excluded to protect these interests . Feudalism slowly disintegrated, accompanied by coalescense into larger political units; growing regional interdependence, coupled with increasingly centralized political control and authority, created the modern nation-state. The barriers to commerce, which surrounded local medieval centers of trade and industry, gradually gave way before the impact of growing nationalism. But this did not mean the disappearance of existing tariffs; the consolidation of petty principalities merely caused the broadening out of old municipal trading regulations into a protective tariff system designed to foster all industry within a common political frontier. Tariffs have become synonomous with modern economic life because of their close relation to nation-building. The introduction of the factory system brought great industrial centers, concentration of production, division of labor, and world-wide trade. The development of specialized techniques of production made "mass" output an absolute necessity. Groups engaged in such production became dependent for their livelihood upon the exchange of manufactured goods with other groups outside the national boundary. Broadly speaking, nations have created and marketed those manufactures and products to which they are suited by nature and the resources at their command. The inevitable corrollary has been, of course, that nations' have had to buy from other nations those goods which they could not themselves produce or produce as cheaply. International trade, then, is based upon the territorial division of labor; it arises, as indicated, because a nation specializes in the production of particular goods and services, thus producing more than enough to satisfy domestic demands. Obviously, it must export the surplus to continue the specialization. Somewhat preceding, and certainly concurrent with, the above economic developments were extensive explorations which opened up almost the entire world to unprecedented commercial intercourse. Given the resulting enormous Increase of trade, both in amount and importance, and given the growth of national unity after the Middle Ages, it was only natural that the state should emerge as the champion and protector of the interests of economic groups within its borders. The new nationalism was self-conscious and self-assertive.

INTRODUCTION

3

Economic thought and policies reflected this Influence clearly, and with the advent of Mercantilism nations began to pay more definite attention to transactions with other nations than at any previous time In history. From early English and Dutch commercial rivalry, through the Zollvereln and the Cobden Treaty, down to the present day, the exchange of goods between national economies has become so vitally Important to modern civilization that It may truthfully be said that one of the most, if not the most, significant peace-time objective of foreign policy is the achievement and preservation of favorable trading conditions. II By national policy in the sphere of international economic relations is meant a course of action taken by a government directed toward influencing the movement of goods, services, and factors of production across national frontiers. The exclusive right of a nation to regulate its own economic system is universally recognized by international law. Once economic activity developed to the point where it expanded beyond the domestic scene, governments claimed, and still claim, the right to take whatever steps they deemed necessary to extend or protect the welfare of their citizens or enhance the power of the state. In the exercise of this right, states have had recourse to a practice which, more than any other, has disturbed international economic relations, namely, discrimination . For each nation obviously has pursued policies most conducive to the preservation of its own economic interest and security, with little or no regard for the effects of such action upon other nations. The concept of economic health and progress also differs with particular states. Out of this conflict in aims has come a conflict in methods. General and specific discriminations have led to long and bitter rivalries and controversies. The attempt to settle these problems is mirrored in the negotiation of treaties of commerce, which constitute, in their modern form, a whole new body of international practice. The parties to a commercial treaty are themselves the authors of the law governing their relations; they are the courts which interpret this law, and the officers or agencies which enforce it. In this respect,

4

THE M O S T - F A V O R E D - N A T I O N

CLAUSE

commercial a g r e e m e n t s are unlike ordinary civil contracts because there is no ultimate a u t h o r i t y to w h i c h disputes can be c a r r i e d . 2 C o n s e q u e n t l y , these agreements represent a compromise of national policies in the field of international economic relations; they recognize and put into practice certain rules of conduct indispensable to amicable trade relations. The degree to which c o m m e r c i a l treaties remove confusion, check discrimination, and diffuse confidence is normally conceded to be one m e a s u r e of their e f f e c t i v e n e s s . The m o s t - f a v o r e d - n a t l o n - c l a u s e m a y be termed "the cornerstone of all m o d e r n c o m m e r c i a l treaties." 3 W i d e acceptance of the p r i n c i p l e of m o s t - f a v o r e d - n a t l o n treatment as a basis of trade policy has undoubtedly resulted in the reduction of discrimination. The clause might be further described as the lubricator of commercial relations, a n e c e 3 3 a r y reagent without which smooth and healthy economic intercourse b e t w e e n states becomes difficult. In view of the long and important use of the clause, It is at once surprising and unfortunate that, in comparison with other phases of c o m m e r c i a l policy, relatively little has been w r i t t e n about it; while Its significance has not been completely overlooked by students of international trade relations, its study has been n o t i c e a b l y n e g l e c t e d . H a v i n g been incorporated into a vast and complex International treaty structure under w i d e l y varying conditions and in m a n y forms, the clause has solved certain problems and created others. It has been alternately hailed and denounced, practiced and discarded, by Individual nations. Ill The remainder of these introductory remarks will be devoted to a statement of qualifications and other important considerations w h i c h must be kept in mind throughout the entire d i s c u s s i o n to follow, concluding w i t h a brief w o r d on the scope and organization of this study. The investigator'3 task is not an easy one, because it is h i g h l y unrealistic to analyze the operation 2. tlement 3. Journal

But nations do frequently make provision for Judicial setof treaty disputes. See Chapter IV. Stanley Hornbeck, "The Most-Favored-Nation-Clause," American of International Law, vol. Ill, 1909, p. 595-

INTRODUCTION

5

of the moat-favored-nation clause apart from the complex history of commercial policy. The later developments In the clause can hardly be explained by reference to its wording in treaties alone. A n d it is only by including a broader view of world economic relations that the functions of most-favored-nation treatment can be accurately set forth. The student of international relations is confronted with a fact of fundamental importance, namely, that all elements in the affairs of nations are closely interrelated. This is particularly true of world economic problems. No account of one phase of these problems can be undertaken without some recognition, whether implicit or explicit, of how that phase complements other aspects of a total situation. Failure to understand that the clause represents, and is the Instrument of, the principle of equality of treatment in foreign trade w i l l lead to many misunderstandings. It belongs to that body of International practice w h i c h has an indeterminate status subject to the changing w i l l of nations. To all Intents and purposes, each time thé principle of equality of treatment is incorporated in a commercial treaty a new clause is born. The essence of the clause is not subject to change: the importance to nations of continuing to receive equal treatment in'their foreign commerce is obvious. It is necessary, however, w h e n dealing w i t h social institutions to distinguish between theory and practice. In the evolution of such an institution, the former usually remains substantially intact, while the latter is subject to change. So it is w i t h most-favored-nation treatment. The rule of equality of treatment constitutes the theory, and the clause, as it is Incorporated in treaties, constitutes the practice. The practice of granting most-favored-natlon treatment has been altered from time to time through the influence of numerous factors, but these modifications have not affected the principle behind the clause. Since the clause Is a means to an end--the end being the application of the rule of equality of treatment in commercial r e l a t i o n s — t h e different forms or versions of the clause are different expressions of the commercial policy of different states directed toward primarily the same goal. It follows then, that the principle of equality of treatment may be one thing in theory but often another in practice; it is important to keep this point in mind. This additional observation should be made:

6

THE MOST-FAVORED-NATION CLAUSE

the clause la accepted as a part of international law and 13 open to varied interpretations by writers and nations alike; hence in the absence of a higher authority, the criterion for such interpretation has too often been personal bias or national selfishness to the exclusion of all other considerations. Furthermore, the clause is imprimis a pledge of obligation (and also the source of certain rights), which means that frequently it Is made with strong reservations. The practice of granting most-favored-nation treatment tends to draw nations together, to make their commercial policies inter-acting and to some extent Interdependent. And yet If the "post-1919" era has had any one outstanding attribute a3 regards International relations, It Is that there prevailed a hypersensitive, nationalistic mania for autonomy of action. On the one hand, the clause is a tacit admission that trade barriers are one of the subjects of state concern least susceptible to exclusively domestic determination; on the other hand, complete control over commercial policy is a legal right no nation can or does deny to another. To the extent that the Inclusion of most-favorednatlon treatment In treaties of commerce does draw nations together, such practice may be said to represent Inter-nationalism in foreign trade as over against autonomous, self-containing, and discriminatory policies. From the point of view of policy as such, however, the distinction between national and International Is unreal. All policies have international repercussions, and policies are always national or nationalistic In that they promote the interests of the nation which adopts them. Most-favored-nation treatment is granted for reasons of national self-lnterest--to protect trade from discrimination abroad; but it differs from economic nationalism In that it places the commercial welfare of nations granting it on a common ground. Because all this is true, the history of the clause has been characterized by pressures and counter-pressures revolving about the question of whether the policy of equality of treatment was best calculated to serve the national interest . The employment of the most-favored-natlon clause in commercial treaties has progressed through what may be termed cycles, the same cycles which mark the swing of foreign trade policies from "liberal" to "autarchlcal' (or points in between) and back again. The most-favored-

INTRODUCTION

7

n a t i o n clause, In lt3 frequency of appearance, Its form, Its scope, and its effectiveness, has been subject to the same Influences w h i c h shape foreign policy in general; the effect of these Influences has b e e n more indirect and of less Intensity, of course, than in the broader aspects of policy. The point to be remembered is that the clause does not exist in isolation; it is inextricably bound up w i t h existing international conditions. To repeat, the clause is a means to an end, and it has b e e n conditioned by tha force w i t h w h i c h that end has b e e n sought by a given nation at any given time, as w e l l as b y the existence of opposing ends held by other nations and the Instruments of policy which they in turn have employed. Until the outbreak of war in Europe in September, 1939» the clause was passing through a cycle, Its operation carried out in a world economy w h i c h h a d b e e n frightened into attempts to maintain economic security by national action regardless of ultimate results. Obviously disastrous and admittedly impractical policies h a d been undertaken In moments of emergency. In the face of International economic collapse, nations ran to cover and had erected high barriers around their economies, further choking off international trade and forcing their peoples to pay the heavy price of bilateral balancing of trade. Along with the "post-1919" economic maladjustments and the depression of 1929-1932, there developed a comprehensive intervention by governments in the economic life of nations. All In all, rapid a n d far-reaching alterations In commercial policy have seriously impaired the effectiveness of the most-favoredn a t i o n principle. A n analysis of the clause Is therefore particularly pertinent today because the disrepute recently surrounding Its operation has given rise to the opinion that it has outlived its usefulness. It is felt in some quarters that new methods of trade control, born of emergency, have become permanent features of economic foreign policy, thereby necessitating a new code of conduct in international commercial relations. For this reason, consideration w i l l be given to the present status of the clause, to the case against its continued employment, and to the clarification of its w e a k nesses In relation to the so-called "new methods of n o n tariff control of trade." The future decision of n a tions as to whether they w i l l adhere to the clause as a fundamental basis of commercial policy holds implications

8

THE MOST-FAVORED-NATION CLAUSE

of an extensive nature. In this connection the present American policy of most-favored-natlon treatment demands careful attention. After considerable change during the past eighteen years, the United States has nov embarked upon a course hitherto untraveled by the makers of Its tariff policy, namely, the establishment of part of the tariff wall by international agreement. The aims, technique, and success of this new program are of great importance to the evolution of the clause. IV Now a word as to the plan and scope of this study. The discussion to follow is limited to a consideration of the most-favored-natlon clause in relation to commerce only. Such subjects as the status of consuls and the treatment of nationals are encompassed by the principle of equality of treatment but they are treated only incidentally here.4 Moreover, the Par Eastern history of the clause will be alluded to only Incidentally. In justification of this it can be said that it is In Its American and European practice that the granting of most-favored-natlon treatment assumes importance commercially. Until modern times the clause was more or less a mere corollary to the interplay of balance of power politics in the Orient. Finally, the analysis of the clause will end with the outbreak of the present war In Europe. Wars have had their effect upon the clause, and the present one may be more Influential than any other. But in wartime normal commercial relations are either suspended or dislocated, and the clause is Imbedded in a vast treaty structure which has been largely Inoperative during the course of this conflict. Even if it were possible to do so, it is too early to take Into account developments of most-favored-nation treatment during the past six years.

I*. 'Of all the matters to which the most favored nation clause is applied, those which touch on navigation and ccemerce are most vital."

Baron B . Nolde, "Droit et technique des Traitée de Com-

merce," Recueil des Cours de la Haye, (Paris, 1925), II 192U, Uli.

II Nature of the Most-Favored-Nation Clause

WITHOUT DETAILED CONSIDERATION of the nature and purpose of the clause, its appearance in commercial treaties, its concepts and interpretation, its scope, and its place among the principles of International law, no proper understanding of most-favored-natlon treatment as an instrument of commercial policy is possible. As a necessary prelude to the analysis which follows, an indispensable minimum of material has been summarized from the pertinent and complex legal and technical data. A. M T I i n T I O H A5D PURPOSE

It has always been a matter of vital concern to each state that its foreign commerce receive treatment at the hands of any particular state at least as favorable as that which the latter accords to other states. Quite naturally, nations are very anxious to obtain the greatest possible advantages in international commercial agreements. But nations are also equally anxious (if not more so!) to make sure that any concessions or guarantees extended to the commerce of other nations w i l l likewise be extended to them, or in other words that their commerce and Industry shall not fall inter a position of competitive disadvantage In the world market. As a result of this interest an instrument has been devised which will automatically accomplish the desired end by preventing oversight and reducing the necessity for repetition in treaties. That instrument is the mo3t-favored-nation clause, the purpose of which 1. By Implication, the discussion in this chapter pertains to the "unconditional" form of the clause.

The "conditional" form of

the clause is discussed in Chapters 5 and 11.

THE MOST-FAVORED-NATION CLAUSE

10

is to prevent the establishment of preferences or distinctions in the granting of trade concessions.2 Definitions sometimes create more difficulties than they solve. Many definitions of the clause have been written; all of them in one way or another leave something to be desired. The following is presented not as a perfect definition but as one best calculated to aid the reader in his understanding: A most-favorednatlon clause Is a provision, generally Inserted in a commercial agreement between two states, which obligates the contracting parties to extend all concessions or favors made by each in the past, or which might be made in the future, to the articles, agents, or Instruments of commerce of any other state in such a way that their mutual trade will never be on a less favorable basis than is enjoyed by that state whose commercial relations The fundawith each is on the most favorable basis. mental point is equality based upon the treatment received by any third country.4 To secure this equality is the purpose for which the clause exists. The clause is not, and should not be represented to be, anything more than the legal embodiment of a precaution against discriminatory treatment of a given nation's foreign business interests and export trade.5 2. Handbook of Commercial Treaties.

(Washington, 1922);

p. 17; Kelsey, "The Problem of the Most-Fa.vored-Na.tion Cla.use," Cumulative Digest of International Law, Vol. Ill, Bulletins 8-9. Feb. 6, 1933), P. 16. 3. Author's definition.

See also: Calvo, Droit International

Théorique en Fra.ctlq.ue, ( Vth ed., 1887) H I , 365.

(This can be

called the "classic" definition); Ebner, La. Clause de la nation la plus favorisce en droit international public, (Paris, 1931) pp. 91-92.

Cf. definitions quoted In Ito, La. Clause de la nation

la. plus favorisée, (Paris, 1930) p. 17. Ito, op. cit., p. 18; Secretary Sherman to President Buchanan, Moore's Digest, V, 278; Gregory, Tariffs: A Study in Methods, (London, 1921) p. ^57; Grot Kopp, Breaking Down the Tariff Walls, (London, 1930), p. 59; Royal Institute of International Affairs, The Most-Fa.vored-Na.tlon Clause as an Instrument of Commercial Policy, Information Department Memorandum, No. 7, 1933; Visser, Revue de Droit International, Series 2, TV (1902), 66; also Ebner, op. cit., p . 102. 5. Eist, "Comments on the Pa.st and Future of the Most-FavoredNation Clause in its Limited and Unlimited Forms," Improvement of Commercial Relations between Nations, (Paris, 1936), p. 111.

NATURE OF THE MOST-FAVORED-NATION CLAUSE

11

M. Farra makes the significant point that the presence of the clause In an agreement does not create a "favored nation." It places all nations on an equal footing vis à vl3 the nation receiving the most favorable treatment, thus in reality creating "le traitement de la nation étrangère la plus favorisée."6 "Equality of treatment" as such must not be confused with "most-favored nation-treatment." This may appear surprising In view of preceding comments, but It Is clear that although the clause represents the former and tends toward It In that a general leveling of the manner In which nations treat each other's commerce usually results from lt, T there is In fact a distinction between the two. A nation can extend equality of treatment simply by unilateral choice without any contractual obligation to that effect. In other words, the principle of equality can exist as an element of policy Independently of the most-favored-natlon clause. Functionally, the clause exists because nations have been willing to assume a legal obligation to extend equality of treatment. It is, therefore, possible, theoretically, for a state to have most-favored-nation pledges with only some countries and yet apply equality of treatment to all. B. MOST-FAVOKED-NATION TREA1MEHT AMI) NATIONAL TREATMENT Before proceeding further it is necessary to draw another distinction. National treatment, or "inland parity," and most-favored-natlon treatment, or "foreign parity," are by no means identical. Both are antidiscriminatory, both guarantee equality. The difference between them lies in the choice of base upon which equality Is to be measured. By granting inland parity, a nation places the citizens of a foreign country on an equal footing with Its own citizens, not with those of "any other foreign country." These two policies are connected by treaty or otherwise, when two states promise each other national treatment (inland parity) 6. Farra, Lea Effets de la clause de la nation la plus favorIsee et la specialization des tarlfs do"«riier8, (Paris, 1910), p. 57. 7. Farra, op. clt., p. 50. 8. Grunzel, Economic Protectionism.

(London,

1916),

p. 171;

Culbertson, International Economic Policies, (New York, 1925), p. 27.

THE MOST-FAVORED-NATION CLAUSE

12

and then promise other states most-favored-nation treatment; in such a case, the latter group may legitimately claim that they are also entitled to be treated on a "national basis," for otherwise they are not being treated as favorably as the most—favored-nation (assuming that there is a material difference in treatment as a result of different promises made.)8 Sometimes inland parity and foreign parity (the clause) are provided for side by side in the same treaty.10 But it must not be overlooked that the national standard of equality and that of the most-favorednation may conflict. For example, if national treatment, as provided in a treaty containing the clause Itself, endows one of the contracting parties (a foreign power) with some favor other than that regularly provided by most-favored-nation treatment, this favor constitutes a discrimination against a third nation provided it also is entitled to non-discriminatory treatment.- Differentiation between nationals and foreigners (for example, between imports on the ground of the nationality.of the Importer) is capable of being practised, yet it is not; discrimination on the ground of the nationality of the carrying ship is, however, not so much frowned upon! 11 The choice between the two standards under discussion depends upon the relations existing between the nations at a given moment. Since the primary concern here is with international trade, it may be concluded that national treatment would apply only seldom to say, customs, because except for the "colonial" trade national produce is not imported. On the other hand, a nation's vessels enter both its own and foreign ports in the same manner as, and in competition with, the vessels of other nations .

9. Gregory, op. clt., p. bk-3. 10. Commercial Treaty between Austria-Hungary and Bulgaria, December 1 8 9 6 :

"With regard to the ... advantages connected there-

with, the Bulgarian Government obligates Itself to treat ... goods and products ... of the Austro-Hungarlan Monarchy ... on a basis of complete equality with the goods of the most-favored-nation or with domestic products." 1889,

A treaty between Italy and Greece, March-April

speaks of "favors which have been or will be accorded to na-

tionals or to the subjects of the most favored state." clt., p. 5 9 .

Also Infra, p . 101.

11. Gregory, op. clt., p. IjM.

Farr, op.

NATURE OF THE MOST-FAVORED-NATION CLAUSE

13

C. LEGAL NATURE OF THE MOST-FAVORED-NATION CLAUSE

From what has been said so far, it is evident that the most-favored-natlon clause constitutes, in essence, a rule of law of equality of treatment. It takes the form of a provision of a contract. It is a legal act qualifying as an International engagement. The clause may be merely a part of an international contract, or it may be an international contract in itself.12 Such a contract provides a method for the practical application of a principle.13 The principle, that of equality of treatment, is realized by a stipulated guarantee that each of the contracting parties will accord mutually, point for point, any or all trade concessions extended to a third nation. The parties to a treaty containing the clause do not know in what way, or when, a country will be most favored.14 All that these parties do know is that they must generalize concessions granted to any third country. 1. JURIDICAL CHARACTER OF PARTIES TO THE CLAUSE.

Three

dis-

tinct and separate countries are concerned, either implicitly or explicitly, in a conventional most-favorednation pledge: the two contracting parties, and a third unknown country, the most-favored-nation. This may seem obvious and somewhat elementary, but it is necessary to remember that unless the third nation is legally presupposed, the clause is unnecessary.15 Each of the contracting parties is the party assured (assurée) and the party obligated (obligée). When a third country is favored, the clause is brought into operation. As to the legal character of parties to the clause, any organism capable of concluding commercial conventions wittf absolute and material economic independence both internally and externally may quality. 10 From this it follows that the parties must be economic units, such as statés, customs unions, half 12. Nolde, op. cit.,/ p. 1*11. * 13. Hepp. Theorie Generale de la. clause de natlon la plus faYorlsee, (Paris, 1911*) p. 60. 1^. Loc. clt. 15. Ito, op. clt., p. 30. 16. Elmer, op. clt., p. 9k.

14

THE MOST-FAVORED-NATION CLAUSE

sovereign states, 1r dominions, protectorates, mandates,18 colonies,19 or federated states. 20 2. SPECIFIC LEGAL NATURE OF THE CLAUSE, (a) Most-favored-nation treatment may be established In three ways. 21 The first is achieved by an administrative act, that Is, by a law or decree. The French law of February 20, 1891, providing a mutual most-favored-natlon regime in the commercial relations between France and Greece may be cited as an example : A partir de la promulgation do la présente loi et Jusqu'au premier février 1892, les sujets, les navires et les marchandises de la Grec9 Jouiront en France, sous condition de réciprocité, du traitement de la nation la plus favorisée, tant pour l'importation l'exportation, le transit et, en general, pour ce qui concerne les operations carme relaie s que pour l'exercise du conmerce et de 1 industrie, le payement des taxes et autres impots, la protection de la propriété

industrielle. 2 2

The second consists of diplomatic action as embodied in an exchange of notes. The forms of such notes may vary but their contents are usually Identical.23 These two methods are almost always provisional until a commercial treaty can be negotiated. The third method by which equality of treatment Is extended, and the most common, is a convention or treaty. The appearance of the clause in treaties requires a chapter to Itself.24 (b) The most-favored-nation clause confers rights and Imposes obligations. This double aspect of the clause often goes unnoticed: It has become so natural that special mention Is not made of the distinction In commercial treaties. 25 The obligations are divided Into two classes, positive and negative. The positive require that each contracting party must extend to the other any favors conceded to a third nation. The 17. For example, Egypt was once a vassal of Turkey but was emancipated in economic matters in 1859. 18. Class A presumably would be the only ones to qualify. 19. Only if there exists a separate and distinct tariff regine. 20. Constituting an independent tariff unit. 21. Hepp, op. cit., pp. 14-15. 22. Ibid., p. 14. 23. Ebner, op. cit., p. 109. 24. See Chapter III. 25. Riedl, La Clause de la nation la plus favorlaoe, (Vienna, 1928), p. 6.

NATURE OF THE MOST-FAVORED-NATION CLAUSE

15

negative require that the contractants refrain from extending disadvantages to each other which are not likewise extended to third nations. In virtue of the rights conferred by the most-favored-natlon clause, the parties to a commercial treaty can claim equality with the nationals of other countries in whatever matters are encompassed by the particular clause involved. "The clause Intends to guarantee the entitled party the advantages which it does not enjoy from its proper right or its proper treaties, but which have been accorded to third powers."26 Two kinds of rights emerge: original and derived.27 The latter accrue Indirectly through the operation of the clause, and the former accrue directly as the result of a commercial treaty between two powers. Two further points bear brief mention. One Is that, generally speaking, the most-favored-nation clause is regarded as "self-executing" with no additional legislation required.28 Second, in at least two countries, the United States and Great Britain, individual importers are quaranteed protection of their rights under mostfavored-natlon treaties.28 This strengthenes the clause because it provides a concrete method of enforcement within the country which has undertaken the obligation. With reference to both of these points, it is a striking fact that in recent years there have been relatively few Interpretations of particular questions arising under the clause In the courts of the world.

26. Visser, La Clause de la nation la plus favorisée dans les traites de commerce," Revue de droit International, 1902, 2nd Series, IV, 7 9 . 27. Ebner, op. cit., p. 131. 28. U.S. Court of Customs and Patent Appeals, John T. Bill Co., Inc. T. United States, C.A.D. 57, 27 C.C.P.A. (Customs) 26, 104F (2nd) 67 (decided May 2b, 1939). 29. Honore Catudal, "The Moet-Favored-Natlon Clause and the Courts," American Journal of International Law, j l l l v , (19^1), pp. 41-55.

Ill Appearance of the Most-Favored-Nation Clause in Treaties

A. NATURE OF TREATIES OF COMMERCE

IT IS A W E L L established principle of International law that a nation m a y enter into any treaties which it deems proper and useful, provided the rights of other nations are not prejudiced thereby. Treaties of commerce comprise a particular application of this general rule. According to V o n Martens, treaties can be divided into two classes: political and social-economic J1 Treaties of commerce are a particular type of economic treaty, and in turn fall into two definite classes: (l) those relating to rights reciprocally granted in all matters concerning navigation; dnd (2) those which concern commerce proper. More specifically, these two categories (our sphere of Interest In this study) embrace such matters as: conditions of import and export, transit, warehousing, customs administration, tariffs, navigation regulations, and ownership of property. 2 The provisions of commercial treaties can be further divided into two groups: 3 absolute (or specific) and relative. The latter, w h i c h may be designated as the "treaty forms," 4 are subdivided into three principal types: reciprocity, parity, and most-favored-nation. 1. "Social" treaties include such items as extradition and literary property. 2. See G. F. V o n Martens, Droit international, II, 314>-315; Calvo, op. clt., Ill, No. 1597, P. 365. 3. Riedl, op. clt., p . 3. 1+. Distinctions or descriptive names of this kind are useful in analysis, but it should be made clear that clauses provided for in both "treaty" and "non-treaty" forms are international agreements and for purposes of later interpretation would be handled as treaties. Harvard Law School Research in International La.v, Draft Convention on the Law of Treaties, (1939), Article I.

THE MOST-FAVORED-NATION CLAUSE IN TREATIES

17

Under reciprocity arrangements, one party limits the rights and advantages that it accords to the other party to those accorded to it in return. Parity, already explain above,5 places the nationals of the contracting states on an equal footing with each other. The third category needs no comment in view of the description in the preceding chapter. The objects of commercial and tariff treaties are very numerous.. A simple summation of these is clear if we ask what the various provisions are intended to accomplish. Thus, in general, the contracting states may attempt either to make the position as between themselves at least as favorable as it is between one of them and any other state, or to make the position of-the states as between themselves better than it is between one of them and any other state,e These two aims will be recognized as equality and preference. The former is reflected in most-favored-natlon treaties, the latter in reciprocity agreements. There are many forms of commercial treaties. Mr. Gregory's analysis is worth reproducing.7 I. Treaties without most-favored-nation clauses and without tariff rates. II. Treaties without most-favored-natlon clauses and with tariff rates. III. Treaties with most-favored-natlon clauses and with tariff rates. IV. Treaties with most-favored-natlon clauses and without tariff rates. This, while informative, is Inadequate. We are interested more particularly in the forms which tariff treaties can assume. Before considering this further, it must be strongly emphasized that the tariff systems employed by various nations determine in great part the form which their trade treaties will take. On the European continent there have been traditionally two • types of tariffs, the maximum-minimum and the conventional. These have predominated elsewhere as well. 8 5. Supra, Ch. II. 6. Gregory, op. clt., p . Vi-5. 7. Ibid.., p . 8. This Is not, however, exhaustive; it canlts the single line and multiple tariffs.

18

THE MOST-FAVORED-NATION CLAUSE

Possibilities of treaty forms suggest themselves in the following outline:9 1. Most-favored-nation treatment only. 2. (a) Grant of part of minimum tariff only. (b) Grant of whole of minimum tariff only. (c) Grant of whole of minimum tariff and conventionalization of some rates or all rates. (d) Grant of special concessions by way of convention only. (e) Grant of special concessions by way of convention and the grant simultaneously of all other conventionalized rates. 3. Combination of most-favored-nation treatment (l) with some of the forms under (2). Under group (l) only most-favored-nation treatment is provided, with no mention of specific tariff rates. The contracting parties shall be treated no worse than the most-favored-nation and each retains full tariff autonomy. Group (2)(a) provide the minimum tariff rates at the moment of the signing of the treaty, and there is no guarantee against alteration or that discrimination will not be practised. The same may be said of group (2)(b) except that the contracting states enjoy the advantage of subsequent autonomous reductions in duty on all articles included in the minimum tariff. On the other hand, group (2)(c) bind the contractants not to alter the rate of duty (on certain articles) for a given period of time. Discrimination is possible but stability is achieved. No grant of most-favorednation treatment is Intended. Groups (2)(d) and (e) consist of those treaties wherein the grantor states bargain with the grantee and accord certain concessions on the general tariff which are embodied specifically in the treaty. Again stability results, but discrimination continues to be a possibility. The form of a treaty is greatly affected when the attempt is made to combine the clause with any of the sub-groups producing Group (3). This is a "mixed" form of treaty "the true nature of which depends upon the extent to which the clause modifies, and is modified by, the technical nature of the bargain in the reciprocal clauses of the treaty."10 Therefore, we 9. Grunzel, Economic Protectionism, p. 1 7 1 . 10. Gregory, op. cit., p-.

THE MOST-FAVORED-NATION CLAUSE IN TREATIES

19

must study the various forms of the clause itself as It appears in commercial treaties. B. THE MOST -FAVORED-NAT ION CLAUSE IN COMMERCIAL TREATIES — THE CLASSICAL ANALYSIS One practical way to study the clause and its effects has been to Isolate its functions by classification of its forms. The clause should not be thought of as necessarily a separate and Isolated treaty article. Actually it may appear in many forms 11 or not at all. It may be vague or precise. The principle Itself may be clearly stated, or the consequences of its application can be expressed with no mention of the most-favorednation clause. 12 Thus there are two broad methods of enunciating the principle of equality of treatment:13 the synthetic and the analytic. The first consists of a general announcement of most-favored-natlon treatment or guaranty of equality; the second is a specific exposition of the complete consequences of most-favorednation treatment. The latter method sometimes is expressed by the clause in one article and the consequences in another, sometimes by a combination of both. The synthetic clause is more generally known as the "covering clause." When reference is made to the "mostfavored-nation clause" it usually denotes the article in which the "covering clause" is 3et forth. 1. BASIC FUNCTIONS OF TEE CLAUSE. The criterion for an exhaustive classification in the classical- analysis is the function which the clause performs. Hence we shall examine the clause in action and give detailed consideration to its many functions. First of all, the clause has four basic characteristics, for it can be (a) positive or negative; (b) reciprocal or unilateral; (c) unlimited or limited; and (d) conditional or unconditional.14 It will be readily 3een that it is possible to arrive at sixteen possible forms. Before proceeding to give examples of these possible forms, an analysis of the above functions is in order. 1 1 . F a r r a , op. c i t . , p . 5 2 ; Horribeck, op. c l t . , p . 627; 0 . Paranaqua, P o l l t l q u e cT""'erclale I n t e r n a t i o n a l e , (Geneva 1 9 3 0 ) , p . 1U0. 1 2 . V i e s e r , op. c l t . , p . 66, 83. 1 3 . Ebner, op. c l t . , p . 1 1 1 ; R i e d l , op. c l t . , p . 3 8 . 1 U . See Paranaqua, op. c l t . , p . I U I .

20

THE MOST-FAVOREß-IMATlüW

CLAUSE

(a) Positive or Negative W e have already touched upon this point above. There It was pointed out that thé clause Imposed upon the contracting parties a dual obligation "to do" and "not do" certain things. However, both of these are not always explicitly provided in various forms of the clause. W h e n the "to do" obligation is explicit we say that the clause is positive in form. W h e n the "hot to do" obligation is expressed we say that the clause is negative in form. The distinction, to be sure, is a fine one, but nevertheless it has given rise to varying wordings of the clause. (b) Mutual or Unilateral Mutuality is the usual basis for commercial treaties. 1 5 The unilateral form is usually associated with the surrender of concessions by backward nations or defeated powers. Unilateral clauses are not common because they imply a one-sided bargain obviously unsuited to relations between sovereign .powers. (c) Limited or Unlimited The clause may be limited with respect to the objects to w h i c h it applies or to the territories which It covers. This is an extremely Important factor in any appraisal of the most-favored-nation clause, so much so that several chapters of this monograph are devoted exclusively to a review of the exceptions to, and limitations on, the operation of most-favored-nation treatment. In the unlimited form of the clause one party undertakes to grant the other nny (or all) favors and privileges (in all matters referred to or not excluded) w h i c h the most-favored-nation e n j o y s . 1 8 (d) Conditional or Unconditional Two distinct and conflicting usages of the mostfavored-nation clause have developed in modern times both as to interpretation and phraseology. The 15- Culbertson, op. clt., p. 58J Calvo, op. cIt., pp. 365-366; Hornbeclc, op. clt., p. 630. 16. Reciprocity and. Commercial Treaties, pp. 391-392.

THE MOST-FAVORED-NATION CLAUSE IN TREATIES

21

unconditional form, as lt3 name Implies, lays down no conditions under which concessions granted by contracting states should be generalized.17 On the other hand, the conditional form and Interpretation Implies concessions shall be generalized only upon the reciprocal payment of equivalent compensation.18 Furthermore, there are two types of the conditional clause. 19 The condition may be (l) a special condition which must be fulfilled to give birth to the right of most-favorednation treatment, in which case the condition relates only to the favored interest and must be accomplished to create this interest; or It may be (2) separate from the favored Interest and relating only to something the other party must do or not do to qualify as the mostfavored-nation. In this case, the Interest (or object) to which most-favored-nation treatment Is to apply is Independent of the condition to be fulfilled and Is not created by its fulfillment. 2. CLASSIFICATION AND EXPLANATION OF VARIOUS RESULTING FORMS.

Strictly speaking, there are two methods of presenting a classification: from the point of view of numerous forms of the clause, and from the point of view of difficulty in putting the clause into practice, that is, wording. The classical analysis combines the two methods In the following c lasslflcatlon of the particular manifestations of the clause derived from the general principles outlined above. In the discussion of the legal nature of the most-favored-nation it was pointed out that there are two distinct ways of legally establishing the principle of equality of treatment; by an administrative act and by convention or treaty. For the sake of clarity we shall call the first the "non-treaty" form and the second the "treaty form." (a) The Non-Treaty Form Although this form of the clause may be set forth by a law or decree, 20 the most common medium is 1 7 . Ibid.., p . 390. 18. Loc. clt. 19. Tisser, op. cit., pp. 159-160. contradistinction to "forme." 20. See supra, p.

"Types" here le used In

22

THE MOST-FAVORED-NATION CLAUSE

an exchange of diplomatic notes. 21 Under this condition, there is no explanation of what precisely the clause implies, and the arrangement is generally provisional. Example: 22 The United States and Italy exchanged identical notes on December 16, 1937, establishing the following temporary commercial agreement: Neither of the High Contracting Parties shall establish or maintain any import or export prohibition or restriction on any article originating in or destined, for the territory of the other High Contracting Party which is not applied to the like article orginating in or destined for any third country.

(b) Treaty Form: The Unconditional Group Unilateral, Un,conditional and Unlimited23-Under the terms of the Versailles Treaty, Germany, Austria and Hungary were compelled to grant unilateral unconditional most-favored-nation treatment to the Allies, the first-named for five years, the latter two nations for three years. 24 This form is, however, rare today, and cannot be said to have been widely practiced In years past. It has been used especially in treaties between Christian or highly civilized states and non-Christian or semi-civilized states whereby the dominant powers extracted unlimited and unconditional favored—nation treatment without extending such treatment in return. Absence of mutuality distinctly indicates lack of bargaining power on the side of one. of the parties. For example, in 1861-1862, France, Great Britain, Sweden, Holland, Russia and Denmark secured unilateral unconditional most-favored-nation pledges from Turkey.25 An example of this type: United States-Slam Treaty, 21. M. Riedl (op. cit., p. 38) classifies this as a "simple clause" but since we shall use the term differently later on, it wa.s considered wiser not to employ it here. 22. United States, Executive Agreement Series, ^0, 116. 23. Horribeck calls this the form of simple transfer, op. cit., p . 1+03. 2k. Treaty of St. German-en-Laye, Article 222; Treaty of Trianon, Article 205. 25. Although in a treaty between Turkey and Portugal, 18^3> conditional reciprocity is -provided.

THE MOST-FAVORED-NATION CLAUSE IN TREATIES

23

26

May 2 9 , 1 8 5 6 , A r t . I X : "The American government and i t s c i t i z e n s w i l l "be allowed f r e e and e q u a l p a r t i c i p a t i o n i n any p r i v i l e g e s t h a t may have b e e n , o r may h e r e a f t e r be g r a n t e d "by t h e Siamese government t o t h e government, c i t i z e n s o r s u b j e c t s of any other nation." U n i l a t e r a l , Unconditional but Limited.27 Some i n c l u s i v e o r e x c l u s i v e p r o v i s i o n may l i m i t a unilateral pledge. Thus: Great B r i t a i n - J a p a n Treaty, O c t o b e r 1 4 , 1 8 5 4 , A r t . V : 2 8 " i n t h e p o r t s of J a p a n . . .now o p e n . . . h e r e a f t e r o p e n e d . . . t o any f o r e i g n n a t i o n , B r i t i s h s h i p s and s u b j e c t s s h a l l be e n t i t l e d . . . t o t h e enjoyment of an e q u a l i t y of a d v a n t a g e s w i t h t h o s e of t h e m o s t - f a v o r e d - n a t i o n , always e x c e p t i n g t h e a d v a n t a g e s a c c r u i n g t o the, Dutch and Chinese from the e x i s t i n g r e l a t i o n s with Japan." Mutual, U n c o n d i t i o n a l and Unlimited (Simple Mutual Form),29 In this the contracting parties agree mutually t h a t each s h a l l g r a n t t o the o t h e r any ( a l l ) f a v o r s or p r i v i l e g e s (in a l l m a t t e r s r e f e r r e d to) which I t has g r a n t e d o r may g r a n t t o a n y o t h e r ( t h e m o s t - f a v o r e d ) nation.30 This form dominated European u n c o n d i t i o n a l p r a c t i c e from i860 u n t i l about 1900. The F r a n c e - G r e a t B r i t a i n T r e a t y of November 1 6 , i 8 6 0 , (complementary t o t h e Cobden T r e a t y ) A r t . V . : 2 6 . M a l l o y , U. S . T r e a t i e s and C o n v e n t i o n s , 1776-1900, v o l . I I , p . 1632. 2 7 . Other t r e a t i e s i n t h e u n i l a t e r a l g r o u p : U n i t e d S t a t e s - C h i n a T r e a t y , June 18, 1 8 5 8 ; G r e a t B r i t a i n - C h i n a T r e a t y , September 5, 1902. 2 8 . H e r t s l e t , T r e a t i e s and C o n v e n t i o n s , e t c . , Between G r e a t B r i t a i n and F o r e i g n Powers, (London, I 8 5 6 ) , v o l . IX, p . 9 7 8 . 2 9 . Note d i f f e r e n c e between t h i s and what E i e d l c a l l s a ' s i m p l e clause." 3 0 . Hornbeck c a l l s t h i s t h e "simple r e c i p r o c a l f o r m ; " G l i e r ( q u o t e d i n Gregory, p . 4^9) c l a s s i f i e s t h i s group a s " c l e a n most f a v o r e d n a t i o n t r e a t m e n t . " Compare Wickersham, R a p p o r t e u r , Subcommittee on t h e Most-Fa.vored-Nation C l a u s e , League of n a t i o n s Comm i t t e e of E x p e r t s on t h e C o d i f i c a t i o n of I n t e r n a t i o n a l La.w. American J o u r n a l of I n t e r n a t i o n a l Law. S p e c i a l Supplement, 1928, p p . 137-138, p p . 4 , 5 . Herod s t a t e s t h a t t h e a d d i t i o n of t h e words, f r e e l y i f f r e e l y g i v e n , e t c . , " i n t h e c o n d i t i o n a l form does n o t mean t h a t t h i s " s i m p l e " form was o r i g i n a l l y u n c o n d i t i o n a l . T h i s i s open t o doubt s i n c e t h e wording i s c l e a r ; no c o n d i t i o n i s e x p r e s s e d , c f . Calvo, l o c . c l t .

2*

THE MOST-FAVORED-NATION CLAUSE

"Each of the High Contracting Powers engages to extend, to the other any favor, any privilege or diminution of t a r i f f which either of them may grant to a third power In regard to the importation of goods whether mentioned or not mentioned in the treaty of 23rd of January, i 8 6 0 . " 3 1 Mutual, ( E x p r e s s l y Immediate and U n c o n d i t i o n a l ) , Unlimited (Imperative Form)--

and

Here the form i s f u n d a m e n t a l l y the same as t h e above e x c e p t f o r the a d d i t i o n of the important words " i m m e d i a t e l y and w i t h o u t c o n d i t i o n . " This i s the most common form of the c l a u s e , and has l a r g e l y superseded t h e above wording. F o r example: The Great B r i t a i n Japan Treaty, April 3, 1911, A r t . 2 t : 3 2 "The High Contracting Parties agree that, in a l l that concerns commerce . . . any favor, privilege or immunity which either High Contracting party haB actually granted, or may hereafter grant, to the ships, subjects or citizens of any other state, shall be extended immediately and unconditionally to the ships or subjects of the other High Contracting Party, I t being their Intention that the commerce, navigation, and industry of each country shall be placed in a l l respects on the footing of the most-favorednation." The R e p o r t o f the United S t a t e s T a r i f f Commiss i o n , upon which t h i s p a r t of the c l a s s i f i c a t i o n i s b a s e d , s u g g e s t s the i n c l u s i o n of t h e above wording i n a c l a s s i f i c a t i o n , but s t a t e s t h a t I t c r e a t e s a " t y p e which may be looked upon e i t h e r a s d i s t i n c t or a s a mere v a r i a t i o n . " 3 3 However, i t should be p o i n t e d o u t t h a t "Immediacy" can be used I n c o n d i t i o n a l t r e a t i e s t o o , a s t h e United S t a t e s - B r a z i l T r e a t y of December 1 2 , 1 8 2 8 , A r t i c l e I I (quoted below) shows. But i n the c a s e of c o n d i t i o n a l forms, the r e q u i r e m e n t of immediacy means only t h a t the c o n c e s s i o n must be extended as soon a s t h e q u a l i f y i n g c o n d i t i o n s have been complied w i t h , and t h i s , be i t n o t e d , I s n o t e q u i v a l e n t t o s a y i n g t h a t a w i l l i n g n e s s t o comply with t h e c o n d i t i o n s has t o be imm e d i a t e l y f o l l o w e d by an a c c e p t a n c e of* the o f f e r t o 31. 32. This has 33.

Hertslet, op. c l t . , I I , 194. Great Britain, Treaty Series, No. 15 (1911), p. 108. been a favorite in British treaty practice. Reciprocity and Commercial Treaties, p. 391«

THE MOST-FAVORED-NATION CLAUSE IN TREATIES 34

25

35

comply. Professor Gregory argues, and very logically too, that the true ground for denying "immediacy and unconditionally" as a sub-class lies in the fact that this stipulation adds nothing to the content of the uncondltlonallty of the clause, for a time lag would infringe either on the unconditional!ty of the clause or its freedom from limitation. Mutual and Unconditional, but Limited This group finds the contracting states agreeing mutually that each shall give the other any (all) favors or privileges which have not been specifically excepted and which have been granted to any other (the most favored) nation. Usually the limitation is in respect to countries or regions. Exceptions in favor of trade with neighboring states, 3 6 especially those that are limitrophe, 3 7 are common. Thus the reciprocal trade agreement between United States and El Salvador, February 19, 1957, after a covering clause (Art. X ) pertaining to customs duties, provides in Art. XIV: The advantages now accorded or which may hereafter be accorded by the Republic of El Salvador to the commerce of Costa Rica, Guatemala, Honduras, Nicaragua or Panama, so long as any special treatment accorded to the commerce of those countries or any of them by the Republic of El Salvador is not accorded to any other country, shall be excepted from the operation of this agreement. The clause can also be limited with respect to the objects to which it a p p l i e s . 3 8 The covering clause appears first followed by the restrictive or semi3b-. Such an offer wa.s in fact implicitly refused by the United St.ates in the ca.se of the Hawaiian Treaty of January 30, 1865, which meant that "the latter country was no longer free to extend to Great Britain even the opportunity to purchase concession," Reciprocity and Commercial Treaties, pp. ^18-1+19. Herod argues that even in the case of unconditional clauses "immediately refers to the self-executing nature of the pledge, not to a condition of enjoyment of concessions. Op. clt., p. 30. 55. Op. clt., p. 14-51. 36. The provisions of the reciprocity arrangement with Cuba in 1902 are always excepted from United States treaties. 37- Border nations, so near geographically as to make possible the mutual extension of particular favors incapable of duplication by other states. See Chapter V for more extensive treatment. 38. Royal Institute of International Affairs, op. clt., p. 5-

26

THE MOST-FAVORED-NATION CLAUSE

definitive clause. 3 a Thus: Great Britain-Czechoslovakia Treaty, July 14, 1923, Article (l): The subjects or •goods, etc. ... each of the two the territories «11 respects as produce ... and

citizens of each of the Contracting Parties and of the two Contracting Parties and the vessels of Contracting Parties shall enjoy unconditionally In of the other, treatment at least as favorable in that accorded to the subjects, etc. ... and the the vessels of the most-favored-country.

The treatment shall he accorded in « n matters of canmerce and navigation, both as regards importation, exportation and transit, and in general all that concerns customs duties and formalities and commercial operations, the establishment of the subjects or citizens of each of the contracting parties in the territories of the other, the exercise of commerce, industries and professions, the payment of taxes and the treatment of commercial travelers and their samples.40 (c) Treaty Form: The Conditional Group Dependent Conditional Clauses A3 has been stated, there are two types of conditional favored-nation pledges, the dependent and the Independent. The dependent is that which specifies a certain condition to be met before the right to claim mostfavored-natlon treatment becomes operative. For example, In the Austrian-Swiss Treaty of December, I 8 9 I , Article 4 4 1 provides for most-favored-natlon treatment on conditions that "--all merchandise ... (be) exported to fairs or markets of the territory of the other contracting party." 4 2 The most frequent form of this kind of conditional clause Is that providing for most-favorednatlon treatment If Imports come directly from country of origin. M. Riedl has produced an Informative 39. Supra, p. 1 9 . 4-0. Great Britain, Treaty Series, no. 35 (192U), p. 2. It is by no means certain that In the absence of this detailed provision such matters would not be subject to equality of treatment provided a covering clause was present. 41. Martens Nouveau recuell general de traltes, Pnri Series, XVIII, 300. k2. As a rule contiguous states alone enjoy such benefits for reasons mentioned above. Such special arrangements should not be confused with the "frontier clause" which is an exception to equality of treatment. See Chapter V.

T H E MOST-FAVORED-NATION CLAUSE IN TREATIES classification of dependent

clauses.

27

43

(l) Clause of Origin. This clause contains such phraaes as "products of soil and commerce" (of the contracting parties, of course); "products of soil and industry." Origin Includes those products manufactured in the other party's country. In some treaties it is specified that goods perfected on the territory of the co-contractant out of foreign materials will be regarded as Industrial products. The clause of origin has a dual purpose: (1) to exclude re-exports, and (2) to give most-favorednatlon treatment to products of contracting parties even though these goods are transported through a third country, provided that nothing has been done to them en route. British treaties make this very clear by stating that contracting parties assure most-favored-nation treatment to products of their respective countries "which are the place of origin of these p r o d u c t s . " 4 4 (2) Clause of Restricted Origin. Here the products of the parties concerned must be produced and exported directly from each, and no Intermediate transit Is countenanced. It Is probable that transit across a third country is not excluded if the goods are kept under strict vigilance. But if a "rupture de traflc" occurs then most-favored-nation treatment is denied. A treaty between Portugal and Sweden in 1904 considered as "direct imports not only the goods dispatched from a port of the other, but also all those w h i c h are accompanied by a direct bill of l a d i n g . " 4 5 Rarely does this form appear. (3) Clause of Origin, Pure and Simple. This form includes all "merchandise" from the contracting parties whether produced by them or n o t . 4 e In cases where products Tre transported to either party by commercial enterprises or Intermediaries of third states, mostfavored-natlon treatment is denied. (4) Mixed Clause-Origin and Production. As might be inferred, this type combines the two factors of origin 43. Riedl, op. cit., p. 40. 44: Ibid., p. 40. 45. Ibid., p . 41. 46. Treaty between France and Sweden, and Norvaj l88l, Article 11. J. Basdevant, Traites et conventions en vlgeur entre la France et lee puissances étrangères, III, 136-140.

28

THE MOST-FAVORED-NATION CLAUSE

and production. Thus the phrases "merchandise and products, natural and industrial" or "natural and industrial products and merchandise in general" are common. For example, Article II of the trade agreement between United States and United Kingdom, November 17, 1938, begins "Articles the growth, produce, or manufacture of the territories of either High Contracting Party, etc." 4 7 Sometimes the clause contains the words "products of soil and industry or merchandise coming from the warehouses of the other contracting party." Two treaties, Holland-Italy, November 24, 1863, and Holland-Switzerland, August 19, 1875, contain a representative wording of this form, to wit: "The products of the soil and the industry of the other contracting party, from whatsoever place they come, and the merchandise, without distinction of origin coming from the territory of the other contracting party" will be given most-favored-nation treatment.* 8 Independent Conditional Clauses The general conditional clause is actually a combination of favored-nation treatment and reciprocity of a particular nature. This form, a pactum de contrabando from the standpoint of International law, deals only with concessions pro praeterlto in that there is no obligation undertaken in reference to concessions granted in the future by either contractant except to offer to reopen negotiations. Lest we use the words "qualified" and "limited" interchangeably, it should be pointed out that the former relates to the requirement for equivalents (or the conditional form) and the latter to subject or territorial limitations. (l) Unilateral, Unlimited, Conditional. As in the instance of unilateral unconditional pledges this form is rare. But once in a while one state obligates itself to give the other (with no such pledge in return) any (all) favors and privileges which it has granted or may grant to any other (the most favored) nation on condition that the state in whose favor this pledge is made shall meet the conditions or concessions, if any, which have attached to the obligation of the same to the third 47. U. S. Department of State, Publication No. 1256, 1938. 48. U. S. Tariff Commission, Handbook of Commercial Treaties, (Washington, 1922) p. 64lj pp. 715-716.

THE MOST-FAVORED-NATION CLAUSE IN TREATIES

29

nation. Example: United States-Korea Treaty, May 22, 1882, Article l4: 4 8 The High Contracting Powers hereby agree that, should at any time the King of Chosen grant to any nation ... any right, privilege, or favor, connected ... with ... commerce, which is conferred by this treaty, such right, privilege, and favor shall freely inure to the benefit of the United States ... provided always, that whenever such right, privilege or favor is accompanied by any condition, or equivalent concession granted by the other nation interested, the United States ... shall only be entitled to the benefit of such right, privilege or favor upon complying with the conditions or concessions therewith. (2) Reciprocal, Unlimited, also Expressly Conditional. 50 This was the model for all United States treaties from 1778 on, and was the form employed by the American Government until 1925. It is characterized by a qualifying phrase "freely, if the concession was freely made, or upon allowing the same compensation, or the equivalent, if the concession has been conditional." Thus: United States-France, February 6, 1778, Art. I I : S 2 The most Christian King and the United States engage mutually not to grant any particular favor to other nations, in respect of commerce and navigation, which shall not immediately become caramon to the other party, who shall enjoy the same favor freely if the concession was freely made, or on allowing the same compensation if the concession was conditional. (3) Reciprocal and Limited, but Expressly Conditional. The conditional pledge may be limited by localization or in some other way: United States-Brazil Treaty, December 12, 1 8 2 8 , Article I I 5 3 (after the usual mostfavored-nation clause) : "it is understood, however, that the relations and conventions which now exist, or may hereafter exis^, between Brazil and Portugal, shall foim an exception to this article." lt-9. Malloy, op. cit., I, p. 339. 50. Sometimes called the "qualified" form. Herod says the phrase, "freely, if ... freely made," was added out of caution not to make a new form. Op. cit., p. 2 5 . 51. The United States-Colombia Treaty, October 3, 182^, uses the same phrasing and wa.s the model for United States-Latin American Treaties. See Malloy, op. cit., I, p. 293. 52. Ibid., p. k69. 53. Ibid., p. 133. See Chapter V for full list of representative exceptions and limitations.

30

THE MOST-FAVÖRED-NATION

CLAUSE

Final protocol: "it is understood that in virtue of the provisions of Article II, the tariff concessions which one of the Contracting Parties has accorded or shall accord to a Third Nation, under the form of concessions limited to these contingents, shall "be equally claimed by the other party within the limits and conditions fixed by the extension of the concession to a third Power." (d) Vague and Precise F o r m a 5 4 The Vague or Indefinite Form. In the so-called indefinite form the clause merely states in general terms that any favor, privilege, or immunity granted by either contracting party to any third state shall be likewise accorded to the other contracting p a r t y . 5 5 Furthermore, there are often in addition to this covering c l a u s e , 5 6 other provisions which do not use the words "mostfavored-nation." 5 7 This class may be called primitive in so far as the definitive elements of most-favorednation treatment are clear enough but there is no formal wording of the clause or use of its synonymous terms. Example: The Germany-Great Britain Treaty, December 2, 1924: Articles produced or manufactured in the territories of one of the two Contracting Parties, Imported into the territories of the other, from whatever place arriving, shall not be subjected to other or higher duties or charges than those paid on the like articles produced or manufactured in any other foreign country. (Article 8) Subject to the provisions of Article 10, no prohibition or restriction shall be maintained or Imposed on the importation of any article, produced or manufactured in the territories of either of the two Contracting Parties, into the territories of the other, from whatever place arriving, which shall not equally extend to the importation of the like articles produced or manufactured in any other foreign country. 5*4-. May be called also the general form. It is rare and is usually temporary. See exchange of notes quoted by M. Hepp, op. clt., p. 23; of Parana.qua., op. clt., p. 146. 55. Culbertson, op. cit., p. 62. 56. Most of the examples in the preceding classification ha.ve been "covering cla.uses." 57. M. Riedl quoted in Ito, op. clt., p. 232.

THE MOST-FAVORED-NATION CLAUSE IN TREATIES

31

( A r t i c l e 9) Articles produced or manufactured in the t e r r i tories of either of the two Contracting Parties exported to the t e r r i t o r i e s of the other, shall not "be subject to other or higher duties or charges than those paid on the l i k e a r t i c l e s exported to any other foreign country. Subject to the provisions of A r t i c l e 10, no prohibition or r e s t r i c t i o n shall "be imposed on the exportation of any a r t i c l e from the t e r r i t o r i e s of either of the two Contracting Parties to the t e r r i t o r i e s of the other which shall not equally extend to the exportation of the l i k e a r t i c l e to any other foreign country. 58 The P r e c i s e or S p e c i f i c F o r m . 5 9 Sometimes the c o n c e s s i o n of m o s t - f a v o r e d - n a t i o n t r e a t m e n t i s made w i t h what almost might be c a l l e d a d e f i n i t i o n of the c l a u s e i t s e l f , i n d i c a t i n g i n a more or l e s s p r e c i s e f a s h i o n t h a t which i s i n c l u d e d by t h e c l a u s e and i n .what manner i t s h a l l apply. H o w e v e r , i t i s n o t t o be c o n c e i v e d as a d e f i n i t i o n i n the s t r i c t sense because i t i s r e a d i l y p e r c e i v e d t h a t no t r e a t y can make a l o g i c a l d e f i n i t i o n o f t h e clause. Y e t t h e c l a u s e i n t h e s e c a s e s i s so c o n s t r u c t ed as t o g i v e an e x p l a n a t i o n s u f f i c i e n t l y e x a c t r e g a r d i n g i t s c o n t e n t and method o f a p p l i c a t i o n , and u s u a l l y t h i s f o r m a p p l i e s o n l y t o f a v o r s mentioned i n t h e treaty.60 Thus the G e r m a n y - I t a l y T r e a t y , O c t o b e r 31, 1925, A r t i c l e 3 : Each of the Contracting Parties pledges to extend to the other a l l favors and immunities which i t accords to a third Power concerning the importation, exportation and transit, and in general a l l that deals with the carrying on of commerce and industry. More particul a r l y , the products of the s o i l and industry of each of the Contracting Parties upon their importation into the t e r r i t o r y of the other, or upon their exportation to the t e r r i t o r y of the other, shall "benefit in that which concerns the amount, collecting and security of rights and services comprising a l l the rights, accessory and additional c o e f f i c i e n t s and entailments, the bonding, the temporary exportation or importation, re-exportation and re-importation, a l l other t a r i f f formalities, the same treatment as the mostfa.vored-na.tion or the products coming from the most-favored-nation.

58.

Great Britain, Treaty Series, no. 45 (1925), pp. 8-9. 59. M. Hepp c a l l s this the "specialized" form which applies to "un ordre de choses determine," op. c l t . , p. 2k. See also, Hornbeck, op. c l t . , p . 404. 60. I t o , op. c l t . , p . 230.

32

THE MOST-FAVORED-NATION CLAUSE

In the same manner, all favors and immunities of this indicated nature vhich one of the Contracting Parties shall accord in the future to a third pover 1 be immediately and without compensation, and in this manner only, extended to the other Party.

Somewhat in between the Indefinite and precise forms is one which is best termed as determinant. It does not consist of a complete most-favored-nation regime, nor is it a general statement covering an unspecified scope. It can best be described by example: In a treaty of February 11, 1902, Prance promised to let all colonial products of Honduras into Algeria on a most-favored-natlon basis. 81

IV The Scope, Interpretation, and Meaning of Most-Favored-Nation Clauses

A . THE SCOPE OF MOST-FAVORED-NATION TREATMENT

THE FIRST QUESTION which arises is: What is the nature of the advantages to which a most-favored-nation pledge establishes a legal claim? A given clause applies, unless otherwise specifically provided, to all rights, privileges, or immunities that a state accords in its actions as a public Institution to a third state, excluding those rights and privileges of a private order which it accords in its function as an juristic person.1 Advantages which fall within the purview of the clause then, are limited to those given by a state in exercise of its purely governmental functions. Another nation can claim the enjoyment of lower duties on particular commodities, but it can not claim advantages resulting, for example, from a special contract concluded by a state to furnish itself with certain raw materials.2 If such arrangements were, however, proclaimed as a decree or law or treaty, then other nations could legally claim a share in the favors. Before leaving this point it might be added that it has been argued by Professor Anzilotti3 that the advantages enjoyed by a third nation in virtue of a simple fact cannot be claimed as most-favored-nation treatment. While it need not be insisted that a country must provide complete material equality as a result of most-favored-nation obligations, this line of reasoning invites qualification. In the first place the terms of the average clause do not definitely specify sources of advantages.4 In the second place, a loose 1. Wickersham Report, p . 6. 2. See, however, exchange of notes, United. States-Greece, November 15, 1938, League of Nations Treaty Series, 195, p . 14-5. 3. Cours de droit International, I, 437. Ehner, op. clt., p . l^-O.

THE MOST-FAVORED-NATION CLAUSE interpretation of the phrase "simple fact" might provide ample opportunity for eluding the effects of the clause. In all justice it must be said, though, that Professor Anzilottl implies here a fact such as physical distance; even so the case is not clear. In the neo-mercantlllam of the 1930's the administration of Import quotas on a first-come-flr3t-served basis aroused the accusation that it violated, at least In spirit, the obligation to administer trade controls on a most-favored-nation basis. 5 To resume, a second point is that advantages do not have to be obtained directly. 6 That is, a mostfavored-natlon pledge can be the source of favors or concessions arising from treaties or agreements other than that in which the said clause is found. Thus, in the Treaty of Frankfort, 1871, France and Germany agreed to extend to each other any favors which either might grant to a specified group of nations, but if any other nations outside this group obtained favors from Germany and France, and If the states named In the treaty received these advantages through the operation of the most-favored-natlon clause, then Germany or France had the right to claim such favors. Nor does it matter whether the third power (concessions to which might be a source of favors to be generalized) obtains its concessions directly or indirectly. This basic characteristic of most-favored-nation treatment partially accounts for Secretary of State .Cordell Hull's statement in 193^ that actually the United States employed only the unconditional version of the clause in spite of the fact that there were then and still are conditional clauses still In effect in the United States treaties, for as he put it, "If, through the unconditional clause in some other treaty, one country obtains a favor 'freely,' countries entitled to conditional most-favored-natlon treatment become entitled to such favor without any condition." 7 Another question is pertinent here: Does the clause apply only to concessions existing at the moment of conclusion of a.treaty or also to those which may be granted in the future? Historically, there has been a 5. Infra, Chapter X: the "Chief Supplier" formula. 6. Vlsser, op. clt., p. 80. 7. Memorandum to House Wbjb and. Means Carnalttee, Hearings on H.E. 8430, 73rd. Congress, 2nd Session, p. 39.

THE SCOPE, INTERPRETATION AND MEANING

55

a great deal of discussion on this particular point. M. Vlsser argues with unimpeachable logic (affirmed by the fact that in most treaties after he wrote the clause Includes the words "or hereinafter granted" or their equivalent)8 that most-favored-natlon treatment must mean equality of treatment at all times.8 Otherwise the clause performs only half of its job. All treaties of commerce affect the future; this particular clause should not be taken to apply solely to past and present conditions. 10 It is well to emphasize again that the chief value of the clause lies in its prevention of discrimination, and this would not be possible if its scope were limited to the situation prevailing at any one time. One of the chief advantages of the unconditional form is that it removes the necessity for repetition of pledges every time conditions are altered by a new commercial treaty. This virtue would, of course, disappear if the clause did not apply tq future concessions. M. Hautefeullle11 and M. Pradler-Fodere12 state that future concessions are not encompassed by the clause, the former maintaining that, "it is necessary to remark that the condition of'being treated as the mostfavored-natlon pertains only to existing favors at the moment of the signature of the treaty, and not to those which may be conceded afterward ..." In the same vein, Signor Caveretta holds that "by virtue of the mere words 'there is granted the most-favored-nation treatment' each nation intends to extend to the other contractant advantages already accorded, not referring to advantages of the future."13 M. Visser answers this by saying that there is nothing in the wording of these clauses which permits the above interpretation, "on the contrary, if two states pledge to treat each other on the footing of the most-favored-nation, this can only signify that one 8. Infra, p.

for the advantages of modern wordings of the

clause in eliminating problems of meaning. 9. Visser, op. clt., p. 8 3 . 10. The clause also embraces concessions made prior to any given treaty.

Otherwise discrimination would prevail.

Despite

this obvious fact, M. Hepp says the clause only guarantees a certain "equilibrium" and hence it could not be disturbed by a prior concession.

Op. clt., pp. 67-68.

11. Hletoire du Droit Maritime, 1 8 6 9 ,

T.T.V., Chapter 1, Sec-

tion i, p. 271. 12. Droit International public, Tome IV, p . 394. 13. Quoted by Hornbeck, op. clt., p. 633.

36

THE MOST-FAVORED-NATION CLAUSE

of the contractants has the right to demand that the other treat it in this manner during the entire duraii 1 4 ^ tion of the convention ... His point is just as valid today as it was forty years ago. There were no examples then where practice followed the "limited-tothe-present" system. And certainly the "Chief Supplier" formula of the American Trade Agreements program is a recognition of the fact that according to recent interpretation of the clause it most certainly does include future concessions.15 M. Pradier-Fodere claims that the reason that future benefits are expressly stipulated as within the scope of the clause is that treaties only apply to present provisions or concessions; in other words, the phrase "or may hereafter be granted" constitutes an exception.16 This is misleading. Actually, the inclusion of such a phrase is explanatory, the same as other provisions or words (e.g., tariffs, even the phrase "most-favored-nation" itself), which are not be considered exceptions because they are mentioned in some treaties and not in others. 17 As a matter of fact, probably 75$ of all the recent commercial treaties contain specific mention of future conditions, while the other 25$ do not. Even if modern practice did not refute the above argument, it would be obvious, in theory at least, that this restricted view would partially deprive all most-favored-nation treaties of their value after ratification. To sum up, the clause applies not only to conditions existing at the moment a treaty is negotiated, or the provisions thereof, but to any concessions granted in the future. This discussion leads to another consideration. What is the duration of the most-favored-nation advantage? To begin with a distinction is in order, between advantages accorded as a result of the indirect operation of the clause, and those accruing from direct negotiation.18 If the former situation prevails (that is, the advantages accrue because of benefits granted to a third nation), then the right ceases when the third nation loses its favored position. The privilege having l1*-. Tisser, op. cit., p. 8 3 . 15. 16. 17. 18.

See Chapter X. Op. cit., p. 392. Farra, op. cit., p. 63; Visser, op. cit., p. 8 3 . Von Martens, op. cit., Tome II, p. 322.

THE SCOPE, INTERPRETATION AND MEANING

37

disappeared, the fact which put the clause into operation no longer exists, and therefore the clause ceases la to have effect (cessante causa, As nn — — — cessat effectu), — M. Lehr suggests, however, the effects of the clause can survive the original concessions to a third party if by special negotiation they have become an integral part of the conventional law between two powers and cease to depend on the relations between the power which made the concessions and that which obtained it first.21 There is no reason to doubt the soundness of this proposition.88 Thus some special recognition of indirect advantages must be obtained by a state if it wishes to continue enjoying most-favored-natlon treatment in that respect after the original grant has ceased. For example, countries A, B, and C have most-favored-natlon treaties with one another. A then concedes (by a new treaty or a modus vlvendl) some tariff reductions to B on a short-term basis. These reductions, under the clause, must be generalized to C. But when A's concessions to B come to an end, C can no longer claim the benefit of them unless A embodies them in a new agreement with C. The whole point is that if an original convention, or any part of it, is terminated, while the resulting benefits are allowed to continue operating for third parties, this in Itself would constitute discrimination against that party which was a contractant to the original treaty. Advantages conferred indirectly by the clause continue until the original basis of such advantages disappears unless they receive a new basis by being incorporated in a new treaty agreement or exchange of notes. The Implication is clear: trade concessions are subordinate to the convention which creates them. Any other interpretation would in reality violate both the letter and spirit of most-favored-natlon treatment. An historical example, one from among many, will confirm this analysis. In virtue of most-favored-nation commitments, many countries 3hared shipping concessions made by the United States to Belgium in Article 4 of a treaty concluded in 1858; in 1875 the United States denounced 19. Herod, op. clt., pp. 31-32; Hornbeck, op. clt., p. 635; Nolde, op. clt., p. U13; Vlsser, op. clt., p . 87. 20. Revue de droit International et de legislation compare, 1893, P. 313. 21. If the advantages are In procese of negotiation, whether they are actually conventional rights le a question of fact. 22. Wlckersham Report, p. 7. 23. Herod, op. clt., pp. 31-32

THE MOST-FAVORED-NATION CLAUSE

38

the treaty with the result that the other nations ceased to enjoy the privileges provided for therein. Finally, as to the specific subjects to which the clause applies, it may be said that they vary with different treaties. The classification in Chapter V indicates an application ranging from a simple pledge of most-favored-nation treatment in all commercial relations to detailed items bearing on the business practice of nationals resident in foreign countries. There is no justification for making a blanket statement regarding the scope of the clause, but it can be stated that in general the application of the clause will be confined to the articles, agents and instruments of commerce. Mr. Herod, writing in 1902, is correct in saying that it does not usually apply to such items as patents and trademarks which have no intrinsic value Independent of the parties concerned.24 An examination of recent treaties furnishes no reason for revising this judgment. The number and kind of advantages which contracting parties will derive from a particular wording or formulation of the clause are Indeterminate at the moment of the signing of a treaty. The overall commercial relations between nations condition the possible range of activity to which a most-favored-nation treaty might apply. When these relations become more complex, the scope of the clause may theoretically be widened or narrowed, depending of course upon the original definition in a treaty. It is appropriate to conclude this section by stressing again the flexible nature of the clause. B. THE IHTERPKETATIOH OF MOST-FAVORED-NATI0B CLAUSES There are several approaches to the specific problem of interpretation of equality of treatment provisions in commercial treaties. One consists of an examination of forms of the clause described in the chapters to follow. Another is to inquire into the nature of a treaty in which the clause Is found. Finally, proper interpretation might be arrived at by reference to the period or epoch in which a given treaty was negotiated. 25 2k. Ibid., p. 53. 25. The throe methods or approaches enumerated here had been accepted by the Etoncmic Consultative Ccmnittee of the League by

1926.

THE SCOPE, INTERPRETATION AND MEANING

39

Thé first approach has become more significant with the development of standardized, clauses. In terms of specific application, present-day commercial treaties are much easier to interpret because they are more clearly worded28 and because the most-favored-natlon clause is now more adequately defined: differences in scope of application are more important than differences in kind. Most clauses are obviously unconditional, reciprocal, self-executing, and they apply to the future; furthermore, their significance does not depend on the source of concessions (whether gratuitous favors or otherwise.)27 Are customs formalities included in the equality of treatment obligation? It is less difficult to answer this question about a treaty negotiated in 1929 than about one negotiated in, say, 1829. The former will perhaps have a separate and definite clause specifying customs formalities by name, or this phrase will be incorporated in the general most-favored-nation pledge: "in short, in all that pertains to their commerce." Sometimes, an extra clause is inserted near the end of the treaty stating that it is the intention of the parties to place their commerce reciprocally "on a footing of complete equality." In nearly all cases, the clause is implicitly or explicitly not restricted to tariffs alone. Final Protocols or Protocols of Signature appear very frequently in the role of clarifiers— especially with reference to favored-nation clauses.28 The contrast in the classification of forms of the clause presented in Chapters III and V makes this point clear,29 The nature of a treaty containing a most-favorednation clause is important. To reiterate: the extent of application of the clause is limited only by matters for which it is stipulated; the content of the clause depends on the Interests in which a convention is expressly drawn up. Treaty titles provide a clue here: Commerce; Commerce and Navigation; Navigation; Establishment Commerce and Navigation; and Exchange of Notes 26. This Is probably true of treaties generally. 27. See Hornbeck's analysis applying this technique, op. clt., pp. 628-630. 28. Italy-Latvia, July 25, 1 9 2 5 , An Article 5 Final Protocol, LNTS 60, p. 91.

The most-favored-nation pledge is to include,

"footstuffs and new materials from overseas whether reconditioned in free ports or bonded warehouses." 29. Recent American treaties are noteworthy for textual precision.

40

THE MOST-FAVORED-NATION CLAUSE

Governing Commercial Relations. The clause applies only to things made the object of most-favored-natlon treatment and it cannot be invoked for matters in respect of which it was not inserted or which are not covered in a particular agreement. Thus if the clause appears in a "treaty of commerce," it cannot be applied to "navigation" (unless the treaty so states, as some do); a brief treaty or exchange of notes will usually set forth equality of treatment for the flow of goods between the high contracting parties, but this will not apply to commercial samples or the status of alien corporations . Differences of opinion as to whether a subject enters the categories specified by the clause sometimes occur. It then becomes necessary to determine if there Is a difference in kind involved. For example, a case in point arose over the application of Article II of the Treaty of Frankfort, 1871. This article accorded most-favored-natlon treatment for certain things, among which was "the admission and treatment of the subjects of the two nations." 30 The Germans claimed, In virtue of this pledge, that concessions made by France to other nations relating to judicial cognizance (especially those granted to Switzerland as a result of a treaty signed in 1869) should also be extended to German nationals. The French High Court decided31 that the clause could only be Invoked If the substance of the treaty which stipulated It was identical to that of the particularly favorable treaty of which benefit was claimed. A somewhat similar situation arose over the French nationality decrees applied in Tunis. A British claim to equality of treatment was rejected because It was based upon a commercial treaty which did not encompass the civil rights involved in the decrees. 32 As noted above, a third step toward a proper Interpretation consists of referring to the period or 33

epoch in which a given treaty was negotiated. There has been a surprising degree of conformity in the use of various forms of the clause at particular stages in 30. Ito, op. clt., p. lltO. 31. Ibid. Decision rendered December 22, 1913. 32. Advisory Opinion, Tunis-Morocco Nationality Decrees, Permanent Court of International Justice, 1923, Series B., No. kt pp. 22-32. 33. Hornbeck, op. clt., p. 627; Ebnar, op. clt., p. 136.

THE SCOPE, INTERPRETATION AND MEANING

41

Its long history. The dominant commercial spirit of an age profoundly influences the scope and nature of the clause. The nev era of liberal economic policies ushered in by the Cobden Treaty of i860 was coincident with the reaffirmation of the unconditional clause. A period of post-Napoleonic autonomous commercial policy was manifest in the conditional interpretation of the clause. To be more specific, it can be asserted that perhaps 90% of the clauses written into treaties during the years 1830 to i860 were conditional in form. 34 On the other hand, of 607 most-favored-natlon clauses negotiated from 1920 to 19^0, only nine were the conditional type.35 In either case, there Is a strong presumption that an obscurely worded clause would belong to that form most typical of the period. This is not an infallible criterion, of course; it must be combined with the other two methods discussed above. Another consideration is Important here. It can be observed that "the question concerning the application of the most-favored-natlon clause ... Is one where the traditional policy of a contracting party is regarded as' decisive ... as governing its attitude at the time of negotiation."38 This eases the problem of construction, and rather tends to remove the clause from the field of simon-pure interpretation. That the effort to ascertain as by Judicial process the sense which both parties to a treaty sought to attach to a particular pledge has given way to attempts to clarify wordings of the clause has been Indicated. This has been reinforced by direct reference to "traditional" national policies.37 By and large, recent treaties leave fewer 54. Visser, op. clt. p. 7 9 . 35. Infra, p .

56.

3 6 . Hyde, International Lav, Chiefly as Interpreted by the United States, II, 59«

Obvious examples here are France and S{>aln

who have followed policies of "limited" most-favored-natlon treatment; in the case of bcth countries, there would hardly be included any pledge of unlimited and unconditional equality of treatment. The same reasoning applies to the policy of the United States before 1923 when the latter was a "notorious" sponsor of the "conditional" clause. 37. See exchange of notes, Finland-Greece, June 22, 1926, LNTS 56, p. 199, in which concessions by Finland to Estonia to preserve traditional commercial relations" are exempted.

THE MOST-FAVORED-NATION CLAUSE

42

loopholes for disputes over Interpretation than older ones .

38

Can a third nation, pleading Its most-favorednation rights, challenge the interpretation of two contracting parties? In general, a third party has nothing to do w i t h a treaty, either in its application or interpretation. The interpretation agreed upon by the parties to a treaty governs their r e l a t i o n s . 3 8 Neither has the third party any redress if a most-favored-nation treaty is abrogated contrary to international law, that is, before a specified time limit is up, or without the consent of one of the contracting states. The rights disappear as if they were regularly abandoned. A l l this is true in the case of most-favored-nation agreements because commercial advantages are only Incidentally bestowed on third parties entitled to share them; the enforcement of such rights in the face of interpretation by the two contracting parties cannot be demanded, nor abrogation or modification protested so long as there is no express intention to favor a third p a r t y . 4 0 But if there is express intention to confer favors on one or more named third parties, and if these intentions are carried out by a "clause of accession" or "acceptance by conduct," then third parties w o u l d have the right to Insist that interpretation of a given treaty include said f a v o r s . 4 1 E v e n if one of the contracting parties has given written or verbal assurances to third parties which have b e e n made clear in the n e gotiations but not set forth in the treaty, the other contracting party would probably be bound. RECENT TREATY PROVISIONS REGARDING INTERPRETATION. Of 607 treaties or agreements containing mention of mostfavored-nation treatment or detailed clauses and negotiated in the period 1920-1940, 133 also contained 38. An earlier treaty which was so drawn as to leave little opening for controversy was that between Nicaragua and the United States in 1867. Malloy, vol. II, p. 169. 39« Visser, op. cit., p. 8 7 . 40. Harvard Law School Research in International Law, Draft Convention on the Law of Treaties, 1939, Article 18 and Comment. 41. Although no right to object to abrogation, suspension, or modification would follow. Ibid. Also, Ronald F. Roxburgh, International Conventions and Third States, pp. 51-60; pp. 111-113.

THE SCOPE, INTERPRETATION AND MEANING p r o v i s i o n f o r t h e s e t t l e m e n t of d i s p u t e s o v e r i n t e r p r e t a t i o n or a p p l i c a t i o n . A l l of t h e s e p r o v i d e f o r a r b i t r a t i o n i n t h e a b s e n c e of s u c c e s s f u l s o l u t i o n by diplomacy.42 They r a n g e i n f o r m f r o m s i m p l e t o complex and t h e y d i f f e r c h i e f l y i n the d e t a i l s or procedure l a i d down. Certain general features recur frequently. Perhaps the s i m p l e s t form i s expressed i n Art i c l e 29 o f a n a g r e e m e n t b e t w e e n Germany a n d A u s t r i a o f September 1, 1920, p r o v i d i n g t h a t : "Should any d i s p u t e a r i s e . . . a s t o t h e i n t e r p r e t a t i o n or a p p l i c a t i o n of the t a r i f f s . . . or . . . the ' m o s t - f a v o r e d - n a t i o n ' c l a u s e s . . . such d i s p u t e s h a l l be s e t t l e d by a r b i t r a tion. . ,"43 i n most l a t e r c a s e s , t h i s form p r o v i d e s t h a t d i s p u t e s s h a l l be s u b m i t t e d to the Permanent Court o f I n t e r n a t i o n a l J u s t i c e , u n l e s s some o t h e r p r o c e d u r e i s agreed upon.4* The W o r l d C o u r t f i g u r e d I n a s u b s t a n t i a l 42. With the exception of those p e r t a i n i n g t o language c o n f l i c t and c e r t a i n types of s a n i t a r y r e g u l a t i o n s , 43. UTS, 4, 1921, p . 243. This I s one of the f e v which r e f e r s s p e c i f l c a l l y t o t h e m o s t - f a v o r e d - n a t i o n c l a u s e . See A u s t r i a Switz e r l a n d , J a n . 6 , 1926, UTS 46 p . 299, A r t i c l e 19, p r o v i d i n g f o r a "court of a r b i t r a t i o n . " 44. Slam-Sweden, Dec. 19, 1925, A r t i c l e 20, UTS 58, p . 429; Greece-United Kingdcm, J u l y 16, 1926, A r t i c l e 29, LBTS ¿1, p . 15; Greece-Netherlands, May 12, 1926, A r t i c l e 7, UTS 6 l , p . 296; Great B r i t a i n and Northern I r e l a n d - Kingdom of Serbs, Croats and Slovenes, May 12, 1927, A r t i c l e 29, UTS 80, p . 165; Guatemala-Netherlands, May 12, 1927, A r t i c l e T i l , UTS 85, p . 323; Hungary-Sweden, Nov. 8, 1928, A r t i c l e 15, UTS 89, p . 283; Albania-Switzerland, June 10, 1929, A r t i c l e 5, LNTS 104, p . 147; A u s t r i a - N e t h e r l a n d s , March 28, 1929, A r t i c l e I I , UTS 109, P . 39; Cuba-France, Nov. 6, 1929, Art i c l e I I , UTS 14, p . 345; Greece-Hungary, June 3, 1930, A r t i c l e 22, UTS 122, p . 37; Netherlands-Yugoslavia, May 28, 1930, A r t i c l e 15, UTS 129, p . 73; Argentine Republic-Great B r i t a i n and Northern I r e l a n d , May 1, 1933; A r t i c l e 5, UTS 143, p . 67; Slam-Sweden, Nov. 5, 1937, A r t i c l e 18, UTS 185, p . 337; Norvay-Siam, Nov. 15, 1937, A r t i c l e 20, UTS 186, p . 9, Sweden-Yugoslavia, May 14, 1937, A r t i c l e 18, UTS 194, p . 21; Norway-San Salvador, Nov. 21, 1938, A r t i c l e 12, UTS 198, p . 157. Netherlands-Czechoslovakia, October 17, 1924, A r t i c l e 7 , UTS', 31, p . 99; United Kingdcm-Siam,July 14, 1925, UTS 49, p . 51. United Kingdcm-Hungary, J u l y 23, 192^ A r t i c l e 19, UTS 67 p . 183. Chile and Norway, Feb-. 9, 1927, A r t i c l e 7, iJTS 80, p . 325. Germany-Siam, Dec. 30, 1937, A r t i c l e 22, UTS 188 p . 401. Questions of i n t e r p r e t a t i o n and a p p l i c a t i o n may be submitted

THE MOST-FAVORED-NATION

CLAUSE

number as the arbitral body designated by the parties, but by far the most common type of more detailed provision sets up an ad hoc mixed tribunal consisting of three members - one each from among the nationals of the two contracting parties and a third (to serve, Implicitly, as "umpire" or "president of the court"), chosen by them from among the nationals of any third s t a t e , 4 5 In some agreements the arbitral body is to consist of five members (if requested) chosen the same w a y . 4 6 Usually the President of the Permanent Court of International Just i c e , 4 7 the Secretary-General of the L e a g u e , 4 8 the President of the Swiss Confederation 4 8 or the President of the Council of Administration of the Permanent Court of Arbitration 5 0 are called upon to appoint the neutral Footnote continued to the Permanent Court of International Justice while the "immediate settlement" of tariff and navigation questions is submitted to ad hoc arbitration. Great Britain and Northern Ireland-Boumanla, Aug. 6, 1930, Article 33, LNTS 123, p. 307J Greece Roumania, Aug. 11, 1931, Art. 27, LNTS 130 p. 33. 1+5. Estonia-Switzerland, Oct. ll+, 1 9 2 5 , Article 15, LNTS 49, p. 1+21; Austria-Estonia, Dec. 11, 1928, Article 29, LNTS 92, p. 229; Germany-Irish Free State, May 12, 1930, Article 2k, LNTS 131, p. 153; Hungary-Roumania, Aug. 12, 1931, 186, LNTS p. 325. Sometimes qualifications for the arbitratbr are mentioned:" . . . he must possess experience in economic questions. . ."Ad Article 16, Protocol of Signature Economic Union of Belgium-Luxembourg - Switzerland, Aug. 26, 1929, LNTS 105, p. 9 . k6. Hungary-Czechoslovakia, May 3 1 , 1927, Article 30, LNTS 65, p. 6l; Greece-Switzerland, Nov. 29, 1 9 2 6 , Article 9, LNTS 63, p. 27; Albania-Greece, Oct. 13, 1 9 2 6 , Article 2k, LNTS 83, p. 325; DenmarkGreece, Aug. 22, 1 9 2 8 , Article ll+ wherein it is provided that three of the five must not be nationals of, domiciled in, employed by one of the parties; the umpire is to be chosen from these three. LNTS 9k, p. 263. kf. Economic Union of Belgium and Luxembourg-Switzerland, Aug. 26, 1929, Protocol of Signature, Ad Article 16 (the Vice President or oldest member of the court if President unavailable), LNTS 105, p. 9; Denmark-Greece, Aug. 22, 1928, Article 1^, LNTS 9k, p. 263; Denmark-Persia, Feb. 20, 193k, Article 16, LNTS 1 5 8 , 299 (the two parties will submit a list from which umpire is to be chosen). U8. Albania-Kingdom of Serbs, Croats and Slovenes, June 22, 1 9 2 6 , Article 3 1 , LNTS 9 1 , p. 9 . k9. Poland-Roumania, June 23, 1930, Article 31, LNTS 133, p.163. 50. Germany-Panama, Nov. 21, 1 9 2 7 , Article 13, LNTS 115, p. 239; Germany-Greece, Mar. 2k, I 9 2 8 , Article 27, LNTS 90, p. 9; GermanyHungary, July 18, 1931, Article 28, LNTS~150, p. 111.

THE SCOPE, INTERPRETATION AND MEANING arbitrator or arbitrators In the event the parties fall to agree within a specified time - one month, generally. Most of these treaty clauses contain a statement that the contractants reserve the right to choose the neutral arbitrator "in advance and for a specified period."51 Instead of submission to judicial settlement by the Permanent Court of International Justice or to "a court of arbitration," commercial treaties sometimes specify a particular bilateral or multi-lateral convention which will govern the peaceful settlement of disputes: the Hague Convention of October 18, 1907, for the Pacific Settlement of International Disputes; 52 the general act for the Pacific Settlement of International Disputes of September 2 6 , 1 9 2 8 ; 5 3 or, for example, the Franco-German Arbitration Convention of October 16, 1925.94 Provisions regarding the rules of procedure to be followed in any given arbitration vary; only the most detailed treaty clauses (these are exceptional) say much about procedure. Apparently this is a matter to be left to the particular mixed commission concerned. Numerically, at least, the most popular method seems to be to leave the establishment of rules or procedure to the arbitral tribunal originally,55 or eventually, if. the two parties fall to agree in a preliminary "compromise." * 51. Germany-Panama, Nov. 21, 1927, Article 13, m T S , 115, p. 239; Estonia-Finland, April 11, 1931, Article 18, U T S 12k, p. 217; Italy-Panama, Oct. 16, 1 9 2 9 , Article 23, U T S 138, p. 155; Bulgaria-Czechoslovakia, Aug. 29, 1933, Article 30, U T S , l W , p. 15. 52. Union of South Africa-Germany, Sept. 1, 1928, U T S 95, p. 289; France-Greece, Mar. 11, 1929, Article 1*01; France-Czechoslovakia; July 2, 1928, Article U T S Greece-Poland, April 10, 1930, Article 2k U T S , 120 p. France, Oct. 16, 1937, Article 34, U T S 1 8 3 , p. Ul.

Article 23 37, U T S 95, 99; p. 105; 369; Estoirla-

53. France-Slam, Dec. 7, 1937, Article 21 U T S 201, p. 113. 54. Gemany-France, Aug. 17, 1927, Article kj, U T S 7 6 , p. 5; Also Greece-Roumania, Aug. 11, 1931, Article 27, U T S 130, p. 33. 55. Greece-Switzerland, Nov. 29, 1 9 2 6 , Article 9, LMTS 6 3 , p. 27; Albania-Greece, Oct. 13, 1926; Article 2k, U T S 8 3 , p. 325; Denmark-Greece, Aug. 22, 1 9 2 8 , Article 14, LHTS 9k, p. 2 6 3 ; DenmarkPersia, Feb. 20, 193k, Article 16, U T S I 5 8 , p. 299. 56. Germany-Lithuania, Oct. 30, 1 9 2 8 , Article 33, U T S 89, p. 127; Union of South Africa-Germany, Sept. 1, 1928, Article 23, U T S 95, p. 289; Hungary-Lithuania, May 16, 1929, Article 18, U T S 96, p. 333; Germany-Estonia, Dec. 7, 1928, Article 28, U T S 99,

46

THE MOST-FAVORED-NATION

CLAUSE

In other cases, rules of procedure are determined by the Statute of the Permanent Court 57 or the Hague Convention of 1907. 58 Rarely, a treaty will specify that procedure is to be ex aequo et bono. 59 The most detailed treaty provisions follow a broadly similar pattern: the first case will be heard by the mixed tribunal in the territory of the defendant contracting party, the second case in the territory of the other, and so on alternatively; the country where the tribunal meets must provide the meeting place and secretarial staff; the umpire acts as chairman and directs the discussion; decisions are taken by majority vote; and in the summoning of witnesses and experts, the authorities of each party will cooperate as fully in the furnishing of judicial assistance as is true of civil court proceedings; proceedings may be carried on in writing if there is no objection; each party will compensate its own arbitrators and pay one half of other remaining expenses.60 Footnote continued. p. 259; Germany-Irish Free State, May 12, 1930, Article 24, LNTS 131, p. 153; Italy-Panama, Oct. 16, 1929, Article 23, LOTS 1 3 8 , p. 355; Germany-Bulgaria, June 24, 1932, Article 32, LNTS 147, p. 211; Bulgaria-Czechoslovakia, Aug. 29, 1933, Article 30, LHTS 148, p. 15; Germany-Hungary, July 18, 1931, Article 28, LNTS 150, p. 111. 57. Denmark-Lithuania, June 21, 1930; Article 2k (Summary procedure in Article 29 of the Statute) LHTS 114, p. 151; BoliviaDenmark, Nov. 9, 1931, Article 6 (same unless agree on ordinary procedure in Chapter III of the Statute) LHTS 147,' P. 27; Great Britain and Northern Ireland-Poland, Article 25 (Article 29 of Statute) LNTS 162, p. 181; Denmark-Haiti, Oct. 21, 1937, Article 6 (summary procedure Article 29 of Statute) LNTS 190, p. 233. 5 8 . Austria-France, May 16, 1928, Article 35 LNTS 88, p. 21; Estonia-France, March 15, 1929, Article 41, LNTS 89, 381; FranceGreece, Mar. 11, 1929, Article 37, LNTS 95, p. 401; Denmark-Persia, Feb. 20, 1934, LNTS 1 5 8 , p. 299. 59. Great Britain and Northern Ireland-Portugal, May 11, 1938, Article 8 U1TS 191, p. 285. 60. ATbania-Kingdom of Serbs, Croats and Slovenes, June 22, 1926, Article 32, LNTS 91, p. 9; Denmark-Greece, Aug. 22, 1928, Article 14 (Umpire chooses meeting place), LNTS 94, p. 263. Economic Union Belgium and Luxembourg-Switzerland, Aug. 26, 1929, Protocol of Signature, AI, Article l6, LNTS 105, p. 9; EstoniaFinland, Apr. 11, 1931, Article 18, LNTS 124, p. 217; Italy-Panama, Oct. 16, 1929, Article 23, LNTS, 1 3 8 , p. 355 (on the question of

THE SCOPE, INTERPRETATION AND MEANING

47

In a majority of instances a special agreement or "compromise" is provided for in advance of whatever later procedure is agreed upon. Such a preparatory statement usually outlines the nature of the dispute and rules of procedure and if agreement is not possible, one or the other of the parties has the right to apply directly to the World Court or some other appropriate agency.01 In nearly all the treaty provisions mentioned above, the "preliminary question" whether a dispute between two parties to a commercial treaty does involve interpretation is to be submitted to arbitration in precisely the same manner as any other question.62 The scope of arbitration is limited in a few treaties by a phrase to the effect that "no matter which falls within the domain of the sovereignty or exclusive competence of the state can become a subject for arbitration."83 But in no case is the arbitral award regarded as anything except fully binding on the parties concerned. There are other interesting and important treaty clauses bearing upon the problem of Interpreting generally, and which therefore relate indirectly to mostfavored-nation clauses. One type attempts to eliminate disputes over language by specifying which of several languages a treaty is drawn up in is to be official for purposes of interpretation, as illustrated by Article 4 of an agreement between Great Britain and China: "The English and Chinese texts of the present treaty have been carefully compared and verified; but in the event of there being a difference of meaning between the two senses as expressed In the English text shall be held to sharing expenses) Article 57 of the Hague Convention of 1899 will apply); Bulgaria-Czechoslovakia, Aug. 2 9 , 1933, LNTS 148, p. 15. 61. Austria-France, May 16, 1 9 2 8 , Article 35, LNTS 8 8 , p . 21, Estonia-France, March 15, 1929, Article 41, LNTS 8 9 , p. 3 8 I ;

Slam-

Switzerland, May 2 8 , 1931, Article 15, LNTS 125, P. 3376 2 . The question of the competence of the mixed arbitral body is to be submitted directly to the P e m a n e n t Court of International Justice in Roumania-C zechoslovakia, June 27, 1930, Article 39, LNTS 119, P. 73. 6 3 . Great Britain and Northern Ireland-Turkey, March 1, 1930, Protocol of Signature, LNTS 108, p. 1+07; Norway-Turkey, March 16, 1931, Article 27, LNTS 1 3 8 , p. 1+1.

THE MOST-FAVORED-NATION CLAUSE 04

prevail." On occasion, two or more languages may be regarded as authentic.65 Sanitary regulations, unilaterally applied, have played an important role in the history of the most, favored nation clause and have teen the cause of many controversies. It is of some significance, therefore, to find an attack on the problem in the form of rather unique treaty provisions. These provide first of all for consultation before sanitary restrictions on imports become operative; if disagreement arises, a commission of technical experts shall be established to make recommendations to the governments involved.66 C. CONCEPT OF THE MOST-FAVORED-MATION CLAUSE

Despite the variety of forms and interpretations which have surrounded the clause, it does have an accepted meaning. This is discoverable in the common elements extracted from the many formulas which embody the principle of equality of treatment. While it is evident that the clause is becoming standardized, there is no fixed wording or formula of the clause; and yet, its raison d'être is always the same; to establish between the contracting parties a treatment equal to that enjoyed by any third nation, to require that they pay no higher tariffs than the nation which pays the least, and to obtain for their nationals the same commercial priviledges and immunities which prevail for the subjects of 6k. Aug. 1 7 ,

LNTS 90, p. 337, Similar provisions in: Germany-China, 1 9 2 8 , Article III, LNTS 91, p. 93; China-Denmark, Dec. 12,

1928, Article IV, IHTS 91, p. 207; China-France, Dec. 22, 1928, Article 3, LNTS 92, p. 267; China-Italy, Nov. 27, 1928, LNTS 93, p. 173. (English prevails in all Chinese treaties except the one with France, where French prevails); Bolivia-Netherlands, May 30, 1929, Article 11, LNTS 133, p . 113; Bolivia-Iceland., Nov. 9, 1931, Article 3, LNTS 114-7, p. 51. 6 5 . Latvia-USSR, June 2, 1927, Article 11, LNTS 6 8 , p. 321; U.S.-Belgium-Greece-Cuba-Panama-Guatemala-Nicaragua-Colombia, Article 14-, LNTS 1 6 5 , p. 9. 66. United States of America-Brazil, Feb. 2, 1935, Article 10, LNTS 166, p. 211; United States of America - Honduras, Dec. 18, 1 9 3 5 , Article 12, LNTS 1 6 7 , p. 313; United States of AmericaColombia, Sept. 1 3 , 1 9 3 5 , Article 8, LNTS I 7 0 , p. 293; United States of America-Switzerland, Jan. 9 , 1 9 3 6 , Article 12, LNTS 171, p. 231.

THE SCOPE, INTERPRETATION AND MEANING other states. Diversity of stipulation is no obstacle to the determination of a concept of the clause. Human activities cause innumerable contracts of sale; each one is different in word and meaning, but this does not mean that the contract of sale has no reality before the law. The concept of the most-favored-nation clause is stated differently by different authors. Some concepts are based on working, that is, positive or negative forms, limited and unlimited forms and conditional and unconditional forms. Others are based upon the effects of the clause. In view of the analysis presented in the coming pages, these concepts sacrifice important considerations. Those which stress the form of the clause overlook the very thin veil of difference between various wordings or definitions. Others which stress the connection between form and purpose ignore the fact that often qualifying words or phrases are added by chance and have no real significance. This is not to say that such factors are negligible; on the contrary each is a descriptive element of the clause. The point is that none of them can be fully descriptive. It has been stated heretofore that every time a new commercial treaty is made, a new clause is created, a new clause in the sense that the effect of most-favored-nation treatment is different In this particular case from any other. This is due in large measure to the fact that the total economic relationship between any two countries will be in some respects unique. The results of negotiation can be studied; the actual wording of the clause can be read. But only those who intimately understand the conditions which prompted the treaty and the purpose envisioned for the clause know its structure. True, it can be said that the clause represents the effort to establish equality of treatment, that it creates rights and obligations, that it has certain exceptions and limitations, that it has jurldicial qualities, that it can apply to many phases of commercial relations, that it is open to many interpretations, and that It is the foundation of all commercial treaties. 'Over and above these things, however, the clause, an Instrument of economic foreign policy, has certain subtle features which cannot be isolated from its common aspects. The amazing lack of unified opinion in the clause is eloquent testimony to this fact.

V A Modern Definition, Classification, and Analysis

THE SUMMARY OF w h a t might be called the classical or traditional analysis of the most-favored-natlon clause in Chapter III properly belongs in this study; it has a certain historical interest if nothing else. The basis of that earlier analysis is now, however, somewhat outdated, even though the examples cited can be found among recent treaties. A close examination of 607 clauses embodied in treaties from 1920 to 19^0 provides a m u c h more interesting and accurate basis for defining the most-favored-natlon obligation. Apart from being confined to the treaty practice of another era, there are other reasons why this classification is unsatisfactory. The wording of the clause has become less important; the scope and Intent of the clause are actually what give it significance. A breakdown of different wordings is only one method--a minor method--of understanding most-favored-nation pledges. W h a t territory does the clause embrace? Does it apply to all kinds of concessions? W h a t is the nature of exceptions to it? Does it cover all the items in the tariff schedule of two contractants? How is the pledge limited? W h a t phrases (isolated or not) sketch in the totality of the obligation peculiar to a particular treaty? These are the questions to be answered, these m u s t enter into any classification of forms. To freeze the clause into rigid forms based on differences in wording is to ignore the overall meaning of each separate obligation. The wording of the equality of treatment clause m a y be exactly the same in commercial treaties between Prance and Yugoslavia and between Estonia and Greece, but further resemblance will end there; even where the same words are used, the situation to w h i c h the words apply m a y only be nominally the same, a n d it is here that degrees of government control over external trade, the elements of a country's

A MODERN DEFINITION, CLASSIFICATION AND ANALYSIS

51

commercial policy and the amount and kind of foreign trade exert their subtle Influence. Thus It Is more appropriate to speak of certain types of most-favored-natlon clauses, that is, a similarity of form with variation In content. It Is to be noted that this Is a much looser methodology than that represented In Chapter III; but more Is Involved than a mere discussion of forms because the change in the method of analysis achieves a better approximation of the nature of the most-favorednatlon clause.1 A. BASIC FORMS

In the classification presented below some fundamental changes are evident. All of the simple and complex types discussed are unconditional; therefore, there seems to be no need to preserve that term as a part of the definition of various forms, especially since the conditional form is being continued in the classification—despite the fact that so few clauses negotiated in recent years take that expression. Neither does there saei to be any point in retaining the "positive" and "negative" wordings as peculiar types; positive and negative wordings are included but only a3 variations within basic types, not as separate categories. Similarly, the use of "limited" and "unlimited" is not quite the same. All of the "complex" types of clause are limlted-whlch embraces mo3t clauses of the recent period. A few of the "simple" clauses are unlimited for reasons having to do with the nature of that form. Furthermore, the words "expressly" and "immediately" no longer have a significance which warrants giving them prominence in any system of classification; most clauses are unconditional to begin with and the time is long past when the omission of the word "unconditional" indicates an alteration of form. Some 65 treaties (ranging from Great Britain and North Ireland-Latvia, June 22, 1923, to United States of America-Venezuela, November 6, 1939), retain the phrase "immediately and unconditionally" or its equivalent. F.ewer treaties also retain a companion 1. Actually the break between the two bases of classification is not bo sharp as might be implied; no doubt most reoent treaties could be forced Into the older analysis; but it seemed better to let a detailed examination of modern agreements develop its own system of definition and classification.

52

THE MOST-FAVORED-NATION CLAUSE

p h r a s e " w i t h o u t r e q u e s t and c o m p e n s a t i o n , " w h i c h can p e r h a p s be e x p l a i n e d by t h e n e c e s s i t y t o d i s t i n g u i s h such o b l i g a t i o n f r o m c o n d i t i o n a l c l a u s e s s t i l l i n e f fect.2 Hence p r e c i s e l y t h e same t h i n g a p p l i e s t o t h e word " i m m e d i a t e l y . " With v e r y few e x c e p t i o n s , and unl e s s p a r t i c u l a r c o n c e s s i o n s a r e by n a t u r e u n i l a t e r a l , most c o m m e r c i a l t r e a t i e s e n t a i l s t r i c t m u t u a l i t y ; a g a i n , i t i s becoming more u s u a l n o t t o s t a t e s p e c i f i c a l l y t h a t obligations are r e c i p r o c a l . Accordingly, there are f i v e b a s i c t y p e s of m o s t - f a v o r e d - n a t i o n c l a u s e s : ( l ) s i m p l e and l i m i t e d ; ( 2 ) s i m p l e and u n l i m i t e d ; ( 3 ) complex and d e t a i l e d ; (4) complex and l e s s d e t a i l e d ; and ( 5 ) c o n d i tional. 1 . THE SIMPLE FORM. The s i m p l e f o r m of t h e m o s t - f a v o r e d n a t i o n c l a u s e i s one i n w h i c h t h e r e i s a s t a t e m e n t ( i n a s e n t e n c e or two) of an o b l i g a t i o n t o e x t e n d e q u a l i t y of treatment without f u r t h e r a m p l i f i c a t i o n . This form app e a r s p r i m a r i l y i n b r i e f e r a g r e e m e n t s - e x c h a n g e s of n o t e s and p r o v i s i o n a l t r e a t i e s . Out of a t o t a l of 607 r n o s t - f a v o r e d - n a t i o n c l a u s e s n e g o t i a t e d from 1920 to 1940, 1 ^ 1 were of t h i s t y p e . The u n l i m i t e d s i m p l e f o r m u s u a l l y c o n s i s t s of a r e c i p r o c a l undertaking to " r e g u l a t e commercial r e l a t i o n s " b e t w e e n the two c o u n t r i e s on t h e b a s i s of a mut u a l a p p l i c a t i o n of t h e m o s t - f a v o r e d - n a t i o n c l a u s e . 3 The same r e s u l t i s a c h i e v e d t h r o u g h d i f f e r e n t w o r d i n g i n an a g r e e m e n t whereby G r e e c e " h a s d e c i d e d t o g r a n t t o Denmark, s u b j e c t t o r e c i p r o c i t y , t h e a d v a n t a g e s of t h e most-favored-nation clause . . . " 4 Often agreements only a f f i r m or c o n t i n u e a p l e d g e made a t a p r e v i o u s t i m e . 5 2 . United States-Estonia, December 23, 1925, A r t i c l e 7, Para. 4, LNTS 50, p. 1 3 ; Austria-Portugal, December 1 8 , 1925, Article I I I , LHTS 54, p . 9 1 ; Poland-Switzerland, June 26, 1922, A r t i c l e 7, LNTS, 1 2 , p . 307; United Kingdom-Poland, November 26, 1923, LHTS 28, p. 430; Greece-United Kingdom, J u l y 1 6 , 1926, A r t i c l e 4, LHTS 6 1 , p . 1 5 ; Italy-Yugoslavia, J u l y 1 4 , 1924, Article 2, LHTS, 82, p . 257 J (a representative l i s t ) . 3 . Albania-Czechoslovakia (exchange of notes), January 1 9 , 1926, LNTS 64, p. 349; Bulgaria and Czechoslovakia (exchange of notes), October 1 6 , 1925, LNTS 56, p . 265. 4. Denmark-Greece (exchange of notes), April 7 and 1 9 , 1927, LNTS 62, p. 219. 5. Economic Union, Belgium-Luxembourg-France, February 23, 1928, LHTS 72, p. 6 1 ; United Kingdom-Kingdom of Serbs, Croats and Slovenes, June 18, 1926, LNTS 57, p. 23; Great B r i t a i n and northern

A MODERN DEFINITION, CLASSIFICATION AND ANALYSIS

53

In an agreement of this kind, no further mention of equality of treatment is made, and it is to be observed that apparently the whole regime of commerce between the two countries la covered - no limitations or exceptions appear. A somewhat more specific type, though still general in scope, is simple but limited. An agreement between Haiti and Italy (Articles 1-2) mentions only the benefit of lowest duties applicable to goods of the most-favored-natlon.s It Is exemplified further in the exchange of notes between the foreign ministers of Denmark and Turkey: I have the honor to inform you that, pending the forthcoming conclusion of a Treaty of Commerce and. a convention respecting conditions of Residence and Business, negotiations for vhich were entered into on March 22, last, the Danish (Turkish) government agrees that, as from October 1, 1926, the products of the soil and of industry originating in and coming from Turkey (Denmark) imported into Danish (Turkish) territory and intended for consumption, re-export, or transit shall, for a further period of sii months enjoy most favored nation trealment. 7

Clearly this is limited to the flow of goods and does not apply to individuals, shipping or inland transportation. Within the category of goods in trade, a single clause may be limited further to agricultural or industrials products.8 A more complete though not unlimited simple clause Is well defined in a reciprocal agreement between Iceland and the USSR which states in part: "Goods and ships of the Union as well as citizens and corporations of the Union in every respect shall enjoy In Iceland the same rights, privileges, and facilities which Iceland has granted or may grant to the goods, ships, citizens Footnote continued Ireland-Chile, November 26, 1937, U1TS 186, p. 285; Spain-Netherlands, March 19, 1928, LNTS 7, p. 117; Austria-Czechoslovakia, May U, July 22, 1931, u n s 128, p. 59. 6. January 3, 1927, IHTS 71, p. 1*05. 7. Denmark-Turkey (exchange of notes), September 19, 1926, IilTS 56, p. 259; Great Britain and Northern Ireland-San Salvador (exchange of notes), August 8. 1931 and September ll*, 1932, U W S 128, p. 1*17; Japan-New Zealand, July 2k, 1 9 2 8 , LNTS 8 5 , p. 129. 8. Denmark-Turkey (exchange of notes), March 15, 1927, LNTS 61, p.287.

51»

THE MOST-FAVORED-NATION CLAUSE

or corporations of any other country."8 An even more comprehensive simple clause 13 that in the provisional agreement between Albania and the Economic Union of Belgium and Luxemburg: "The most favored nation system shall be applied reciprocally in commercial relations between Albania and the Belgo-Luxemburg Economic Union and in matters concerning establishment, taxation, industry and navigation."10 Sometimes thi3 kind of clause will comprise the core of a short treaty,11 remaining simple in form despite being in a treaty instead of an exchange of notes. The chief difference between the two can be summarized in the longer duration of the latter; as demonstrated by a detailed treaty between Italy and Switzerland, Article I: The Contracting Parties undertake to grant each other most favored nation privileges and treatment as regards importation, exportation and transit ... Each of the Contracting Parties accordingly undertakes to apply free of charge and immediately in favor of the other all the privileges and advantages in these respects vhich it has granted or may grant to a third power.12

The "limited" versions of the simple clause in the examples cited so far have been so termed because in such cases the clause does not apply to some phase of the economic, relations between the contractant3; the simple clause can also be limited by being applicable only to certain specific matters. Article 2 .of an exchange of notes between Chile and the Economic Union of Belgium and Luxemburg states that the former "shall apply thereto [to Belgian Commerce] 12 the reduced duties which it applies to goods produced in France in virtue of the modus vlvendl signed on that date." 13 The detailed 9: Iceland-USSR, (exchange of notes) May 25, 1927, U T S 63, p. 105, Japan-Turkey (exchange of notes), July 31, 1929, LNTS 111, p. 289; Greece-Hungary, June 4, 1925, Article 1, LHTS 39, p. 11*1, to Greek industrial and agricultural products. 10. Albania-Economic Union Belgium-Luxemburg, (exchange of notes) February 19, 1929, U T S 90, p. 429; Abyssynia-Netherlands, (exchange of notes), September 30 - October 2, 1926, Article 2, U T S

78, p. 89. 11. Chile-Norway, February 9 , 1927, Article 1, U T S 80, p. 325; limited because it does not apply to Spitsbergen (see Article 8); Roumania-Sweden, October 7, 1931, Article 8, U T S 131, p. 51; ItalySwitzerland, Article 1, January 27, 1933, U T S 25, pp. 23-25. 12. January 27, 1923, U T S , pp. 23-25. Author's parentheses. 13. Economic Union Belgium and Luxemburg-Chile, (exchange of

A MODERN DEFINITION, CLASSIFICATION AND ANALYSIS

55

quota agreement between Great Britain and the Argentine Republic (the so-called Runclman-Roca treaty) contains no overall most-favored-nation clause, but it does require reciprocal extensions of most-favored-nation treatment to applications for foreign exchange. 14 The same is true of a similar treaty between Great Britain and Iceland, 15 with reference to reductions and increases in quota items. In neither is there any further mention of equality of treatment. Most-favored-natlon treatment is established between Chile and the Netherlands-Indies, Surinam and Curacao in an exchange of notes of December 30, 19361.6 Roumanla agreed to grant equality of treatment to all oil companies in which there was a substantial British financial interest in the matter of the issuance of permits for exploration and exploitation of new lands and in all matters concerned with the chartering and operation of concessions and with the production of oil. 17 Simple clauses, brief though they usually are, may also be narrowed in scope by stated exceptions: Las Partes Contractantee se obligan a concederse reciprocamente el tratamento de la Nación mas favorecido en asuntos comerciales, consulares y marítimos, con excepción del cabotage; y al efecto, cual quler derecho, franquicia o favorque una de ellas conceda a una tercera Nación, por el mismo hedro Ipso facto ee entrende otorgado a la otra Parte Contractante,le

Many agreements to which Egypt is a party contain exceptions pertaining to either products or territories. In one with Hungary, Egypt gives most-favored-nation Footnote continued notes), December 14, 1931, IflTS 125, P. 247; Chile-Netherlands, (exchange of notes), December 17, 1931, I M S 127, P. 79; Great Britain and Northern Ireland-Chile (exchange of notes), Otober 15, 1931, LNTS 128, p. 439; the date of the agreement with France was May 22, 1931. . The Argentine Republic and Great Britain and Northern Ireland, May 2 and September 26, 1933, Article 2, LNTS 143, p. 6 7 . 15. Great Britain and Northern Ireland-Iceland, May 1 9 , 1933, Article 3, IJiTS 144, p. 33. 1 6 . Similar type: Belgium-Luxemburg-Persia, May 9 , 1 9 2 9 , IJJTS H O , p. 377; Chile-Netherlands, December 30, 1936, LNTS 177, p. 89; see also earlier agreement: December 7, 1931. 17. Great Britain and Northern Ireland-Roumanla, May 11, 1939,, Annex I, LNTS 1 9 6 , p. 3 5 1 . 18. Germany-Guatemala, Oct. 4, 1924, Article I, LNTS 52, p. 1 9 .

56

THE MOST-FAVORED-NATION CLAUSE

treatment to a l l Hungarian products e x c e p t " l e a f tobacco."19 In o t h e r s , Egypt w i l l not extend to t h i r d n a t i o n s the t r e a t m e n t s h e g i v e s t o t h e Sudan and Sudanese products.20 F i n a l l y , s i m p l e c l a u s e s , l i k e o t h e r s , may e x p r e s s the p r i n c i p l e of e q u a l i t y o f t r e a t m e n t i n l a n g u a g e which i s out of the o r d i n a r y . F o r e x a m p l e , t h i s q u o t a t i o n from an exchange of n o t e s by C h i l e and F r a n c e wherein both p l e d g e t o " r e f r a i n from any measure which might a d v e r s e l y a f f e c t t h e s y s t e m of e x c h a n g e s between t h e two c o u n t r i e s . . . by d i s c r i m i n a t o r y . . . m e a s u r e s . 2 1 2. THE CONDITIONAL FORM. T h i s form of t h e c l a u s e i s n o t a s i m p o r t a n t a s i t once w a s , and i t h a s n o t changed a s much as other forms. To r e p e a t , o n l y n i n e c o n d i t i o n a l c l a u s e s were n e g o t i a t e d i n t h e whole p e r i o d f r o m 1920 t o 19^0. There a r e , of c o u r s e , c o n d i t i o n a l c l a u s e s s t i l l i n e f f e c t i n t r e a t i e s drawn b e f o r e World War I , 2 2 b u t s o f a r as recent p r a c t i c e i s concerned, i t has d e f i n i t e l y f a l l e n into disuse. In a d d i t i o n , even where a c o n d i t i o n a l c l a u s e d o e s a p p e a r , i t r a r e l y d o m i n a t e s a whole commerc i a l a g r e e m e n t ; more o f t e n than n o t i t w i l l be accomp a n i e d by a l i m i t e d u n c o n d i t i o n a l c l a u s e . Thus A r t i c l e 5 of a t r e a t y between Canada and F r a n c e p r o v i d e s : If c.t any time Franco grants to the United. States of America for any products other than those enumerated in Schedules A and B to this convention more favorable treatment than i s granted to Canada, Canada shall tie entitled to claim the benefit of the same treatment for any identical or similar products originating in and ccmlng from Canada, on condition that France shall be entitled to ask from Canada a reasonable and equivalent concession. 2 3 Unconditional most-favored-natlon c l a u s e s appear in A r t i c l e s 2 , 4 , 6 , 8 , 18, 23 and 24 of t h l 3 3ame t r e a t y 19. Egypt-Hungary (exchange of notes) February 16, 1927, INTS 80, p . 6 l ; Egypt-Kingdom of Serbs, Croats, Slovenes (exchange of notes), May 12-15, 1927, UTS 96, p . 367. 20. Denmark-Egypt (exchange of notes) May 7, 1930, UJTS 102, P. 137; Egypt-Netherlands (exchange of notes), March 17, 1930, LNTS 105, p . 95; Egypt-Finland (exchange of notes), June 12-13, 1930, LNTS 111, p. 315. 21. May 22, 1931, LNTS, 124, p . 31. 22. See Chapter 323. December 15, 1922, UTS 21, pp. 37-56; note the element of contingency in this a r t i c l e . The conditional clause here i s obvieasly limited as well as contingent.

A MODERN DEFINITION, CLASSIFICATION AND ANALYSIS

57

Article 3 of a treaty between France and Latvia provides immediate and unconditional equality of treatment concerning the removal or alleviation of Import prohibitions and restrictions but as regards export restrictions and prohibitions the contractants "may not claim exemptions, which may be conceded to other Powers, only in return for some equivalent or as part of a commercial agreement." 24 Here, too, the conditional clause is limited as well as being surrounded by unconditional obligations. 25 A conditional clause of the more traditional type appears in Article 3 of a treaty between Austria and Greece, which provides that if Greece grants lower than her minimum tariff to any third country, Austria can claim the benefit of these duties if she will grant special compensations in return. 2 0 An interesting variation on the traditional conditional theme is found in Article 19 of a treaty between Japan and Peru; favors, privileges and immunities relating to commerce, navigation or Industry, to entry, travel, or residence which either has granted or may grant "to the subjects or citizens of any European or North American nation" shall extended to the other party" gratuitously, if the succession in favor of that European or North American nation shall have been gratuitous, and on the same or equivalent condition if the concession shall have been conditional. 2 7 Japan and Belgium-Luxemburg signed a treaty which is clearly dominated by a number of unconditional clauses, and yet Article XII, treating of vessels, states that the two parties: shall enjoy, free of charge the rights and privileges...accorded

to

vessels of any other country, provided that such rights have b e e n granted free of charge to a third party, and subject to reciprocity or to compensation if conditions of that nature have b e e n laid down in the case of the country in q u e s t i o n . 2 8

Article V of a convention between France and Hungary states that Hungary shall likewise enjoy the benefits of such advantages as may be granted to Germany in respect of the products enumerated in the said list 2k. October 30, 1921»-, LNTS 37, p . 1+03.

25. Article k. 26. April 18, 1925, LHTS 3 8 , p . 313. 27. Sept. 30, 192k,

LNTS 102, p . 33.

28. Economic Union Belgium and Luxembourg-Japan, June 27, 1924, LHTS 36, p. 97.

58

THE MOST-FAVORED-NATION CLAUSE

D without being required to make any corresponding concession of any kind for products not in Lists B and C "on condition that Prance ha3 the right to claim reasonable and equivalent compensation from Hungary." 28 A safe generalization would seem to be that any conditional clauses negotiated in the recent period are decidedly subordinate, applying to some one phase of bilateral economic relations. Treaties dominated by a "covering" conditional clauses are probably a thing of the past. 3. THE COMPLEX CLAUSE. The chief purpose to be served by designating the most numerous most-favored-natlon clauses as "complex" is to emphasize that the reciprocal obligation to grant equality of treatment to commerce (in the largest sense) usually does not begin and end with a mere statement to that effect. By "complex" is meant, therefore, clauses which define most-favored-natlon treatment in greater detail. 30 This does not necessarily mean, however, that complex clauses are wider in 3cope than simple clauses; ordinarily the reverse is true. To repeat, the Important difference between forms of the clause is that of the clarity and extent of definition. ^f there is such a thing as a "standard" mostfavored-nation clause it falls among the complex types, these comprising the major share of all clauses negotiated from 1920 to 19^0 - four hundred seventy-3lx. (a) Less Detailed For convenience, complex clauses can be divided roughly into those which are more and less detailed. As was true of simple clauses, less detailed complex clauses are more often found in exchanges of notes and brief treaties. This is partly a matter of the function of a treaty of commerce; one may newly establish relations between the parties, «mother may be provisional to cover a period of uncertainty, and yet another may modify, or be additional to, some past agreement. While it is not invariable, the nature of clauses will be influenced accordingly. Typical of most-favored-natlon agreements in 2 9 . Oct. 1 3 , 1 9 2 5 , UJTS 1*8, p. 9. 30. The term ' clause here means all mention of most-favorednation treatment in contrast to the "covering clause." Supra, Ch. III.

A MODERN DEFINITION, CLASSIFICATION AND ANALYSIS

59

this category la that set forth In an exchange of notes between Brizil and Switzerland, consisting of six paragraphs which can be summarized briefly: Paragraph a) the contracting parties grant each other "unconditionally" and "without limitation" most favored nation treatment in all matters concerning customs duties, the methods of levying such duties and the rules, formalities and charges which may accompany custom clearance; Paragraph b) accordingly, natural or manufactured products originating in the territory of either contracting party shall In no case be liable "in the above respects" to any other or higher duties, dues, charges, or to any rules and formalities other or more burdensome than those which are or may hereafter be applied to products of the same nature originating In any third country; Paragraph c) Similarly, natural or manufactured products exported from the territory of one of the contracting parties to the territory of the other shall in no case be liable in the above mentioned respects to any other or higher duties, dues, charges or to any rules and formalities other or more burdensome than those which are or may hereafter be applied to products of the same nature exported to any third country; Paragraph d) All advantages, favors, privileges and Inanunlties granted to the products of any third country "shall be Immediately and without compensation" extended to products of the same nature originating in the territory of the other contracting party or destined for it; Paragraph e) Privileges already granted or which may hereafter be granted "to adjacent states with the object of facilitating frontier traffic" or the privileges resulting from a customs union with some other power, shall be excepted from the most favored nation treatment pledged above; and Paragraph f) This agreement will come Into force Immediately for one year and can be denounced on three months' notice.31 It will be noted that this form applies only to the flow of goods, that It applies to exports as well as Imports and that It excepts certain measures from equality of treatment; it Is also worded negatively. All that Is said about trade In a treaty between Hungary and Norway Is a pledge of mo3t-favored-natlon treatment plus: Goods and other products of the soil and of industry may not, as regards their importation and re-exportation, be subject to other or 3 1 . October 29, 1931, U T S 140, p. 265. Specifically unconditional, Germany - Switzerland, July 14, 1926, Article 1, U T S 59, P. 87.

60

THE MOST-FAVORED-NATION CLAUSE

more onerous taxes, restrictions or general or local obligations, or to other import or export formalities than may hereafter be im32 posed, upon the most favored nation. Ona of the earliest examples of the employment of the unconditional clause by the United States occurs in an exchange of notes with Estonia: Every concession with respect to any duty, charge or regulation affecting commerce now accorded or that may hereafter be accorded by the United States or by Estonia, by law, proclamation, decree or agreement, to any foreign country will become immediately applicable without request and without compensation to the commerce of Estonia and of the United States and its territories and possessions, respectively.33 This, too, is confined to goods alone. The whole matter of the treatment of nationals with reference to economic activity is covered in an agreement between France and Bulgaria in the following manner: "As regards the right to settle and to exercise trade, industry, and navigation, French and Bulgarian nationals shall reciprocally enjoy most favored nation treatment in France and in Bulgaria... 3 4 Less detailed clauses may nevertheless be comprehensive, applying equality of treatment to nationals, goods, vessels, in everything pertaining to acquiring and carrying on business, commerce (export and Import), shipping, Including transportation and formalities. 3 5 This may take the form of seven or eight short articles in a treaty. 3 8 Another type of less detailed clause simply provides that subject to the exceptions laid down, the parties "shall grant to the other in all matters concerning trade 32. Sept. 16, 192^, LHTS, 33, p. 107. Not expressly unconditional. 33. March 2, 1 9 2 5 , LHTS k3, p. 292. 31+. Jan. 23, 1929, LHTS 9 1 , p. 3 1 7 . This is apparently unlimited in application. Exchange of Notes, Oct. 22, 1925, LNTS 1A, p. 257; Hungary-Japan (Exchange of notes). 35. Bulgaria-Estonia (exchange of notes), Feb. 11, 1928, LNTS 79, P. b3. 36. Guatamala-Netherlands, May 12, 1927, LNTS 85, p. 323. Only one article in the treaty did not deal directly with mostfavored-nation treatment and that was the last one (Till) stating that the treaty applied also to the Netherlands East Indies, Sur.inam and Curacao.

A MODERN DEFINITION, CLASSIFICATION A N D ANALYSIS

6l

b e t w e e n the two countries, the privileges, facilities and favors of every kind as are or m a y hereafter be granted i n respect of the trade with any other c o u n t r y ; " 3 7 clearly, this is the main or " c o v e r i n g " 3 8 clause and it w o u l d have been classified as "simple" were it not for the exceptions concerning double taxation, customs union, frontier traffic, the settlement of debts arising out of W o r l d W a r I, and import and export prohibitions and restrictions.30 It does not fall into the more detailed complex group because most-favored-natlon treatment is n o t defined extensively. 4 0 Occasionally a general ("covering") clause will be accompanied by one additional clause as in exchange of notes b e t w e e n Norway and Roum a n i a where commercial relations are to be regulated on the basl3 "of the reciprocal application of the mostfavored-nation clauses" and Norwegian vessels are to receive equality of treatment in R o u m a n i a n p o r t s . 4 1 Article III, paragraph 1, of a treaty between the Netherlands and Czechoslovakia provides: natural products or manufactured articles...shall be admitted into the territory of the high contracting parties at rates not less favorable than those which either of the high contracting parties has granted or may hereafter grant, to any third State, both' as regards all charges and taxes and all coefficients, additional charges or increases to which such duties are or may hereafter be subject. 4 3

Article III, paragraph 2 of the same agreement applies favored nation treatment to export and import warehousing, transit, formalities and duties. A n d Article V applies it to all matters connected w i t h trade, Industry, shipping and consular activity. Finally, Article VIII indicates that the arrangement is to apply to all colonies of the Netherlands. The scope of equality of treatment is very broad here and the application Is virtually unlimited. A Latvian-Swedish agreement of December 22, 37. Roumanla-Sweden, Oct. 7, 1931 Article VIII, LNTS 121, p. 51.

38. See supra, Ch. III. 3 9 . Houmania-Sweden, loc. cit., Articles 8, 2k, 2nd Protocol Ad Article 2k. kO. Attention Is called to the difference between this covering clause and that which appears In the agreement between Estonia and the United States, preceding page. 41. October 1, 1924, U T S , 2 9 , p. 3 9 9 . See also Economic Union Belgium and Luxemburg-Hungary.

42. October 17, 1924, U T S 31, p. 95.

62

THE MOST-FAVORED-NATION CLAUSE

1924, speaks In more specific terms about property and establishes most-favored-nation treatment Tor "requisitions for military or public purposes. 4 3 The foregoing examples show that, like all forms of the clause, the less detailed complex varies; it is more than a simple statement of most-favored-natlon treatment and less than the wordy definitions contained in long, involved treaties of commerce. (b) More Detailed«« The "standard" most-favored-natlon clause, will be found in thi3 category. Not that this form is necessarily the most numerous; but it is the one which usually characterizes treaties of commerce and navigation or treaties of establishment and commerce-treaties which are the basic instrument in the regulation of relations between countries for long periods of time. A "standard" clause will be likely to have the mark of any given nation's commercial policy upon it. The core - perhaps 43. LNTS 36, p. 285. V*. Following is a list of important detailed clauses; the list Is not exhaustive. United Kingdom-Finland, Dec. 14, 1923, U T S 29, p. 130; Italy-Finland, Oct. 22, 192b, U T S 32, p. 151; Japan-Paraguay, Nov. 17, 1919, LHTS 6, p. 368; Poland-Switzerland, June 26, 1922, U T S 12, p. 307; Austria-Germany, Sept. 1, 1920, U T S p. 221; United Kingdom-Poland, Nov. 26, 1923, LNTS 28, p. 930; Economic Union Belgium and Luxemburg-Latvia, July 7 1 9 2 5 , U T S 54, p. 267; Spain-Siam, Aug. 3, 1925, LNTS 55, p. 39; Japan-Czechoslovakia. Oct. 30, 1925, U T S 58, p. 263; Japan-Finland, June 7, 1924, U T S 58, p. 279; Gemany-Latvia, June 28, 1926, LNTS 57, p. 403; United Kingdcm-Siam, July 14, 1925, U T S 49, p. 51; Economic Union Belgium and Luxemburg-Estonia, Sept. 28, 1926, U T S 62, p. 433; Austria-Latvia, Aug. 9, 192k, LNTS 65, p.7; Finland-Greece, Dec. 18, 1926, U T S 70, p. 89; Guatemala-Itlay, Sept. 15, 1926, U T S 70, p. 175, Italy-Yugoslavia, July 14, 1924, U T S , 82, p. 257; FranceCzechoslovakia, July 2, 1928, U T S 99, p. 105; France-Switzerland, July 8, 1929, U T S 114, p. 189; USA-Austria, June 20, 1931, LNTS 118, p. 241; Greece-Turkey, Oct. 30, 1930, U T S 125, P. 371; NorwayPersia, May 8, 1930, U T S 134, p. 153; Estonia-France, Oct. 16, 1937, LNTS 183, p. 41; Poland-Czechoslovakia, Feb. 10, 1934, U T S 183, p. 213; Siam-Sveden, Nov. 5, 1937, U T S 185, p. 357; HungaryBounania, Aug. 12, 1931, LNTS 186, p. 325; Chile-Sweden, Oct. 30, 1936, U T S 188, p. 283; German-Siam, Dec. 30, 1937, U T S 188, p. 401; Sweden-Yugoslavia, May 1, 1937, U T S 194, p. 21; USA-Turkey, April 1, 1939, U T S 202, p. 129.

A MODERN DEFINITION, CLASSIFICATION AND ANALYSIS

63

the whole covering clause - will be roughly equivalent in each case, yet the total clause (the covering clause, plus the modifying clauses, exceptions, and limitations) Will be a reflection of national economic interest. The nature of a most-favored-nation clause in a treaty is best shown by a complete resume or direct quotation of all those provisions in which it appears: A treaty between Greece and Turkey begins in Article I with the pledge that the nationals of either contracting party may (provided they comply with local laws) "freely enter, travel, reside and establish themselves" in the territory of the other or leave it any time without being subject to any restriction other than to nationals of the most-favored-nation (without prejudice to police regulation); Article III extends full freedom to acquire.and possess every description of property movable and immovable "which the laws of the other High Contracting Party permit or may hereafter pernit, the nationals of the most favored nation to acquire and possess" Article IV: the parties agree "that in all matters relating to commerce, navigation and industry and the pursuit of profession or trade or any occupation of whatever kind, any privileges, favors or immunities which either High Contracting Party has already granted or may subsequently grant to the ships and citizens or subjects of another foreign country, shall be extended, simultaneously and without request, condition, or compensation to the ships and nationals of the other Party, it being their intention to grant each other reciprocally equality of treatment with the most favored foreign country;" Article 5: in the case of industrial and financial joint stock and transport companies, the contracting parties agree not to place any obstacle in the way of their establishment if they are engaged in activities that are generally allowed to the companies of all other countries; 4 5 Article 7: most-favored-nation treatment shall apply to resident taxes and taxes relating to the completion of police formalities; Article 10: Natural or manufactured products originating in the territory of the Turkish Republic (the Hellenic Republic) shall not, on importation into the territory of the Hellenic Republic [the Turkish Republic] be subject "as regards Customs duties, surtaxes, and coefficients of increase or any other duties and charges whatsoever including octroi," to lees favorable treatment than that which is accorded or may in the future be accorded to similar products of the most-favored-nation "whatever their regional appellations;" without prejudice to paragraphs 1-2, imports into Greece shall be subject to the tariffs specified in List A and imports into Turkey shall be governed by 45. In most clauses this provision is couched in tenns of "national treatment."

64

THE MOST-FAVORED-NATION CLAUSE

the rates in List B; Article 11: most-favored-nation treatment applies also to export duties; Article 12: and to the "manner" of levying duties, warehousing, customs charges and formalities, to. customs treatment and clearance of goods whether imported, exported or in transit; Article 13: If imports come by way of one or more third nations they shall tie charged the same duties as if they came direct; Article 14: internal charges levied in the territory of either High Contracting Party on the production, preparation or consumption of an article on behalf of either the State or of the Communes and corporations shall be no higher than those paid by the most-favored-nation; Article 16: most-favored-nation treatment shall apply to Import and export prohibitions and restrictions or "any other restriction on the freedom of trade" with the exception of measures undertaken a) for public safety and defense of the territory b) for public health or to combat diseases harmful to human, animal and plant life c) to control imports of arms, ammunition and implements of war and all supplies intended for war d) for the exercise of state monopolies; if import licenses are established, equality of treatment shall prevail and any suspension of a prohibition or restriction, no matter how temporary, shall apply immediately and unconditionally to identical or similar products from the other contracting party; Article 17: passengers, baggage, goods and articles of every kind, vessels, boats, carriages and wagons or other means of transport shall be given free transit on routes most convenient for international transit and they shall be granted most-favored-nation treatment in this respect; prohibitions and restrictions, if applicable to all countries alike, and "if for the following purposes, will be permitted: a) public safety and national security, and b) for public health and to destroy Insects, parasites, and diseases harmful to animals and plants; Article 18: Commercial travelers shall be granted most-favored-nation treatment "in all matters concerning their business and in particular as regards Customs facilities granted for samples; nationals of either party "proceeding to fairs or markets, not reserved for the nationals" of one party, "for purposes of carrying on their trade therein shall not be treated less favorably than the nationals of the most-favored-nation;" Article 21; General exceptions to the most-favored-nation pledges in this agreement: a) the privileges which have been or may subsequently be accorded by either party in the matter of frontier traffic with neighboring countries within a zone of 15 kilometers on each side of the frontier; b) the special favors resulting from a customs union; c) special favors and advantages given by Turkey to countries detached from the Ottoman Empire in 1923; Article 28: exceptions to national treatment in the matter of navigation other than those enumerated shall be governed by the principle of most-favored-nation treatment;

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65

Article 32: Consular officers shall enjoy in the territory of the other party "the same privileges, rights and exemptions" as are or may hereafter be accorded to similar consular officials of "any other foreign country;" Article 33: in all matters connected with the administration of estates, "all rights, privileges, favors or immunities" which one of the High Contracting Parties has accorded to the consular officials of any other foreign country shall be immediately to the consular officials of the other subject to reciprocity. In the Protocol to this treaty, the parties reserve the right to take "necessary measures against dumping" (ad Article 10) and "both pledge that neither may invoke the most-favored-nation clause to obtain more favors from its consular officers than it grants to the consular officials of the other party. (Ad articles 32-33).46

It can be seen at once that the foregoing constitutes, in the large, a very detailed description of most-favored-nation treatment; the only aspect which is not treated as extensively as It is in some other agreements is navigation. Another agreement which belongs among the models of the detailed complex is the treaty between Estonia and France, signed October 16, 1957: Article 1 - French imports into Estonia will be subject to the minimum tariff and in no case shall they be liable "to duties less favorable than those which are or may be applied by Estonia to goods of the same nature originating in and coming from any other country"; Article 2 - natural or manufactured products from Estonia enumerated in Schedule A (and imported into France) shall be admitted to the French minimum tariff, "that is, at the lowest rates which are or may be granted by France to any other Power"; Article 3 - otherwise imports from France shall be subject to the duties in Schedule B, while those from Estonia will be subject to Schedule C, and each reserves the right to modify these duties on 15 days' notice; Article k - pledges reciprocal equality of treatment in the matter of export duties; Article 5 - each will extend to the other the "benefit of any alterations in Customs nomenclature or in methods of computing duty" made by administrative action, legislation or treaties with other Powers; Article 6 - any import or export prohibitions must be confined to measures for the following: a) wartime purposes b) to protect health or public security c) to combat diseases harmful to animals and plants d) to protect industrial, literary and artistic rights e) pertaining to goods constituting a state monopoly; these restrictions "shall apply indiscriminately" and shall not become a pretext for k-6. Convention of Establishment Commerce and Navigation, Oct. 30, 1930, LNTS 125, P. 371.

66

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CLAUSE

Imposing duties or have a purely economic aim; tut nothing in this article 8hall affect the rights of either party to adopt measures "to meet extraordinary and abnormal circumstances or to protect the vital economic or financial interests of the country," provided, however, the duration of such measures is limited to the causes or circumstances which gave rise to them; any removal of Import, prohibitions granted even temporarily or by means of the filing of a quota by either of the contracting partieB in favor of the products of a third power shall apply under the same conditions to the same or like products originating in or coming from the territory of the other; Article 7 - the determination of the origin of goods imported by either shall be governed by mostfavored-nation treatment; Article 9 - guarantees moat-favored-nation treatment to customs formalities "relating to the transit, warehousing re-exportation and trans-shipment of goodB and all other operations which goods may undergo on Importation or exportation or during transit, as well as in the matter of charges connected therewith^" Article 14 - merchants, manufacturers or Industrialists "shall in every respect enjoy most-favored-nation treatment"; Article 15 - as to duties and charges payable by the importers of samples or specimens (and in particular for affixing of marks to permit identification) the high contracting parties will grant most-favored-nation treatment; Article 16 - Articles 14-15 do not apply to itinerant trading, hawking or the soliciting of orders frcm persons not engaged in any trade or industry; Article 17 - subject to general laws concerning entry and residence of foreigners in respect of passports, residence permits ( identity cards) and the right of expulsion "the nationals of each of the High Contracting Parties shall, in the Customs territory of the other, enjoy most-favored-nation treatment as regards: a) residence and establishment b) carrying on a trade or industry c) the right to possess, acquire, occupy or hire movable and immovable property and to dispose thereof in any manner whatsoever d) the right to form companies for the carrying on of business"; expropriation shall be undertaken only on the basis of equality of treatment; Article 18 - civil, commercial, industrial, financial, and insurance companies and other companies of a business character constituted in either country in accordance with the laws of that country and having their registered head offices in its territory shall be recognized as properly constituted by the other party and "they shall be entitled to engage in any activities permitted to companies of any other state, establish branches and agencies and enjoy all the rights granted to individuals under Article 17..."; Article 19 - residence taxes or charges connected with police formalities are permitted provided most-favored-nation treatment is adhered to; Article 22 - equality of treatment is to apply to

A MODERN DEFINITION, CLASSIFICATION AND ANALYSIS

67

the engagement and transport of emigrants; Article 29 - the provisions of the present agreement will apply to Algeria; Article 30 Estonian exports shall be charged the minimum tariff upon Importation into French "assimilated" colonies (those having in principle the same customs system as the mother country) and products imported into Estonia frcjn these colonies shall he admitted In accordance vith Schedule B, hut whether Included In Schedule B or not, they shall enjoy equality; in non-assimilated French colonies, Estonian goods shall be treated likewise, and reciprocally, the products of French non-assimilated colonies, protectorates and mandates shall be admitted to Estonia under conditions not less favorable than that enjoyed by any third country; Article 3 1 Articles 5, 7, 8, 9, 10, 33, 31*, 35 apply to French colonies, protectorates, and mandates; Article 32 - Estonian ships in French colonial ports shall enjoy most-favored-nation treatment; Article 33 - exceptions to the most-favored-nation pledges in this agreement: a) concessions designed to facilitate frontier traffic 15 kilcmeters each side of the border; b) favors given by Estonia to Finland, Latvia, Lithuania and the Soviet Union; c) special arrangements between France and French Tunisia and French colonies and between the colonies themselves, and between the colonies and Tunisia; d) special favors given by France to Morocco and mandates e) concessions granted to a third party for establishing a proper balance between it and one of the parties in Internal taxation and to avoid double taxation; f) special arrangements concluded in accordance with the Stresa Conference (Sept. 5-20; 1932); finally the Protocol of Signature (ad Article 8) providing that any advantage granted by either to a third power with regard to certificates of origin shall immediately apply to the other party.147 This example la in some respects more detailed than the first, but It should be noted that the agreement does not cover the entire range of the French and Estonian tariffs - a factor which distinguishes It from the treaty between Greece and Turkey. There is no mention of consular affairs, nor is navigation included. Another, yet different, kind of detailed complex clause is found In a treaty between Spain and the United Kingdom (October 31, 1933):

Article 1. "The subjects or citizens of each of the Contracting Parties and the goods, the growth, produce or manufacture of the territories of the two contracting Parties and the vessels of each V7. IflTS 183, p. M . Canpare Canada-France, Dec. 1922, U T S 21, pp. 37-38 France-Czechoslovakia, Aug. 17, 1923, LHTS 1*4, p. 21.

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THE MOST-FAVORED-NATION

CLAUSE

of the two Contracting Parties shall enjoy unconditionally in the territories of the other, treatment at least as favorable in all respects as that accorded to the subjects or citizens and the produce of the soil and industry and the vessels of the most favoreS. foreign country. This treatment shall be accorded in all matters of commerce and navigation both as regards importation, exportation and transit and in general in all that concerns custom duties and formalities and commercial operations; the establishment of the subjects or citizens of each of the Contracting Parties in the territories of the other; the exercise of commerce, industry and profession, the payment of taxes and the treatment of commercial travelers and their samples. Article 2 - The contracting parties agree that, in all matters relating to commerce, navigation, and industry, any privilege, favor or immunity which either contracting party has actually granted or may hereafter grant, to the ships and subjects or citizens of any other foreign State, shall be extended simultaneously and unconditionally without request and without compensation to the ships and subjects of the other, it being their intention that the commerce, navigation and industry of each contracting party shall be placed in all respects on the footing of the most favored nation;' Article 3 - extends most-favored-nation 'treatment to the acquisition and possession of all kinds of property; Article - any charges connected with the possession of property shall not be greater than those paid by any other country or its nationals; Article 5 - most-favored-nation treatment shall apply to the second part of Schedule A, and the rest of the items in that Schedule shall be subject to the second column of the Spanish tariff except where Spain makes concessions to any foreign country in which case Spain must extend them "on receiving an application for such extension from His Britannic Majesty's representative at Madrid' ; Article 6 - the produce or manufacture of the territories of one of the Contracting Parties Imported into the territories of the other, from whatever place arriving, shall not be subject to other or higher duties or charges than those paid on the like articles, the produce or manufacture of the territories of any other foreign country." Article 7 - neither party shall levy any"... prohibition or restriction...which shall not equally extend" to the commerce of "any other foreign country;" Article 8 - exports of either party shall be treated as are the exports of the most-favorednation in the territory of the other; Article 9 - equality of treatment applies unconditionally to commercial travelers and their samples; Article 15 - the Contracting Parties will grant mostfavored-nation treatment to vessels engaged in the coasting trade; Article 16 - most-favored-nation treatment is also extended to stationing, loading and unloading of vessels; Article 17 - also they guarantee equality in the matter of tonnage, harbor, pilotage and

A MODERN DEFINITION, CLASSIFICATION A N D ANALYSIS

69

lighthouse duties; Article 20 - most-favored-nation treatment shall apply to the direct taxation of consuls.*8 This treaty 13 briefer than the first two examples presented, although It Is more detailed concerning shipping. The "covering" clause is also longer and more comprehensive; this does not necessarily mean, however, that the agreement as a whole is more comprehensive. Actually, in this case, it is not, even though the 3cope of the most-favored-treatment Is wider because in the French agreement the range of tariff items affected is smaller. A treaty between Denmark and Finland (August 3, 1923) presents some interesting features: Article 1 - "in all matters of commerce, industry, handicraft, agriculture, navigation and all other trading activities, treatment not lees favorable than that which is now, or may subsequently be accorded to the most-favored-natlon," is provided for. Article 2 - citizens of one of the two parties may, in the territory of the other, carry on business and acquire property under conditions of equality and neither shall impose on the nationals of the other any higher tares, charges or dues in those respects than are imposed on the nationals of the most-favored-nation; Article 3 - companies formed for trade, industry or finance may acquire, own, possess, and dispose of property and in general, shall be subject to most-favored-nation treatment; Article 8 - if either party finds it necessary to issue, Import to export prohibitions or to introduce restrictions they pledge that they will treat each other as they treat the most-favored-nation and every suspension or alleviation of any import or export prohibition by one of the parties shall be extended "immediately and unconditionally" to the same or similar products of the other; Article 10 - "goodB which ccme from the territories of the High Contracting Parties shall, on importation to the other country, enjoy, in «11 that concerns import duties and customs co-efficients, and also as regards supplementary dues or other charges of any kind which are levied in connection with the Import of goods, at least as favorable treatment as that which is accorded or may subsequently be accorded, to goods from any third country;" exports and goods in transit (whether or not to be stored) are to be extended equality of treatment; the handling of goods in customs, customs formalities, refunding of customs charges which U8, Poland, Nov. 26, 1923, U T S 28, p. >00; United KingdcmFinland, Dec. 1U, 1923, LMTS 29, p. 130; IflTS 28, p. 3^2; See also Great Britain and Northern Ire Land-Latvia, Oct. 7, 1922, UiTS 20,- p. 398; United Kingdom-Czechoslovakia, July I923, U T S 29, p. 378.

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have been Imposed, the storing of goods In custcmers' warehouses 1 must be administered In accordance with most-favored-nation treatment; Article 11 - consumption, production, trans-shipment, monopoly, excise dues, inlaid charges are to be no higher than those paid by any other nation; Article 13 - goods transported by public means" are to be treated In the territories of both parties on a footing not less favorable than that of any third nation; Article 1U in all matters respecting certificates of origin the contracting parties will grant each other most-favored-nation treatment; Article 16 - veosele of both parties shall be granted Immediate and unconditional equality In their inspecting ports and territorial waters; Articles 18, 19, 20, and 21 specify most-favored-natlon treatment for re-export duties, stranded vessels, emigration or immigration, and consular officers. T h e f i f t h a n d f i n a l e x a m p l e of a d e t a i l e d , c o m p l e x c l a u s e is a t r e a t y b e t w e e n t h e U n i t e d S t a t e s a n d F i n l a n d , f r o m w h i c h the f o l l o w i n g are q u o t a t i o n s of m o a t f a v o r e d - n a t i o n p r o v i s i o n s : T h e p r e a m b l e states that the two parties "being desirous of strengthening the traditional bonds of friendship between the two countries by maintaining the principle of equality of treatment as the basis of commercial relations" have agreed as follows: . . . Article V: - "Articles the growth, produce or manufacture of the United States of America or Finland, shall, after importation into the other country, be exempt frcin all internal taxes, fees, charges, or exactions other or higher than those payable on like articles of national origin or any other foreign origin"; Artiole Till: "if the government of the United States of America or the Government of Finland establishes or maintains any form of quantitative restriction or control of the Importation or sale of any article In which the other country has an interest, or imposes a lower Import duty or charge on the importation or sale of a specified quantity, of any such article than the duty or charge imposed on importation in excess of such quantity, the government taking such action shall:... (b) Unless otherwise mutually agreed allot to the other country for such specified period a share of such total quantity as originally established or subsequently changed in any manner, equivalent to the proportion of the total Importation of such article which such other country supplied during a previous period, such period to be such as to result in a fair and equitable allotment to the other country;..." Article IX: "in the event that the government of the United States of America or the government of Finland establishes 1*9. LNTS 21, p. 303.

A MODERN DEFINITION, CLASSIFICATION AND ANALYSIS 71 or m&lntalns a monopoly for the importation, production, or sale of a particular ccnmodity or grants exclusive privileges, formal 1y or In effect, to one or more agencies to Import, produce or sell a particular ccnmodity, the government of the country establishing or maintaining such monopoly or granting such monopoly privileges, agrees that in respect of the foreign purchases of such monopoly or agency the commerce of the other country shall receive fair and equitable treatment. To this end it is agreed that in making its foreign purchases of any product such monopoly or agency will be influenced solely by those considérations, such as price, quality, marketability, and terms of sale, which would ordinarily be taken into account by a private commercial enterprise interested solely in purchasing such product on the most favored terms.'' Article X: "The tariff advantages and other benefits provided for in this agreement are granted by the United States of America and Finland to each other subject to the condition that if the government of either country shall establish or maintain, directly or indirectly, any form of control of foreign exchange, it shall administer such control so as to Insure that the nationals and commerce of the other country will be granted a fair and equitable share in the allotment of exchange. With respect to the exchange made available for commercial transactions, it is agreed that the governnent of each country shall be guided in the administration of any form of control of foreign exchange by the principle that, as nearly as may be determined, the share of the total available exchange which is allotted to the other country shall not be less than the share employed In a previous representative period, prior to the establishment of any exchange control...": Article XI: With respect to (1) customs duties or charges of any kind imposed on or in connection with Importation or exportation; (2) the method of levying such duties or charges; (3) all rules and formalities in connection with Importation or exportation; and ( h) all laws or regulations affecting the sale or use of Imported goods within the country any advantage, favor, privilege or immunity which has been or may hereafter be granted by the United States of America or Finland to any article originating in or destined for any third country, shall be accorded immediately and unconditionally to the like article originating in or destined for Finland or the United States of America, respectively. The provisions...of this Article shall not extend: (1) to the treatment which is accorded by the United States of America to the commerce of Cuba under the provisions of the Commercial Convention concluded by the United States and Cuba on December 11, 1902, or any other commercial agreement thereafter concluded by the United States with Cuba; or to the advantages now accorded or which may hereafter be accorded by the United States of America, its territories or possessions or the Panama Canal Zone

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to one another or to the Republic of Cuba. This provision shall continue to apply in respect of any advantages now or hereafter accorded by the Halted States of America, Its territories or possessions or the Panama Canal Zone to the Philippine Islands irrespective of any change in the political status of the Philippine Islands; (2) to the benefits which either country has accorded; or may accord, to its neighboring Btates In order to facilitate local traffic; (3) to the treatment which Finland accords or may hereafter accord to the ccnmerce of Estonia"; Article XV. Except as otherwise provided in the second paragraph of thie article, the provisions of this agreement relating to the treatment to be accorded by the United States of America and Finland, respectively, to the commerce of the other country, shall not apply to the Philippine Islands; the Virgin Islands, American Samoa, the Island of Guam or to the Panama Canal Zone. The provisions of this Agreement regarding most favored nation treatment shall apply to articles the growth, produce or manufacture of any territory under the Sovereignty or authority of the United States of America or Finland, Imported from or exported to any territory under the sovereignty or authority of the other country. It is understood, however, that the provisions of this paragraph do not apply to the Panama Canal Zone.; Article XVI: Nothing in this Agreement ehall be construed to prevent the adoption of measures prohibiting or restricting the exportation or importation of gold or silver, or to prevent the adoption of such measures as either government may see fit with respect to the control of the export, or sale for export, of arms, ammunition or Implements of war, and, in exceptional circumstances, all other military supplies. Subject to the requirement that there shall be no arbitrary discrimination by either country against the other country In favor of any third country under lite circumstancos, the provisions of this Agreement shall not extend to regulations for the enforcement of police or revenue laws of the United States or of Finland relating to Imports the importation, transportation or sale of which is prohibited or restricted; or to prohibitions or restrictions (1) Imposed on moral or humanitarian grounds; (2) designed to protect human, animal or plant life, or health; or (3) relating to prison-made goods;" Article XVII: "in the event that the government of the United States of America or the government of Finland adopts any measures or takes any action which even though It does not conflict with the terms of this Agreement, is considered by the government of the other country to have the effect of nullifying or Impairing any object of the Agreement, the govenment which has adopted such measure or taken such action shall consider such representations and proposals as the other

A MODERN DEFINITION, CLASSIFICATION AND ANALYSIS

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government may make with a view to affoctlng a mutually satisfactory adjustment of the matter." 50

Moat clauses in the detailed complex group fall among the five types exemplified above. In outline, they are all somewhat similar but closer examination will show them to differ in detail. Those differences in detail are important for there is no such thing as a mostfavored-natipn clause which is everywhere and under all circumstances the same. It is not enough to speak in terms of "covering"91 clauses alone; covering clauses are pretty much alike - that is, the same words and phrases are regularly employed. But as these treaty provisions show, most-favored-nation clauses run all through a lengthy agreement, and provisions which do not seem directly to Involve most-favored-nation treatment may in fact affect it a great deal. More will be said of this presently. It remains now to conclude this chapter with some variations on the types presented. B. VARIATIONS HI WORDINGS AND SUBJECT MATTER

The "time" element 13 handled most clearly in an unusual wording found in Article 7 of an agreement between Poland and Yugoslavia: "Each of the Contracting Parties undertakes, therefore to extend immediately and unconditionally to the other all benefits, privileges or rebates of duties or taxes which it has already granted, or may subsequently grant in the' above connection either permanently or temporarily to a third state." 52 Prohibition or restrictions on Import trades are so important that ordinarily they are treated in a separate article but sometimes not as shown by this covering clause: "Each...binds Itself unconditionally to Impose no higher or other duties or conditions and no prohibitions on the importation... that are or shall be imposed on,..any like article...of any other foreign country," 53 50. May 18, 1936, LBTS 172, p. 97. This treaty represents what might be called the United States model; It Is repeated, with minor changes, in later treaties. See USA-Ecuador, Aug. 6, 1938, LHTS 193, p. 85 and USA-Venezuela, Nov. 6, 1939, LNTS 203, P. 273.

51.

In the above examples, supra, pp.

16; 20-21; 22; 23.

52. Poland-Kingdom of Serbs Croats and Slovenes, Oct. 23, 1922, U T S k9, p. 265. 53. USA-Estonia, December

23, I925,

Article 7, I M S 50, p.

13.

THE MOST-FAVORED-NATION CLAUSE

74

It is also somewhat unusual to have most-favored-nation treatment applied to patents, trademarks, designs and copyrights and the use of local courts by foreign nationals but it is so specified in Articles III and XVI of a treaty between Spain and Siam signed August 3, 1925. 54 Neither does most-favored-nation treatment always include subjection to military training by aliens as it does in Article 4 of a Germany-Finland agreement: only owners, lessees or occupiers of immovable property are to be liable to military service and then only on the basis of equality.55 In this same category fall provisions relating to forced loans.56 Customs formalities have become an almost regular part of the over-all most-favored-nation clause, but in addition to this it is provided in some treaties that the "classification and interpretation" of tariffs are covered, too. 57 Occasionally most-favored-nation treatment will apply to railroad rates by name. 58 A treaty between Norway and Siam negotiated in 1926 is noteworthy for several reasons. In the first place, it is one of the most, if not the most, detailed treaties so far as most-favored-nation pledges are concerned which modern trade relations record. In particular, the treatment of the contractants' nationals is 54. LNTS 55, p. 39; Also Portugal-Siam, Aug. 14, 1925, LNTS 55, P- 57; Netherlands-Slam, June 8, 1925, LNTS 5 6 , p. 57; GermanyLatvia, June 28, 1 9 2 6 , LHTS 57 p. 403 (Access to courts); NorwaySiam, July 16, 1 9 2 6 , Article VII, LHTS 60, p.35 (Access to courts). Nationals of each party will be able to choose lawyers and defend rights without complying with any conditions not applicable to nationals of any other country. 55. Germany-Finland, June 26, 1 9 2 6 , LNTS 5 6 , p. 197; JapanCzechoslovakia, Oct. 30, 1925, Article II, LNTS 5 8 , p. 263; Japan-Finland, June 7, 1924, LNTS- 5 8 , p. 379, Norway-Siam, July l6, 1926, LNTS 60, p. 35. 5 6 . Japan-Czechoslovakia, Japan-Finland (See footnote 57)57. Poland-Czechoslovakia; April 7, 1925, LNTS 5 6 , p . 2 8 5 ; Economic Union Belgium and Luxembourg-Czechoslovakia, Dec. 28, 1925, LNTS 5 8 , p. 111.

Spain-Sweden, May 4, 1 9 2 5 .

Final Protocol 2A,

LNTS 3 6 , p. 325.. Italy-Finland, October 22, 1924, Art. 3, LNTS 32, p. 151j Norway-Siam, July 16, 1926, Art. 5, LNTS 60, p. 35. See next chapter. 58. Poland-Yugoslavia, Oct. 23, 1922, Article 16, LNTS 49, p. 2 6 5 .

Austria-Poland, Sept. 25, 1922, Article 13, LNTS 59, p. 307;

Finland-France, July 13, 1921, LNTS 29, p . 449 (Article 10); FranceLatvia, Oct. 30, 1924, Article 7, LNTS 37, p. 403.

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75

unusually explicit. Article XII, the covering clause (11 clauses in thi3 agreement relate to equality of treatment) states: Articles the produce or manufacture of Norway, and articles, the produce or manufactures of Siam, shall on their importation into the territory of the other Party in « n matters relating to Import duties or charges of any kind enjoy a treatment at least as favorable as that which is or may he granted to the articles of the mostfavored -nat i on. 5 9

Coasting trade is to be accorded mo3t-favored-nation treatment Instead of national treatment (as is generally the case) in Article 20 of a treaty between Great Britain and Yugoslavia. 00 An interesting provision dealing with Individuals appears in Article 3 of a treaty to which Albania and Greece are parties: "In the course of their business in the territory of the other Contracting Party they shall receive the same treatment from the public administrations and public service as nationals of that party or nationals of the most-favored-nation."el A covering clause will on occasion take the following form: "The High Contracting Parties agree to grant each other most favored nation treatment in respect of the matters dealt with in the following articles of the present treaty: 4, 5, 6, 7, 8, 9, 10, 12 and 13."02 In each of these there is, of course, a separate clause. Nearly all complex treaties contain a clause to the effect that each of the parties may require that "certificates of origin" accompany the exports of the other; but once again relatively few treaties explicitly require the determination of the origin of goods to be subject to equality of treatment, an agreement between Germany and Turkey proving the generalization. 63 Also, nearly 5y. N6ivay-blffl!l, July 16, 1926, LNTS 60, p. 35; See the almost Identical agreement, Italy-Siam, May 9, 1926, U T S 6l, p. 215. 60. May 12, 1927, U T S 80, p. 165. 61. Oct. 15, 1926, U T S 83, p. 325. 62. May 27, 1930, U T S 110, p. 9 (Ad Article 3); See PolandSweden, Dec. 2. 192U Final Protocol, Ad. Article 5, LNTS 36, p. 303. "Form and tenor" and use of certificates of origin are subject to mostfavored -nation treatment. It may be assumed, however, that at least seme other clauses mentioning "customs formalities" would cover this point. 63. Sept. 1, 1920, Article 25, U T S , k, p. 241.

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THE MOST-FAVORED-NATION

CLAUSE

all such treaties contain a clause stating that the "privileges, powers, and immunities" of their respective consular officials shall he e q u a l to those shared by the consular agents of the m o s t - f a v o r e d - n a t l o n ; a n Infrequent appendage to this can be seen in a separate article in a treaty b e t w e e n A u s t r i a and G e r m a n y w h i c h announces the reciprocal right to appoint consular agents to all centers where third countries are similarly p r i v i l e g e d . Clauses pertinent to Individual business activities are common, but this clause is more d e t a i l e d than any of those c i t e d in the previous section: Provided they conform to the laws of the country, the nationals of each of the contracting parties may also acquire, possess, rant or occupy such houses, factories, shops, stalls, or premises as they may need or may lease land for any lawful purpose on the same conditions as the nationals of the most-favored-nation.84 Duties and internal taxes...which are imposed or may subsequently be Imposed, on the production, preparation or consumption of any goods in the territory of one of the Contracting Parties shall not affect the produce, goods or articles of the other Party in a higher or more vexatious degree than the native produce, goods or articles of the same kind or those of the most-favored-natlon.05 This is a n example of a v a r i a t i o n in w o r d i n g w h i c h is seldom employed. Article 9 of a n a g r e e m e n t b e t w e e n E s tonia a n d H u n g a r y pledges that n a t u r a l or m a n u f a c t u r e d products coming from Estonia shall receive the lowest tariffs "which H u n g a r y may allow or m a y allow directly or Indirectly to any third p o w e r . " 0 0 Strongly w o r d e d clauses are infrequent yet Interesting; for example, Article 5 of a n a g r e e m e n t b e t w e e n Lithuania a n d N o r w a y declares that both shall "unreservedly enjoy" in all matters the same rights a n d privileges as are e n d o w e d upon the m o s t favored-nation.67 Likewise Article 1 of a Belgium-Siam treaty: "They shall not be compelled under any pretext w h a t e v e r to pay any charges, taxes or impositions other or h i g h e r 6k. Latvia-Czechoslovakia, Oct. 7, 1922, LHTS 20, p. 381 65. A phrase used in Economic Union Belgium and LuxenburgPoland, Dec. 30, 1922, Article 3, LNTS 21, p. 185; Poland.Switzerland, June 26, 1922, Article 5, LNTS 12, p. 307" More Irksome manner." 66. Oct. 19, 1922, LHTS 30, p. 355. 67. Japan-Poland, Dec. 7, 1922, LNTS 32, p. 66 (Article 5;.

A MODERN DEFINITIONj CLASSIFICATION AND ANALYSIS

77

than those paid by nationals of the most-favored-natlonl108 In some cases the most-favored-nation obligation is expressed as follows: "Articles, the produce or manufacture of the territories of one High Contracting Party, upon importation into the territories of the other... shall enjoy the lowest rates of customs duty applicable to similar articles of any other foreign origin."69 Or it may be "the moat favorable scale of customs duties which the...High Contracting Parties grant...to any third state." 70 An early agreement between Great Britain and the USSR contains this phrase: "Both parties agree... not to exercise any discrimination against such trade, as compared with that carried on with any other foreign country..." Finally, an unique provision Is observed In a revision of a previous agreement negotiated by Great Britain and Spain so that ...in order to remove doubts It is hereby agreed that the most favored nation principle 1b to be invariably applied in euoh manner that articles produced or manufactured In the territory of one of the Contracting Parties imported into the territory of the other shall not be subject to higher duties than the lowest duties accorded to any similar articles produced or manufactured in any other foreign country... 7 1

68. Dec. 10, 1926, Article 1, LHTS

62, p. 287.

6 9 . Sweden-Czechoslovakia, Apr. 18, 1925, Article 3, LNTS 3 6 , p. 293. 70. March 16, 1921, LNTS

p. 129.

71. Apr. 5, 1927 (exchange of notes, same day), LOTS 6 3 , p. 1 8 9 .

VI A Modern Definition, Classification, and Analysis Continued

Thus far the analysis has consisted of an overall view of the moat-favored-nation clause as expressed in general form in recent treaties. Now these clauses must be further broken' down in order that certain sharper impressions may be drawn. It must be repeated that while the covering clauses and general statements of mostfavored-nation treatment are important, the auxiliary clauses (the explanatory clauses) are equally so; it is these 'accents" which help to individualize each clause. A. DELINEATING CLAUSES1

Naturally, these provisions appear only in complex treaties, and they are difficult to classify. Typical manifestations rather than standard forms are, therefore, a more fitting basis of presentation. After stating that Article 4 of the Treaty of Rapallo regarding the legal position of citizens and the regulation of commerce is to be in no way' affected by the clauses referring to most-favored-nation treatment which follow, an agreement between Germany and the Soviet Union (Article 5) provides: "Moreover, the clauses in the various Agreements providing for advantages greater than tho&e accorded by the most-favored-nation principle shall in no way be restricted by the fact that the above stipulation establishes most-favored-nation treatment in general."2 These significant words are found in Article 1. 1. This category includes treaty provisions which are at once more than covering clauses and less than ccmplete clauses. The purpose in Including them is that in most cases they have an Important tearing on the nature of the whole most-favored-nation obligation in a treaty. The examples vhich follow Ijnmediately are worthy of mention because they show how complex clauses are defined in greater detail. 2. Germany-USSR, October 12, 1925, U T S 53, p. 7.

A MODERN DEFINITION, CLASSIFICATION AND ANALYSIS

79

6 of a treaty between Germany and Spain: "Any other similar privilege which Is or may in the future be granted to a third country and which la calculated to encourage the import, circulation, and sale of products."3 A precautionary element Is evident in an additional agreement signed by Austria and Hungary in which the duties specified in Annexes A and B of the current instrument are not to affect the right to equality of treatment laid down In Article III of the treaty of February 8, 1922.4 The same might be said to this clause: "The two Contracting Parties undertake to allow each other most-favorednation treatment in their respective territories with regard to all administrative or other formalities necessitated by application of the measures contained in the present convention."5 The Netherlands and Yugoslavia agree not to apply the exception to the most-favorednation clause in Article 5 of their agreement of May 28, 1930, so a3 to create In effect a disguised restriction on international trade.® Norway agrees that Siam may raise tariff rates higher than the conventional or treaty level on the condition that all other nations entitled to claim special tariff treatment assent freely and without requiring compensatory benefits or privileges;7 the same agreement also pledges no discrimination whatever in favor of government nationals or ships of the other party in the application of most-favored-nation treatment.8 A somewhat frequent provision lays a prohibition on the parties to the effect that neither can claim for its nations, goods, consuls, companies, or cooperative societies in the territory of the other any rights other or more extensive than those itself grants to others. 3. Gemaiiy-Spain, May 7, 1926, LHTS, 53, p. 321. 1*. April 9, 1926, Article 1, LHTS 55, P. 367. 5. Italy-Poland, Mt^y 12, 1922, Article 12, LHTS 59. p. 293; Austria-Belgium Economic Union and Luxemburg, September 22, 1924, Article 24, U T S 29, p. 2 9 . 6. Final Protocol, U T S 129, p. 73. 7. July 16, 1926, Article XI, LHTS, 60, p. 35. 8. Ibid., Annex III. 9. Estonia-Turkey, March 12, 1 9 2 8 (Article 10) LHTS 8 6 , p.453; Sweden-Turkey, February 1928, Article 9, U T S 88, 155; Great Britain and Northern Ireland-Turkey, March 1, 1930, Protocol Ad. Articles 27-28, LNTS 108, p. 407. Roumania-Turkey, June 11, 1 9 2 9 , Article 9 , U T S 112, p. 139; Poland-Yugoslavia, October 23, 1922, Article 14, U T S 49, p. 265; Poland-Turkey, July 23, 1923, Article 11, U T S 1*9, p. 329.

80

THE MOST-FAVORED-NATION CLAUSE

Explicitly or Implicitly, railroad, rates and facilities figure frequently in most-favored-nation clauses - as has been indicated previously. Paragraph 5 of the Final Protocol to an agreement between the Union of South Africa and Germany is unusual in stating that mostfavored-nation treatment concerning railroad transportation can only be claimed "for transport of similar goods in the same direction and on the same routes." 10 Of this same general type, only positive instead of negative, is Article 2 of a convention between France and Hungary which expressly requires that the high contracting parties grant one another advantages resulting from changes in customs nomenclature or from administrative measures. 11 Should its goods be subject to "special regulations" the USSR shall have the benefit of conditions generally applicable to other countries" to which the mostfavored-nation clause is granted, but "these conditions shall not be less favorable, however, than those hitherto applicable to Soviet goods." 12 The term "foreign country" or something similar is inseparable from the clauses under study; Article 2 of a recent convention defines it as a "country not being a territory under the sovereignty, suzerainty protection or mandate of His Majesty the King of Britain, Northern Ireland and the British Dominions beyond the seas, Emperor of India."13 Some clauses are designed to counteract omissions in complex treaties. Article V of an agreement between the Netherlands and Czechoslovaklan states that in cases not provided for, most-favored-natlon treatment shall be granted in all matters connected with trade, industry, shipping and consular affairs. So far a3 the objects to which most-favored-nation treatment applies, this clause makes this agreement almost unlimited.1,4 Similarly Article VI of a treaty between Netherlands and Guatemala requires reciprocal most-favored-natlon treatment "in all cases not provided for in the preceding 10. September 1, 1928, U1TS 95, p. 289. 11. December 21, 1929, UTTS 132, p. 189. 12. Economic Union Belgium and Luxemburg-USSR, September 5, 1935, Article 3, LHTS 173, p. 169. 13. Great Britain and Nprthern Ireland-Cuba, February 19, 1937, LNTS 192, p. 301. lU. Netherlands-Czechoslovakia, October 17, 192^, UjTS 31, P. 95.

A MODERN DEFINITION, CLASSIFICATION AND ANALYSIS

8l

15

Articles." A narrower version of this follows a general clause (duties, taxes, supplementary taxes and sutaxes - imports and exports) in a treaty between Hungary and Czechoslovakia: "In all other respects each of the Contracting Parties furthermore undertakes not to subject imports from and exports to, the other Party to treatment other or less favorable than that accorded to any other state." 16 One of the most interesting examples of a series of delineating clauses in one treaty is that between Latvia and Norway signed August 14, 1924. 17 Articles 1 through 9 apply most-favored-nation treatment to the following: nationals resident, their property, duties on the export of proceeds of property, all taxes, companies and corporations, consuls and their activities, Import, export, re-export or transit duties, taxes, supertaxes, imposts, contributions, restrictions and obligations either general or local. Ordinarily the agreement might stop there and still be relatively complete; but Article 10 specifies equality of treatment for products, vessels wagons and postal traffic in transit, including the cost of transport and forwarding on railways and navigable waterways; Article 11 - commercial travelers, merchants, manufacturers and industrialists are to be treated on an equal footing with those of the most-favored-natlons; Article 12 - as regards exports In the vessels of the other contracting party" the same export duties shall be paid and the same premiums and rebates accorded... on the export of any article which may now or in the future be legally exported therefrom, whether export is effected in vessels sailing under the flag of the most-favorednation or in Norwegian or Latvian vessels...;" Article 13 - fees and formalities pertaining to stationing, loading, and unloading of vessels shall be levied on the mostfavored-nation basis; Article 15 - so, also, in the case of tonnage, canal, harbor, pilotage, lighthouse, and quarantine charges; Article 16 - vessels engaged In the postal service in the territorial waters of the other party shall be treated no less favorably than the vessels of any third nation likewise engaged; Article 20 - shipwrecked vessels shall be entitled to the same treatment 15. May 12, 1927, UITS 85, p . 323. 16. May 31, 1927, LNTS 65, p. 6l. 17. LNTS 36, p. 213.

This agreement is unique, especially in

itB emphasis upon shipping.

82

THE MOST-FAVORED-NATION CLAUSE

as any other foreign vessels; and Article 22 climaxes the treaty, stating that all privileges, favors, facilities and Immunities granted to third countries by one of the contracting parties shall be unconditionally and at once extended to the other party. A common formula Is expressed In Article I of a convention between Latvia and Sweden: Swedish nationals and the products of the soil and industry of Sweden shall enjoy In Latvia, and Latvian nationals and the prod, ucts of the soil and Industry of Latvia shall enjoy In Sweden, without any reserve whatsoever, In all matters relating to commerce, the same advantages as the nationals and goods of the most favored nation. This treatment l extend to everything relating to the carrying on the trade, navigation and industry, to the right to acquire or own movable or immovable property, to taxes and other dues of any kind whatsoever, to requisitions for military or public purposes, to import, export and transit prohibitions, to excise, consumption, Import and export duties and to customs formalities.18

A frequent practice in treaties follows up a general covering most-favored-natlon clause with a repetition In different phraseology; this may be included In the same article or It may be entirely by Itself.18 Thus, Article I (the covering clause) of a convention signed by Austria and Czechoslovakia on May 4, 1921, provides: "The nationals, vessels, merchandise, raw materials or manufactured articles of one of the two Contracting Parties shall not, within the territory of the other, receive less favorable treatment than the national's vessels, merchandise, raw materials or manufactured articles of a third state." Then In Article 2: "The nationals of the Contracting Parties shall not in either State be treated less favorably as regards the establishment and carrying on of trade and industry than the nations of any other State."20 Within the same article which contains a general unconditional clause 18. Latvia-Sweden, December 22, 1924, U T S 36, p. 285. 19. For example, China-Netherlands, December 19, 1928 (exchange of notes, too), U T S 111, p. 161. Here the exchange of notee repeats the most-favored-natlon pledge of Article 1 of the treaty In Identical language. 20. U T S 15, p. 87. Incidentally, the most-favored-nation clause appears in 13 articles of this treaty. See also CanadaNetherlands, July 11, 1921*, U T S 39, p. k6 (Articles 1, 2, and 4), merchandise trade only.

A MODERN DEFINITION, CLASSIFICATION AND ANALYSIS

8?

agreed by Bulgaria and Poland these words appear: " In particular they may in no case be subject to duties, coefficients, surtaxes, increases or other taxes higher than those which apply to ... [the goods] of the mostfavored-nation."21 Delineating clauses sometimes become so individualized that they are found only seldom in recent treaties. Such is Article 12 of an agreement by Latvia and Switzerland whereby If either imposes upon the products of a third country higher duties than those applicable to similar products of the other party, the latter shall be entitled to Impose minimum duties or certificates of origin; and Article 14 states that the liberties, immunities and privileges there listed are not exceptions to the principle of most-favored-nation treatment on which the present convention was based, and if Latvia grants special privileges to any states but those enumerated, Switzerland can claim them Immediately and unconditionally.22 In the same category Is Article 25 of a treaty between Japan and Mexico which provides that If the acts of "insurgents, savages, rebels" constitute a violation of international law the settlement for damages shall be on a most-favored-natlon basis. 23 B. CUSTOMS FORMALITIES, ETC.

Recently an important group of explanatory clauses has developed relative to the numerous kinds of formalities which surround the movement of goods and people across national frontiers. The "invisible tariff" may include barriers which are either beyond the scope of equality of treatment or are in fact a violation of it In spirit, if not in letter. Out of them grow some of the most vicious obstacles to trade. It Is important to know what kind of an antidote has been created in the form of treaty clauses. Fortunately, such clauses are sufficiently numerous and clearly defined to have become a separate category of auxiliary mo3t-favored-natlon clauses. In a majority of cases, equality of treatment is simply enlarged to embrace "custom formalities" in 21. April 29, 1925 (Article 5) LMTS 60, p. 103; cf.USA-Latvia, Feb. 1, 1926, LHTS 55, p. 33. 22. December k, 1924, LHTS 34, p. 413. 23. October 8, 1924, U T S 3 6 , p. 275.

84

THE MOST-FAVORED-NATION CLAUSE

one sentence, 2 4 or as a part of a list. 2 5 In others, a detailed clause Is employed: "Most-favored-natlon treatment shall apply to the amount of, guarantees for, and levying of, customs duties and other charges, and to customs formalities and their enforcement; to methods of examining and analysing goods; to the conditions for the payment of customs duties and other charges;..." 2 0 Article 3 of an agreement between Belgium and Turkey mentions the method of collecting Import and export duties, warehousing and customs charges and formali-ties and customs treatment generally. 2 7 A treaty between Austria and France provides that any alteration In customs nomenclature or In the method of computing duty by administrative action, legislation or treaties shall be extended without reserve to the commerce of the other 24. Norway-Poland, December 22, 1926, Article 15, U T S 66, P. 359; Estonia-Greece January 1927, Estonia-Poland, February 19, 1927, Article 19, LMTS 115, p. 177. Article 9, LHTS 69, p. 33; Greece-Latvia, February 25, 1927, Article 8, LHTS 71, p. 25; LatviaPoland, February 12, 1929, Article 18, U T S 115, p. 1 8 5 . Economic Union Belgium and Luxemburg-Estonia, February 11, 1928, (exchange of notes), U T S 79, p. 43; Germany-USSE, October 12, 1925, Article 27, LHTS 53, p. 7. Greece-Norway, June 29, 1927, Article 11, U T S 82, p. 187?. Germany -Spain, November 18, 1 9 2 5 , Article 6. U T S 53, p. 309; Bulgaria-Poland, April 29, 1935, Article 16, U T S 60, p. 102: "administrative or other formalities," charges, coefficients or supercharges, export duties, customs formalities..." 25. Finland-Greece, December 18, 1926, Article 10, LNTS 70, p. 89; "duties, charges, additional. 26. Article 8, U T S 91, p. 9; Germany-Panama, November 21, 1927, Article 4 - Final Protocol, Ad. article 7, U T S 115, P. 239; cf. Austria-Spain, February 8, 1925, Article 2, U T S 43, p. 317; Austria-Latvia, August 9, 1924, Article 12, LNTS 65, p. 7; Economic Union Belgium and Luxemburg-Yugoslavia, December 16, 1926, Article 8, U T S 70, p. 371. 27. Economic Union Belgium and Luxemburg-Turkey, August 28, 1 9 2 7 , Article 3, LNTS 82, p. 77; Denmark-Finland, August 3, 1 9 2 3 , Article 10, U T S 21, p. 303; Estonia-France, January 7, 1922, Article 10, LNTS 62, p. 9; Albania-Yugoslavia, June 22, 1926, U T S 60, p. 102; Norway-Siam, July 1 6 , 1926, Article XII, LNTS 60, p. 35; "drawbacks and use of bonded warehouses," Germany-Finland, June 26, 1926, Article 7, LNTS 56, p. 203; "deposit on security" for payment of tariff.

A MODERN DEFINITION, CLASSIFICATION AND ANALYSIS

85

contracting party.28 T h i s c l a u s e may d e a l o n l y and s p e c i f i c a l l y w i t h " t h e amount and s e c u r i t y f o r c u s t o m s dues."20 The term " c u s t o m s f o r m a l i t i e s " may r e f e r t o more t h a n t h e r e g u l a r I m p o r t t r a d e I f t h e c l a u s e d e s i g n a t e s " r e - e x p o r t , t r a n s - s h i p m e n t or t r a n s i t . " 3 0 Mostf a v o r e d - n a t l o n treatment w i t h r e s p e c t to f o r m a l i t i e s i n c l u d e s m e r c h a n t s and t r a d e r s a s w e l l a s g o o d s . 3 1 C. EQUIVALENTS OF MOST-FAVORED-NATION TREATMENT E q u a l i t y of t r e a t m e n t i s d e f i n e d o f t e n enough a s s o m e t h i n g o t h e r t h a n any t r e a t m e n t g r a n t e d t o a t h i r d c o u n t r y t o w a r r a n t s i n g l i n g out 3uch c l a u s e s f o r s p e c i a l attention. A Great Britain-Turkey t r e a t y I l l u s t r a t e s one f o r m of t h i s v e r y w e l l ; i n t h e P r o t o c o l t h e p a r t i e s d e c l a r e t h a t whenever the t r e a t y mentions " n a t i o n a l t r e a t m e n t , " 3 2 most-favored-nation treatment I s Implied, I t being t h e i r intention, that n a t i o n a l treatment " I s at l e a s t e q u a l or s u p e r i o r t o t h e t r e a t m e n t of t h e most favored foreign country."33 Usually a simplified vers i o n t o the e f f e c t t h a t n a t i o n a l t r e a t m e n t and m o s t favored-natlon treatment a r e t o be c o n s i d e r e d e q u i v a l e n t wherever e i t h e r i s u s e d t h r o u g h o u t a g i v e n .convention i s employed.34 A n o t h e r common f o r m s p e c i f i e s t h a t t h e b a s i s of t h e e q u a l i t y l a i d down i n c e r t a i n a r t i c l e s s h a l l be a c o u n t r y ' s t r e a t m e n t of I t s own n a t i o n a l s or the n a t i o n a l s ( t h e i r goods, p r o p e r t y , p r i v i l e g e s , e t c . ) , of the m o s t - f a v o r e d - n a t i o n "whichever 28. May 1 6 , 1928, A r t i c l e 6, UTS 88, p . 2 1 ; France-Czechoslovakia, August 1 7 , 1923, A r t i c l e 1 1 , UTS Wt-, p . 2 1 ; FranceHungary; October 1 3 , 1925, LNTS 1+8, p . 9. 29. Germany-Greece, March 28, 1928, A r t i c l e 1 5 , UTS 90, p. 9. 30. Poland-Koumania, June 23, 1930, A r t i c l e 1 1 , UTS 1 3 3 , p . 163; France-Hungary, October 1 3 , 1925, LNTS k8, p. 9. 3 1 . Great B r i t a i n and Northern Ireland-Yugoslavia, May 1 2 , 1927, A r t i c l e lU, UTS 80, p. 1 6 5 ; February 1 2 , 1926, "Commercial travelers and their saaiples," LNTS U5, p . 201; Austria-Czechoslovaki a , Article 1 0 , May 1 9 2 1 , LNTS 1 5 , p. 87, Germany-France. 32. See Ch. I I . 3 3 . March 1 , 1930, LNTS 108, p . 1+0?. 3l|. Austria-Netherlands, March 28, I929, LNTS 109, p . 39; USA-Siam, November 1 3 , 1937, F i n a l Protocol, UTS 192, p . 2Vf; Japan-Mexico, October 8, 192U, A r t i c l e 9, UTS 36, p . 275.

86 Is more

THE M03T-FAV0RED-NATI0N

CLAUSE

35

favorable." As expressed by the following article, the standard of most-favored-natlon treatment may be equated w i t h a scale of duties: "The grant of the minimum tariff of the products enumerated in Schedule A means the treat ment of the most-favored-nation as respects such products..."30 Or: "The products enumerated in List B which in accordance w i t h paragraph I come under the minimum tariff, shall for that reason enjoy most favored nation treatment."37 But at least one agreement clearly provides that the minimum tariff is not the same a3 mostfavored-natlon treatment. 3 8 D. CONTINGENT CLAUSES

The generalization of economic favors or concessions does not always take place automatically. This is the normal practice, but there pre treaty provisions w h i c h require that the enjoyment of equality shall depend upon the existence or fulfillment of certain conditions. Thus, Germany and the Netherlands obligate themselves to grant most-favored-natlon treatment reciprocal ly only so long as the tariff reductions in Article I and the Annex of the agreement continue to p r e v a i l . 3 0 So long as Panama enjoys most-favored-natlon treatment in British protectorates, mandates, or colonies, Panama will grant unconditional most-favored-natlon treatment to goods coming from these territories. 4 0 A good example of the contingent clause is seen 35. Greece -Netherlands, May 12, 1926, Protocol, LNTS 6l, p. 295 Netherlands-Yugoslavia, May 28, 1930, Final Protocol, Ad. Articles 7, 8, 9, LHTS 128, p. 73; Bolivia-Netherlands, May 30, 1939, Protocols of Signature, LHTS 133, p. 113. Significantly all these appear in "protocols;" see ch. 36. Canada-France, December 15, 1922, Article 2, LHTS 21, pp. 37-38; France-Hungary, October 13, 1925, UfTS 1+8, p . 9; FranceCzechoslovakia, August 17, 1923 LHTS 44, p. 21. 37- Germany-France, March 31, 1937, Article 2, LNTS 66, p . 6; Siam-Netherlands, June 8 , 1925, Protocol, LHTS 56, p. 6 9 . 38. Greece-Roumania, March 28, 1927, LHTS 68, p. 6 7 . 39. Germany-Netherlands, November 26, 1925, LNTS 57. 40. Hote that this is not put in the usual reciprocity terminology. Also Brazil-Netherlands, September l6, 1931, exchange of notes, LNTS 125, P. 197; Great Britain and Northern Ireland and Panama, September 25, 1928, Article 12, LNTS 90, p. 311.

A MODERN DEFINITION, in this Article are p a r t i e s :

of

CLASSIFICATION AND ANALYSIS

a treaty

t o w h i c h Canada and

87

France

I f France Bhall at any time grant to the United States of America as regards any of the products mentioned in Schedule B to the p r e s ent convention percentages more favorable than those mentioned in the said Schedule, or the b e n e f i t of the minimum t a r i f f , the same or s i m i l a r products originating in and coming f r a n Canada shall Immediately and unconditionally enjoy the b e n e f i t s of said concessions.41 B e t w e e n F i n l a n d and L a t v i a i t was a g r e e d t h a t L a t v i a c o u l d n o t c l a i m any r i g h t s e x t e n d e d t o F r a n c e i n an a g r e e m e n t w i t h F i n l a n d ( A r t i c l e 6 ) on J u l y 13, 1921, u n t i l t h e y had b e e n g r a n t e d t o a t l e a s t two o t h e r p o w e r s besides France.42 I n t h e same v e i n i s t h e f o l l o w i n g : Nevertheless, the Economic Union of Belgium and Luxemburg undertakes to grant Finland most-favored-nation treatment without reservat i o n in the event of Finland's granting the Economic Union of B e l gium and Luxemburg 1 the abatements of customs duty which are granted by Finland to France and which are not s p e c i f i e d in the above mentioned l i s t A . " 4 3 A n e g a t i v e c o n t i n g e n t c l a u s e i s e x e m p l i f i e d by A r t i c l e 8 o f an I t a l l a n - C z e c h o s l o v a k i a n a g r e e m e n t : Should e i t h e r of the two Contracting P a r t i e s , in thé. matter of import duties, not grant the most-favored-nation treatment uncondit i o n a l l y and without compensation to any other State i t shall be e n t i t l e d to cease to extend such treatment to the other Contracting Party also on two months' notice being g i v e n . 4 4 Thus, as i t

each g r a n t s e q u a l i t y o f t r e a t m e n t o n l y i n so f a r g r a n t s t h a t t r e a t m e n t t o any t h i r d c o u n t r y . L a t v i a i s one o f many c o u n t r i e s w h i c h b e s t o w s s p e c i a l t r e a t m e n t on t h e commerce o f some o f h e r s u r r o u n d i n g n e i g h b o r s , 4 5 and i t i s n o t u n n a t u r a l t o f i n d a p r o v i s i o n i n a L a t v i a n t r e a t y t o the e f f e c t t h a t i f L a t v i a g r a n t s s p e c i a l p r i v i l e g e s " t o any s t a t e b u t t h o s e e n u m e r a t e d , " S w i t z e r l a n d can c l a i m them " i m m e d i a t e l y and u n c o n d i t i o n a l l y . " 4 6 T h i s means t h a t as l o n g as a 1+1. December 15, 1922, A r t i c l e LHTS 21, pp. 37-58. 1+2. August 23, I92U, A r t i c l e 9, LNTS 37, p . 3 8 5 . !+3. Belgium and Luxemburg-Finland, February 12, X92b, UTS 24, p. 21. 1+1+. March 23, 1921, LHTS 32, p. 2191+5. See Chapter DC. 1+6. Latvia-Switzerland, December 1+, 1921+, A r t i c l e ll+, LNTS p. 1+13.

88

THE MOST-FAVORED-NATION CLAUSE

certain situation exists, moat-favored-nation treatment shall come into play. 4 7 A narrower application of the same idea is Article X of a treaty signed by Germany and Persia which makes it possible for each to claim the favors extended to particular vessels in the coasting trade if they are also granted to a third power and if the other Contracting Party reciprocates. 48 Also under the heading of contingent clauses, brief mention may be made of instances in which the mostfavored-nation clause is a part of an economic bargain. Thus, in an agreement between France and Germany, the former grants her minimum tariff in return for which "French products shall enjoy unrestricted most-favorednation treatment de jure in Germany." 48 A kindred type pledges San Salvadore to grant British goods ("Table B") the same treatment as to goods of French origin and Great Britain gives most-favored-natlon treatment in return. 50 E. THE CLAUSE AND RECENT TRADE PRACTICES It Is to be observed that up to this point by far the most numerous treaties quoted and cited to support the analysis have been those negotiated from 1922 to 1931. These were, and in many cases still are, the substantial basis of conventional economic relationships. Superimposed upon these agreements after 1931 were a new group which were clearly responsive to the straitened circumstances of International trade and business. The spurt of neo-mercantilism created fresh subject matter for agreement and novel trade controls began to figure prominently in bilateral arrangements. It was inevitable that some effort—an Important effortshould be made to bring these within the compass of equality of treatment. At a more appropriate place 51 a detailed examination of the commercial treaty policy of the latter half of the period between the two wars and its effect upon the most favored-nation clause will be undertaken. But this much is nece33ary here in order 5T: May 29, 1925, Article 20, U T S 1+8, p. 119. 1*8. February 1 3 , I929, LHTS 111, p. 263. 1+9. August 17, 1927, IHTS 76, p. 5. Cf. Netherlands-Portugal, February 27, 192b, LNTS 27, p. 40 (Articles 1-2). 50. Exchange of notes, January b-7, 1928, U T S 80, p. 233. 51. Infra, Chapter VIII.

A MODERN DEFINITION, CLASSIFICATION AND ANALYSIS

89

to suggest the significance of the forms of the clause analyzed in the present section. Two things might be said in reply to any argument that the analysis now becomes overly minute to no proper purpose. First, the. trade controls mentioned in this chapter will probably endure indefinitely in one degree or another; second, much of the future destiny or equality of treatment depends upon the success with which it can be harmonized with these controls. The reader need not, however, be harassed with a "quota" clause, a "monopoly" clause, or a "currency" clause; once again an account resulting in a general impression will be more useful. It must not be thought that the application of most-favored-natlon treatment to various phases of quotas, public trade monopoly and foreign exchange control began only after 1951. As early as 1921 an agreement between Estonia and Finland included an article on a possible state monopoly maintained by either: "it shall grant the same advantages in every respect, to the nationals of the other contracting 3tate, as regards their transactions with the administration of the monopoly, as are granted, or may hereafter be granted to the nationals of the most favored nation." 5 2 Following a covering most-favored-natlon clause (no higher or other duties than are levied on the goods of any foreign country, etc.), in Article 2, Article 3, of a treaty between the United Kingdom and Czechoslovakia allowed the former to levy higher or other duties where the depreciation of currency relative to sterling forced prices below those at which similar articles could be produced profitably in England. 53 Another early agreement between Italy and Finland, repeating a formula common in this period, devoted a special provision to applying equality of treatment to governmental price control. S4 Modifying article 52. Austria-Lativa, August 9, 192k, Article 12, U T S 6 5 . p. 7; October 29, 1921, Article 10, U T S 13, p. 119; Germany-USSR, October 12, 1 9 2 5 ,

Articles 12-13, U T S 5 3 , p. 7; Bulgaria-Turkey,

February 12, 1 9 2 8 , Article 1, U T S 81, p. 3 8 3 . 53. July 14, 1923, LNTS 29, p . 3 7 8 ; Albania-Italy, January 20, 1924, Article 10, LNTS

p. 5 3 9 .

No monopolgy privileges or con-

cessions for "sole benefit of third parties." 54. Finland-Hungary, May

29,

1925,

Article 9 (Government con-

trol of price or condition of sale), U T S 48, p. 119; October 22, I924, Article 12, U T S 32, p. 151. 1922, Article 7, U T S 6 2 , p . 9 ;

Also Estonia-France, January 7,

Italy-Poland, May 12, 1922,

90

THE MOST-FAVORED-NATION CLAUSE

II of an agreement of May 1921, Austria and Czechoslovakia agreed on November 27, 1924, to extend mostfavored-natlon treatment to the nationals and companies of the other with reference to the purchase and sale of currency, domestic and foreign, 5 5 import licenses 5 0 and even "customs quotas" are mentioned in several agreements in the nineteen twenties. 5 7 The sporadic nature of these examples demonstrates that such controls were exceptional and temporary; they played no important role In commercial policy as they did later on. References to Import licenses become Increasingly frequent after 1950 and this clause is typical: Conditions under which licenses are granted "shall be as favorable as the conditions under which licenses are given in the case of any other foreign country." 5 8 More often than not, there Is a simple statement declaring that If import licenses are required by one of the parties, most-fatfored-nation treatment shall govern the manner in which they are distributed. 5 9 Footnote continued Article 15, U T S 59, p. 293; Finland-Greece, December 18, 1926, Article 9, UTTS 70, p. 89; Estonia-Greece, January 4, 1927, Article 8, U T S 69, p. 33; Denmark-Spain, January 2, 1928, Article 3 , LNTS 71, p. 271; Finland-France, July 13, 1921, Article 9, LHTS 28, pp. 450-453; Estonia-Eungary, April 29, 1929, Article 7 (prices or conditions of sale controlled by government or any organization authorized by government), UTTS 96, p. 23; Finland-Poland, November 10, 1923, Article 10, LHTS 29, p. 237; France-Latvia, October 30, 192lt, U T S 37, pp. 403-405; Greece-Latvia, February 25, 1927, Article 7, UTTS 71, p. 25. 55. LNTS 1+2, p. 441. Also Greece-United Kingdom, July 16, 1926, Article 11, LNTS 6x, p. 16; France-Hungary, October 18, 1925, Article 10, U T S 48, p. 9; Austria-Great Britain and Northern Ireland, May 22, 1924, Article ID, U T S 35, p. 180. 56. Greece-Turkey, October 30, 1930, Article 16, LNTS 126; Great Britain and Northern Ireland-Jugoslavia, May 12, 1927, LNTS

80, p. 165.

57. Estonia-Greece, January 7, 1922, U T S 62, p. 9 (temjorary quotas) Germany-Greece, March 24, 1928, Final Protocol, U T S 90, p. 9; Germany-Spain, May 7, 1926, Article 6, U T S 53, P. 32; if Greece establishes exchange control, moat-favored-nation treatment shall prevail. 58. Greatin Britain and Northern Ireland-Eoumania, August 6 , 1930, Article 15, U T S 123, p. 3 0 7 . 59. Greece-Turkey, October 30, 1930, Article 16 LNTS 125, p. 371; USA-Chile, September 28, 1931 (exchange of notes) U T S 144,

A MODERN DEFINITION, CLASSIFICATION A N D ANALYSIS

91

Quantitative controls In the form of quotas are subjected to equality of treatment through a variety of formulas. One is a pledge that the country which establishes quotas will see to it that the other party is given as its share a "fair and equitable" proportion of the total q u o t a , 8 0 somewhat as expressed in Article 2 of a treaty between Spain and Uruguay: "In the event of one of the High Contracting Parties at any time applying... a system of import quotas...affecting exports of the other party, it shall accord to the latter treatment equitable and as favorable as possible for the produc'ts concerned." 0 1 Another Is a general statement that quotas or "quantitative controls" shall be operated on the basis of the most-favored-nation, without further elaboration.8 2 Commonly, equality of treatment as applied to quotas becomes an amount based on a "previous representative period" of import and agreed upon by contractants so as to do as little harm to the trade involved as possible. 8 3 A different aspect of the problem of Footnote continued p. 11+7; Greece-Czechoslovakia, July 30, 1932, Article 2, LHTS 156, p. 159; France-USSR, January 11, 193k, Article 7, UITS 167, p. 3^9 (obligation by France alone); Canada-Poland., July 3, 1935» Article 5, LOTS 172, p. 69; Australia-Czechoslovakia, August 3-18, 1936, Article 5, U T S 177, p. 21+5; Germany-Estonia, October 2k, 1937, m T S 182, p. 201; Nev Zealand-Switzerland, May 5, 1938, UITS 181, p. 167; USA-France, May 6, 1936, Article 6, U T S 199, P. 259. 60. Brazil-Great Britain and Northern Ireland, August 10, 1936, LNTS 172, p. 273; Australia-Czechoslovakia, August 3-18, 1936, Article 5, U T S 177, p. 2l+5; Japan-Siam, December 8, 1937, Final Protocol, para. 5, LOTS 188, p. 375. 61. January 2, 1935, LHTS 161+, p. 95. 62. USA-Brazil, February 2, 1935, Article 9, U T S 166, p. 211; Salvador-Sweden, June 23, 1936, U T S 171, p. 291; Guatemala-Sweden, July 11, 1936, LOTS 171, p. 299; Germany-Estonia, October 2l+, 1937, LOTS 182, p. 201; Siam-Sweden, November 6, 1937, Article V, U T S I 8 5 , p. 337; USA-Italy, December 16, 1937, LNTS 187, p. 15; Great Britain and North Ireland-Siam, November 23, 1937, Article 8, LNTS 188, p. 333; Economic Union Belgium and Luxemburg-Siam, November 5, 1937, Article III, LNTS 190, p. 15; USA-Ecuador, August 6, 1938, Article 8, LOTS 193, P- 8 5 . Occasionally quota provisions will be more explicit: Great Britain and North Ireland-Norway, May 15, 1933, Article 1+, U T S 11+5, p. 187 (fish) . 63. Australia-Switzerland, November 1+-22, 1938, Article 1, U T S iw+, p. 35; Canada-Haiti, April 23, 1937, Article II, LOTS 19!+,

92

THE MOST-FAVORED-NATION CLAUSE

q u a n t i t a t i v e c o n t r o l s I s met by thi3 t y p e of clause: " I n the e v e n t o f any other f o r e i g n s u p p l y i n g c o u n t r y r e n o u n c l n g o r f o r e f e l t l n g i n whole o r I n p a r t I 3 a l l o c a t i o n o f any o f t h e a f o r e s a i d , p r o d u c t s , t h e a l l o c a t i o n t o E s t o n i a s h a l l be I n c r e a s e d i n a r a t i o n no l e a s f a v o r a b l e t h a n t h a t a c c o r d e d t o any o t h e r f o r e i g n c o u n t r y . " a , t F i n a l l y , moat-favored-nation treatment appllea to the " r u l e s , f o r m a l i t i e s and c h a r g e s " c o n n e c t e d v l t h t h e a d m i n i s t r a t i o n o f q u o t a s - - l n i n a t a n c e a when t h a t t r e a t m e n t does n o t i n c l u d e t h e a c t u a l d e t e r m i n a t i o n o f c o n t i n g e n t s . 6 5 Most c l a u s e s e m b r a c i n g e x c h a n g e c o n t r o l a r e , once again, general i n n a t u r e , c o n s i s t i n g of a r e c i p r o c a l p l e d g e t o e x t e n d e q u a l i t y o f t r e a t m e n t i f one or t h e o t h e r o f two c o n t r a c t i n g p a r t i e s i n t r o d u c e s c o n t r o l o v e r t h e b u y i n g and s e l l i n g o f f o r e i g n and d o m e s t i c Footnote continued p . 59; USA-Greece, (exchange of notes), November 15, 1938, LHTS 195, p . 11*5; USA-Chile, February 20-24, 1939., (exchange of notes) LHTS 197, P- 217; USA-Canada, November 17, 1938, Article I I I , LHTS 199, p . 91; USA-Slam, November 13, 1937, Article 3, LNTS 192, p. 247; USA-Equador, August 6, 1936, Article 8 , UTS 193, p. 85; USA-France, May 6, 1936, Article 6 ( r e c i p r o c a l ) IJ1TS 199, p . 259; USA-Czechoslovakia, March 7, 1938, Article 8 , UTS 200, p . 87; USA-Great B r i t a i n and North Ireland, November 17, 1938, Article 5, UTS 200, p . 293; USA-Venezuela, November 6, 1939, Article 7, UTS 203, p. 293; USA-Liberia, August 8, 1938, Article 9, LNTS 201, p. 163; Usa-Turkey, April 1, 1939, Article 7, UTS 202, p. 219. 64. Great B r i t a i n and North Ireland-Eatonia, July 11, 1934, Article 5, UTS 152, p. 131, Great B r i t a i n and North Ireland-Latvia, July 17, 1934, Article 6, UTS 154, p. 25; Great B r i t a i n and North Ireland-Lithuania, July 6, 1934, Article 5, UTS 155, p. 9; Great B r i t a i n and North Ireland-Poland, February 27, 1935, Article 7, LNTS 162, p. 181. 65. Canada-Guatemala, September 28, 1937, Article I I , LNTS 194, p . 65; Great B r i t a i n and North Ireland-Netherlands (exchange of notes, para. 7 ) , July 20-30, 1934, LOTS 154, p . 305; Great B r i t a i n and North Ireland-Lithuania, July 6, 1934, Article 5, LNTS 155, p . 9; France-Sweden, March 22, 1935, UTS 158, p. 299; USA-Sweden, May 25, 1935, Article 2, UTS l 6 l , p . 109; France-Sweden (exchange of notes, para, (c ) ), January 18, 1936, UTS 167, p. 197; FranceSweden, February 17, 1937 (Exchange of Notes), UTS 176, p. 267 (France, only, grants); France-Sweden, January 31, 1938, WIS 185, p. 223 (France only grants); Australia-Switzerland, November 4-22, 1938, Article 7, UTS 184, p. 35. Canada-Haiti, April 23, 1937, Article I I , UTS 184, p. 59.

A MODERN DEFINITION, CLASSIFICATION AND ANALYSIS

93

06

currencies; as is also true of quotas, what this will mean--that is whether it will apply to formalities or to actual allocation of exchange--is left for interpretation under particular circumstances, but the fact that some treaties further define the nature of this obligation hints that this form is not always satisfactory. Unconditional and unlimited most-favored-nation treatment may also apply to what is called "the supply of currency. " 0 T The phrase "fair and equitable," which has almost become a synonym for the clause with respect to recent trade controls, appears also in exchange control provisions: 6 0 If such control is Imposed, the parties 66. Union of South-Africa-Netherlands, February 20, 1935 (exchange of notes) LNTS 160, p. 11+3; USA-Sweden, May 25, 1935, Article 9, U T S l6l, p. 109; USA-Haiti, March 28, 1935, Article 6, LNTS l6l, p. 157; USA-Brazil, February 2, 1935, Article 6, LNTS 166, p. 211; USA-Colombia, September 13, 1935, Article 9, LNTS 170, p. 293; USAGuatemala, April 2k, 1936, Article 9 , U T S 170, p. 3^5; USA-Ecuador (exchange of notes) June 12, 1936, LNTS 170, p. 377; Salvador-Sweden, June 23, 1936 (exchange of notes), LNTS 171, p. 291; Guatemala-Sweden, July 11, 1936, (exchange of notes), U T S 171, p. 299; Brazil-Great Britain and North Ireland, August 10, 1936, U T S (Brazil will practice "no discrimination" in foreign exchange control); USA-£l Salvadore, February 19, 1937, Article 9 , LNTS 1 7 9 , p. 219; Brazil-Netherlands, (exchange of notes, para 4), March 15, 1937, LNTS 179, P. 395; USA-Costa Rica, November 28, 1936, Article 9, U T S 181, p. 183; Germany-Estonia, October 2k, 1937 (exchange of notes), LNTS 182, p. 201; Brazil-Lithuania (exchange of notes), September 28, 1937, U T S 186, p. 403; USA-Italy, December 16, 1937 (exchange of notes) U T S 187, p. 15; Economic Union of Belgium and Luxemburg-Slam, November 5, 1937, Article 12, LNTS 1 9 0 , p. 151; Norway-El Salvadore, November 21, 1938, Article 7, LNTS 198, p. 157; USA-Ecquador, August 6, 1938, Article 9 , LNTS 193, p. 85; USA-Czechoslovakia, March 7, 1938, Awt. X (rates, taxes, surcharges on exchange transactions) U T S 200, p. 87; USA-Liberia, August 8, 1938, Article 10, LNTS 201, p. 163; Dominican Republic-New Foundland, March 1 6 , 1940, Article 3, U T S 203, p. 141 ("in all matters pertaining to allocation of exchange" mostfavored-nation treatment shall be granted); USA-Venezuela, November 6, 1939, Article 9, U T S 203, P. 273 (rates, taxes, surcharges on exchange); USA-Slam, November 13, 1937, Article 3, LNTS 192, p. 247; USA-Sweden, May 25, 1935, Article 9, LNTS l6l, p. 109. 6 7 . Netherlands-Uraguay, January 29, 1934, Final Protocol, U T S 166, p. 1*3; Norway-Uraguay, April 1936, Final Protocol, LNTS 1 7 6 , P. 115. 68. USA-Finland, May 19, 1 9 3 6 , Article 10, LNTS 172, p. 97;USANicaragua, March 11, 1936, Article 9, LNTS 173, p. 14; Slam-Sweden,

94

THE MOST-FAVORED-NATION

CLAUSE

will grant each other a "fair and equitable share" of the supply of currency available. An exchange of notes between the United States and Chile blnd3 Chile to avoid exchange rates higher than would be set up in a free market in order that American trade will not be placed in a relatively worse position than the trade of other nations in the Chilean m a r k e t . 8 0 Turkey and the United States agree to grant each other equality in "administration" of exchange control only and this does not apply to another article (9) in the same agreement which obligates Turkey to provide foreign exchange sufficient to maintain the proportion of American exports to Turkey during January 1, 1935» to December 31» 1937, is maintained. 7 0 The most widely used clause concerning trading monopolies is a one sentence declaration that if either of two parties operates a government monopoly which affects certain imports it will guarantee "fair and equitable" treatment of the other's products which are so affected. 7 1 The remainder apply most-favored-nation treatment directly to government monopolies maintained by either of two parties to a commercial t r e a t y . 7 2 Footnote continued November 5, 1957, Article V, LNTS 185, p. 337; Union of South AfricaCzechoslovakia, January 27, 1937 (exchange of noteB, para. Ill) LNTS 189, p. 97; Canada-Guatemala, September 28, 1937, Article 5, LNTS 194, p. 65; Canada-Haiti, April 23, 1937, Article T, U T S 194, p. 59. 69. February 20, 24, 1939 (exchange of notee), • LNTS 197, P. 217. 70. April 1, 1939, Article 8, LNTS 202, p. 129. 71. USA-Finland, May 18, 1 9 3 6 , Article 9, U T S 172, p. 97; USA-Nicaragua, March 11, 1936, Article 8, LNTS 173, p. 141j USANetherlands, December 20, 1935, Article 8, LNTS 1 7 8 , p. 239; CanadaHaiti, April 23, 1937, Article IV, LNTS 194, p. 59; Canada-Guatemala, September 28, 1937, Article IV, LNTS 194, p. 65; USA-Greece, November 15, 1938, (exchange of notes), U1TS 195, p. 145; USA-Canada, November 1 7 , 1937, Article III, LNTS 199, p. 91; USA-France, May 6, 1936, Article 9 , LNTS 199, p. 259; USA-Czechoslovakia, March 7, 1938, Article 9, U T S 200, p. 8 7 ; USA-Great Britain and North Ireland, November 17, 1938, Article 8, LNTS 200, p. 293; USA-Liberia, August 8, 1938, Article 11, LNTS 201, p. 163; USA-Iraq, (exchange of notes), December 1938, LNTS 203, p. 107; USA-Sweden, May 25, 1935, Article 8, LNTS l6l, p. 109. 72. For example: USA-Italy, December 16, 1937 (exchange of notes), LMTS 1 8 7 , p. 139; USA-Brazil, February 2, 1935, Article 5 , LNTS 155, p. 211.

A MODERN DEFINITION, CLASSIFICATION AND ANALYSIS

95

A different version consists of a promise by the two contractants to "give sympathetic consideration" to alleged discrimination which may result from an import monopoly.73 Clearing and compensation agreements have been responsible for clauses applying unconditional mostfavored-natlon treatment to international payment control to the end that such control is administered so as not to undermine the comparative position of either party and so as not to impair other provisions of a treaty.74 In concluding this section, it may be observed that even though the phrase "fair and equitable" seems to dominate clauses dealing with quotas, monopolies and exchange control, it is justifiable to count the latter among the important new developments in most-favorednation treatment, for if the phrase has any meaning at all, it must mean treatment which will not place one nation at a disadvantage relative to another. This is never an exact proposition even where equality is specified. F. MISCELLANEOUS CLAUSES

Some clauses are Interesting, significant, and belong at this point in the analysis, yet they fit no particular category. Thus the clauses which state that in the letting of contracts for public works and in the purchase of supplies no discrimination shall be shown in favor of any third country. 75 Another unique clause gives either party the privilege of withdrawing a concession or imposing a quantitative restriction on imports or exports if there is evidence that "as a result of the extentlon of such concession to third countries, such countries will obtain the major benefit of such concession and in consequence thereof an unduly large increase in importation of such article will take place." 76 73. USA-Costa Rica, November 28, 1936, LHTS 181, p. 183 USA-Siam, November 13, 1937, Final Protocol, para 5, LNTS 192, p. 2^7. 75. U.S.-Greece, November 15, 1938, (exchange of notes), LNTS 1 9 5 , p. 1^5; USA-Canada, November 17, 1938, Article III, LNTS 199, P. 91. 76. Union of South Africa-Netherlands, February 20, 1935, Article 1U, LNTS 160, p. 143; USA-Switzerland, January 9, 1936, Article 16, IHTS 1 7 1 , February 27, 1 9 3 5 ,

p. 231; Economic Union Belgium and Luxemburg,

IJJTS 160, p. 27.

96

THE MOST-PAVORED-NATION CLAUSE

The Final Protocol of a Treaty signed by the Soviet Union and Latvia provides that most-favored-natlon traat ment shall govern the determination of responsibility fo acts of state economic organizations by the Union or its Trade Delegation. 77 The 3ame two countries had agreed earlier (and this remained an Integral feature of their conventional relationship): "When concluding new commercial treaties and agreements, and when prolonging existing commercial treaties, to continue to ensure that the rights, benefits and privileges which are or may hereafter be granted to the other Contracting Party shall not be extended to third states on the basis of the most-favored-nation clause." 78 Russia and Estonia concluded an agreement in 1929 whereby if no "Soviet Clause should appear in an Estonian treaty, Estonia would take steps at once to see that the Soviet Union should enjoy most-favored-natlon treatment in Estonia."78 For the products mentioned In the Schedules in this convention, Canada and France grent to each other the benefit of the most favor ble rates that may result from changes introduced Into the classification of goods or from specializations Introduced Into the tariffs aB a result of administrative or legislative measures or as a result of conventions entered into with other powers. 80

That any alteration in customs nomenclature or in the method of computing duties whether by legislation administrative action or treaty shall be accorded to all countries without discrimination is also set forth in Article 6 of a treaty between France and Austria. 81 77. Ad Art. 5, December 1935. 78. Estonia and Finland are parties to a similar article; October 29, 1 9 2 1 , Art. 18, LNTS 13, p. 119; June 2, 1927, Article 2, IÜTS 68, p. 321. This is the legal basis of the provisions found in all Latvian treaties excepting favors to the USSR from most-favored-natlon treatment, and will be recognized aa a type of regional reciprocity clause; it actually denies most-favored-nation treatment. 7 9 . The "Soviet clause" is simply a unilateral declaration by Estonia that any special concessions given to the Union will be exempt from generalization under the clause. May 17, 1929, IfJTS P. 323. 80. Canada-France, December 1 5 , 1922, Article 12, LNTS 21, p. U4. 81. May 16, 1928, LNTS 88, p. 21; Spain-Sweden, May 21, 1925, Article U, LNTS 36, p. 3 2 7 . France-Czechoslovakia, August 19, I 9 2 3 Article 11, LNTS UU, p. 21.

A MODERN DEFINITION, CLASSIFICATION AND ANALYSIS

97

Palestine and Egypt agree In an exchange of notes to reduce tariffs to the lovest extent possible "bearing In mind the fact that the reduced duties will also have to be accorded to similar goods, the produce or manufacture of other countries."82 It may be observed, finally, that a most-favored-nation clause may cover everything but tariff rates in a treaty. 83 G. PROTECTIVE CLAUSES

A numerous and important group of most-favorednation provisions consists of those whose function may be twofold:84 to protect the state granting most-favorednation treatment in the exercise of basic rights (national defense, health, morals) in the carrying out of a traditional policy, and from adverse affects of the clause; or to protect the operation of equality of treatment from conditions or measures which threaten to impair it. From these provisions, additional insight into the nature and operation of favored-nation-clauses can be gained. Protective measures of both types can be found in the same treaty and, indeed, in the same article. But they are not to be classified as regular exceptions to the most-favored-nation clause which will be considered in a separate chapter. Though they are phrased somewhat in the manner of exceptions, in reality they permit, prohibit, or recommend courses of actions with reference to the practice of granting most-favorednatlon treatment. Examples follow in sub-section3 1 and 2 below. 1. INSURING THE WIDEST APPLICATION OF EQUALITY OF TREATMENT. International trade can suffer from impediments other than tariffs, charges, taxes and formalities of one sort and another. Under the general heading of "restrictions and prohibitions" may fall a multitude of discriminatory sins. Therefore, one of the commonest of protective clauses is worded generally as follows: the high contracting parties shall establish no Import or export restrictions or prohibitions which shall not equally extend to 82. Great Britain and North Ireland.-Egypt, August 18, 1936, mTS

176,

p.

177.

8 3 . Estonia-Franco, January 7, 1922, LNTS 62, p. 9. 84. 179 of the total number of treaties with complex clauses alBO contained protective clauses.

98

THE MOST-FAVORED-NATION

CLAUSE

the i m p o r t a t i o n or e x p o r t a t i o n of t h e l i k e a r t i c l e s b e i n g the produce or manufacture o f t h e t e r r i t o r i e s o f anyother f o r e i g n c o u n t r y . 8 5 I n other words, most-favoredn a t i o n t r e a t m e n t 3 h a l l a p p l y t o r e s t r i c t i o n s and p r o h i b i t i o n s — p r i m a r i l y on I m p o r t s , a l t h o u g h e x p o r t s a r e n e a r l y always i n c l u d e d . 8 8 O f t h e 179 t r e a t i e s which c o n t a i n " p r o t e c t i v e " c l a u s e s , 155 have g e n e r a l p r o v i sions of t h i s t y p e . Some are more e x p l i c i t . I n t h e l i c e n s i n g or p r o h i b i t i o n o f i m p o r t s and e x p o r t a , t r e a t m e n t as f a v o r a b l e as t h a t e n j o y e d by any o t h e r n a t i o n " w i t h r e s p e c t to c o m m o d i t i e s , v a l u a t i o n s , and q u a n t i t i e s " must be g r a n t ed.87 A r t i c l e 9 o f a compact b e t w e e n Germany and G r e e c e declares that import and e x p o r t p r o h i b i t i o n s and r e s t r i c t i o n s must be a p p l i e d i n t h e "same manner t o all

85. A p a r t i a l l i s t of t r e a t i e s in which this clause ( o r one nearly l i k e i t ) appears: France-Siam, February 14, 1925, Article 14, UTS 43, p. 199; Austria-Spain, February 3, 1924, A r t i c l e 3, LHTS *+3, P. 319; United Kingdom-Estonia, January 18, 1926, A r t i c l e 5 , UTS W3, p. 209; USA-Latvia, February 1, 1926, para. 1 ("licenses or prohibition's"), LNTS 55, p . 33; Japan-Czechoslovakia, October 20, 1935, A r t i c l e VI LNTS 58, p. 268; Spain-Hungary, June 17, 1925, Article IV, LNTS 60, p. 69; Greece-Switzerland, November 29, 1926, Article 8, UTS 6 3 , p. 27; Italy-Guatemala, September 1 5 , 1926, Article 10, LNTS 70, p. 175; Dennark-Spain, January 2, 1928, A r t i cle 3, LNTS 71, p. 3 3 5 ; Italy-Yugoslavia, July 14, 1924, Article 7 ( t r a n s i t t o o ) , LNTS 82, p. 257; Denmark-Eoumania, August 28, 1930 (exchange of notes), LNTS 108, p . 165 (provided no arbitrary discrimination) ; Albania-Roumania, November 3, 1930, A r t i c l e I I I , LNTS 118, p. 39; Japan-Portugal, March 23, 1932, A r t i c l e 3, LNTS 128~ p. 363; Denmark-Persia, February 20, 1934, A r t i c l e 10, UTS 1 5 8 , p. 299; Union of South Africa-Netherlands, February 20, 1935, ( e x change of notes), LNTS l60, p . 143; USA-Switzerland, January 9, 1936, Article 14, LNTS 1 7 1 , p. 245; Bulgaria-Finland, October 27, 1936, A r t i c l e 4, LNTS 179, p. 309; Australia-Czechoslovakia, August 3-18, 1936, A r t i c l e 4, LNTS 177, p . 245; Economic Union of Belgium and Luxemburg-Si am, November 5, 1937, A r t i c l e I I I , UTS 190, p. 151; USA-Equador, August 6, 1938, A r t i c l e 16, UTS 193, p. 8 5 ; Great Britain and North Ireland - February 5, 1939, LNTS 1 9 6 , p . 303; A r t i c l e 9 only. 86. United Klngdcm-Siam, July 14, 1925, UTS 49, p . 51 export prohibitions and restrictions; Fi-ance-Greece, March 11, 1929, Article 9 ( Import restrictions or other obstacles to freedom of grade), UTS 96, p. 401. 8 7 . Great Britain and North Ireland-Haiti, February 25, 1928 (exchange of notes) LNTS 8 5 , p. 91.

A MODERN DEFINITION, CLASSIFICATION AND ANALYSIS

99

88

countries In Identical circumstances," and further that "the import and export prohibitions existing in either country shall continue to be applicable to the other country for a3 long as they are applied to all other countries." 89 These words are also found in a general protective clause: "or to other prohibitions and restrictions than those to which similar goods produced or manufactured in any other foreign country are subject." 80 It is worthy of note that in the two agreements just quoted the basl3 of most-favored-natlon treatment differs, being in the former "countries in Identical circumstances" and in the latter "similar goods." An exchange of notes between the Union of South Africa and the Netherlands states that the requirement of most-favored-nation treatment on prohibitions and restrictions shall have been fulfilled If such are applied to all countries of which It can be said the same reasons exist for establishing the restrictions. 01 A whole set of provisions revolve about another point; here the most-favored-nation clause seems to be even more strongly worded than in its general protective form. If export or import prohibitions are removed (cancelled) 82 suspended, 93 relaxed, 94 or alleviated, 95 88. Great Britain and North Ireland-Turkey, March 1, 1930, Article 16, LNTS 108, p. U07; Netherlands-Foumanit, August 28, 1930, Article 3 ( exchange of notes), LNTS 108, p. 17"7. 89. March 2k, 1928, LNTS 90, p. 9. 90. Great Britain and North Ireland-Panama, September 25, 1928, Article 5, LNTS 90, p. 311. 91. February 20, I 9 3 5 , LNTS l60, p. ll+3. 92. Austria-Denmark, April 6, 1928, Article 8, LNTS 95, p. 423; Estonia-Hungary, April 2 9 ,

1929,

Article 6, U T S 96, p. 23; Greece-

Latvia, February 25, 1927, Article 6, LNTS 71, p. 25; CzechoslovakiaTurkey, May 31, 1927, Article U, LNTS 71, p. 335; France-Hungary, October 13, 1925, Article 10, LNTS 1+8, p. 9; France-Greece, March 11, 1929, Article 9 ,

M T S 9 5 , p. 401 ; Greece-Roumania, August 11, 1931,

Article 5 , LNTS 130, p. 35; USA-Haiti, March 28, 1935, Article 8, LNTS l6l, p. 157; Hungary-Lithuania, May 16, 1929, Article 7, LNTS 96, p. 333; Yugoslavia-Czechoslovakia, November ll+, 1928, Article 7, LNTS 97, p. 9; Hungary-Yugoslavia, July 2k, 1926,

Article 2, LNTS

97, p. 101; Estonia-Greece, January h, 1927, Article 7, UiTS 6 9 , p. 33; Finland-Greece, December 18, 1926, Article 8, LNTS 70, p. 8 9 . 93. France-Czechoslovakia, August 17, 1923, Article ll+, LNTS 1+1+, p. 21; Germany-Portugal, March 20, 1 9 2 6 ,

Article 2, UfTS 53,

p. 3ol; Greece-Turkey, October 30, 1930, Article 16, LNTS 125, p.371. 91+. Finland-Hungary, May 2 9 ,

1926,

Article 8, LNTS 1+8, p.119;

100

THE MOST-FAVORED-NATION CLAUSE

whether temporarily or not, as-far as the commerce of any one country 13 concerned, the action shall apply immediately and unconditionally to all other countries. Article 8 of a treaty signed by Denmark and Finland on August 2, 1938, epitomizes those provisions designed to give the widest possible application to the principle of equality of treatment: "Every suspension or alleviation of any Import or export prohibition or restriction conceded to a third power even if the measures in question are of a purely provisional character shall be extended ... to the same or similar goods..."BO Protective clauses do not all relate to restrictions and prohibitions. For instance, an unusual provision appears in a convention between Albania and Italy to the effect that any tariff concessions, privileges or advantages extend to the other party whether the rates concerned are "fixed by the present treaty or not.1137 Refinement of tariff classifications has been effective in reducing the scope of most-favored-natlon treatment, hence 3 o m e treaties obligate the contracting parties to prevent detailed specification in customs tariff and differences of duties for similar articles corresponding to them from "nullifying the value and significance of the most-favored-nation clause." 08 Provisions may also be aimed at the practice of turning recognized and legitimate exceptions to equality of treatment into disguised Footnote continued USA-Slam, November 15, 1937, Article ?, U T S 192, p. 247; CanadaHaiti, April 23, 1937, Article 2, U T S 194, p. 59; Canada-Guatemala, September 28, 1931, Article 2, U T S 199, P. 65; Estonia-Greece, January 4, 1927, Article 7, U T S 6 9 , p. 33; Finland-Greece, December 17, 1926, Article 8, U T S 70, p. 8 9 ; Greece-Latvia, February 25, 1927, Article 6, U T S 71, p. 25; Czechoslovakia-Turkey, May 31, 1927, Article 4, U T S 71, p. 335; Austria-Denmark, April 6, 1928, Article 8 , U T S 8 5 , p. 423; Estonia-Hungary, April 29, 1929, Art. 6 , U T S 96, p. 23. 95. Hungary-Lithuania, May l 6 , 1 9 2 9 , Art. 7, U T S 9 6 , p. 333; Jugoslavia-Czechoslovakia, Nov. 14, 1928, Art. 7, U T S 97, p. 9; Hungary-Jugoslavia, July 24, 1928, Art. 2, LNTS 97, P• 101. 96. U T S 21, p . 303. 97. January 20, 1924, Article 2, LNTS 9 8 . Netherlands-Yugoslavia, May 28, 1930, (para. 2), U T S 192, p. 73; China-Netherlands, LHTS 111, p. 161; Bolivia-Netherlands, May 30, Signature, U T S 133, p. 113.

p. 359. General Provisions December 19, 1928, 1929, Protocols of

A MODERN DEFINITION, CLASSIFICATION AND ANALYSIS

101

discriminatory restrictions on International trade." It was pointed out In a previous chapter that In modern treaties, protocols - the afterthought of negotiations - often clarify the Interpretation to be placed on most-favored-nation clauses. This Is Illustrated by a Protocol of Signature between France and Turkey referring to Article 6 of their agreement which applied the clause to restrictions and prohibitions unless they were necessary to Implement the obligations of international conventions; the Protocol then states that this necessity cannot lead to discrimination If the prohibitions or restrictions are In practice as liberal as the privileged treatment provided for in said convention.100 In addition to a general protective clause, a recent treaty between Estonia and France further requires of any restrictions maintained by the parties that "in no case may they be used by the parties a3 a pretext for imposing customs measures or have a purely economic aim."101 Protective clauses are sometimes directed toward specific objects. Thus France has agreed that although the French colonies are exempt from most-favored-natlon obligations, she will not permit the latter to differentiate against Estonia if they impose restrictions and prohibitions on trade; Estonia reciprocates.102 Immigration regulations and restrictions in contravention of treaty articles to the contrary Is mutually permitted by Norway and Persia.103 Bearing indirectly upon equality of treatment is another type of protective clause as shown by Article X of an agreement between Poland and Estonia which sanctions Import and export restrictions only as a result of "existing economic conditions" and only for the duration of such conditions-.104 Or the parties may promise that if prohibitions and restrictions 99. Persia-Czechoslovakia, April 30, 1929, Article 6, LHTS 110, P- 357; Netherlands-Yugoslavia, May 28, 1930, Final Protocol (Ad. Article 5), U T S 129, p. 73; Persia-Econcmic Union Belgium and Luxemburg, Article 6, May 9, 1929, U T S 110, p. 377; Greece-Roumania, August 11, 1931, Article 5, LHTS 130, p. 33.

38).

100. August 29, 1929, LHTS 123, p. 193. 101. October 16, 1937, Article 6, LHTS 1 8 3 , p. M . 102. March 15, 1929, U T S 8 9 , p. 381 (Protocol, Ad. Article 103. May 8, 1930, Article 2k, U T S 13^, p. 153. 104. February 19, I927, LHTS 115, P- 177.

102

THE MOST-FAVORED-NATION CLAUSE

become n e c e s s a r y t h e y w i l l " t a k e e a c h o t h e r ' s n e e d s i n t o account."105 One o f t h e most p r e v a l e n t c l a u s e s 1 0 6 i n t h i s c a t e g o r y may be summarized a s f o l l o w s : f i r s t t h e r e i s u s u a l l y a d e c l a r a t i o n t h a t t h e r e s h a l l b e no p r o h i b i t i o n s o r r e s t r i c t i o n s on i m p o r t s o r e x p o r t s and t o t h i s may be added: u n l e s s t h e y a p p l y t o a l l c o u n t r i e s a l i k e ; then i t i s s t a t e d t h a t provided most-favored-natlon t r e a t m e n t p r e v a i l s , p r o h i b i t i o n s and r e s t r i c t i o n s may be imposed f o r t h e f o l l o w i n g p u r p o s e s r a n g i n g from t h e e x t e r n a l s a f e t y of the s t a t e to the r e g u l a t i o n of p r i s o n made g o o d s . These are n o t e x c e p t i o n s to e q u a l i t y , though t h e y may be pronounced such i n a n o t h e r a r t i c l e o f a treaty in other connections. I t may a c t u a l l y b e s t a t ed t h a t r e s t r i c t i o n s and p r o h i b i t i o n s f o r t h e e n u m e r a t e d p u r p o s e s s h a l l n o t be r e g a r d e d a s a v i o l a t i o n o f t h e most-favcred-nation c l a u s e . 1 0 7 The p u r p o s e s l i s t e d f o r a l l o w a b l e r e s t r i c t i o n s u s u a l l y r a n g e from f o u r ( a r t i c l e s c o n s t i t u t i n g a s t a t e monopoly; r e g u l a t i o n s o f t h e f l o w o f a r m s , ammunitions and Implements o f w a r ; p u b l i c s a f e t y ; o r s e c u r i t y and p u b l i c h e a l t h s u p e r v i s i o n and p r o t e c t i o n o f u s e f u l p l a n t s and a n i m a l s a g a i n s t d i s e a s e ) , 1 0 8 t o e i g h t ( t h e previous f o u r p l u s : moral or humanitarian p u r p o s e s ; p r o t e c t i o n o f n a t i o n a l t r e a s u r e s o f an h i s t o r i c a l o r a r c h e o l o g i c a l n a t u r e ; t h e flow o f g o l d and s i l v e r c o i n and b u l l i o n , p a p e r money and s e c u r i t i e s ; and, f i n a l l y , " r e l a t i v e t o m e a s u r e s h a v i n g as t h e i r obj e c t the e x t e n s i o n to imported products o f a regime a n a l a g o u s t o t h a t which e x i s t s f o r t h e i n t e r n a l commerce 105. Poland-Yugoslavia, October 23, 1922, UTS' 1*9, p. 265. 106. Seventy-six out of a t o t a l of 179 t r e a t i e s vith protect i v e clauses of a l l kinds. 107. Hungary-Lithuania, May 16, 1929, Article 7, LHTS 96, P. 335. 108. Italy-Yugoslavia, July lU, 192^, Article 7, LHTS 82, p. 257; Germany-Estonia, December 7 , 1928, Article 7, LHTS 99, p. 259} the war supplies phrase may also contain "under extraordinary circumstances." Austria-Japan, August 16, 1930, Article X, LHTS 126, p . 351! the usual American formula i s : public security; moral or humanitarian; sanitary; prison-made goo'ds; pólice or revenue laws. See USA-Netherlands, December 20, 1935, A r t i c l e 11, LHTS I98, p. 239; USA-Slam, Hovember 13, 1937, Article 3, LHTS 192, p. 247; USA-Equador, August 6, 1938, Article 16, LNTS 1932, p. 85; USA-Iraq, December 3, 1938 (exchange of notes), LHTS 203, p. 107; USA-Venezuela, November 6 , 1938, Article 16, UTS 203, p. 273. Plua moral or humanitarian.

A MODERN DEFINITION, CLASSIFICATION A N D ANALYSIS 100

10?

110

of the country in like p r o d u c t s . " ) ' Various combinations of these purposes form the bulk of such clauses. But other purposes are recognized too, and they are of Interest. One of these is to guarantee food supply.111 Another is to safeguard "national requirements regarding production and c o n s u m p t i o n . " 1 1 2 Or to fulfill certain international obligations to which both signatories are p a r t i e s . 1 1 3 A common purpose is to protect "the vital economic and financial interests" of the country."114 Police or revenue laws are also an allowable basis for prohibitions and restrictions if equality 109. USA-Franae, May 6 , 1 9 3 6 , Article 12, LHTS 199, p. 259; Albania-Yugoslavia, June 22, 1926, Article 6, U T S 91, p. 9; GreeceYugoslavia, November 2, 1927, Article 15, LHTS 91, p. 137; HungaryItaly, July It, 1928, Article 14, LHTS 92, p. 117; Latvia-Yugoslavia, October 18, 1928, Article 3, U T S 96, p. 229; Slam-Switzerland, May 28, 1931, LHTS 125, p. 357; Italy-Panama, October 16, 1929, Article 11, LHTS 138, p. 355; Latvia-Lithuania, December 1, 1933, Article 9, LHTS 148, p. 99; Estonia-Lithuania, January 13, 1938, U T S 148, p. 337; Latvia-Lithuania, April 10, 1935, Article 9, LHTS 159, p. 305; Economic Union Belgium and Luxemburg-Siam, November 5> 1937» Article 3, U T S 190, p. 1 5 1 . 110. Greece-Roumanla, August 11, 1931» Article 8, LHTS 130, p. 33 (including regulation of bones and rage); Norway-Persia, May 8, 1930, Article 8, LHTS 134, p. 153; Hungary-Romania, August 13, 1931, Article 9, U T S 186, p. 325; Estonia-Turkey, September 16, 1929, Article 15, U T S 117, p. 377; Finland-Turkey, August 12, 1929, Art. 15, U T S 96, p. 239; Economic Union Belgium and LuxemburgSwitrerland, Aug. 26, 1929, Art. 4, U T S 105, p. 9; Persia-Czechoslovakia, April 30, 1929, Art. 6, U T S 110, p. 357; RoumaniaCzechoslovakia, June 27, 1930, Art. 9, LHTS 119, p. 73. Economic Union Belgium and Luxemburg-Persia, May 9 , 1929, Article 6, LHTS 110, p. 377; Roumania-Turkey, June 11, 1929, Article 10, LNTS 112, p. 139; France, Switzerland, July 8, 1929, Article 5, LNTS 114, p.

189.

111. Economic Union Belgium and Luxemburg-Yugoslavia, December 16, 1926, Article 9 , U T S 70, p. 371 (vital raw materials, too); Economic Union Belgium and Luxemburg-Turkey, August 28, 1927, Article 6, LNTS 82, p. 77. 112. Spain-Yugoslavia, September 27, 1929, Article 13, LNTS 98, p. 319; Bulgaria-Turkey, February 12, 1928, Article 6, LNTS 81, p. 383 (economic activity). 113. Poland-Roumanla, June 23, 1930, Article 7, U T S 133, p. 163; Latvia-Turkey, January 12, 1938, Article 15, LHTS 201, p. 229. 114. Germany-Hungary, July 18, 1931, Article 7, LNTS 150, p.Ill; Latvia-Turkey, January 12, 1938, Article 15, U T S 201, p. 229.

THE MOST-FAVORED-NATION CLAUSE of treatment prevails. 115 To conclude this group, measures taken to guard the "vital Interests of the country In exceptional and abnormal circumstances" may be cited 116 Ordinarily an additional proviso Is Included to the end that no arbitrary discrimination shall accompany them and they shall be confined to the duration of the events which gave rise to them. 117 2. PREVENTING DISADVANTAGEOUS RESULTS FRCM THE APPLICATION OF MOSTFAVCEED NATION TREATMENT.

One of the disadvantages of the most-favorednation clause is the fact that trade concessions granted to the other party to a bilateral agreement may seem at the moment of negotiation to be modest enough. Generalized to all other nations entitled to most-favorednation treatment, however, they may seem to threaten, or may actually constitute, a large gap in the tariff wall. So it Is that treaties sometime provide that either party may withdraw a concession: "if there is evidence that as a result of the extension of such concession to third countries such countries will obtain the major benefit of such concession and in consequence thereof an unduly large increase in importation of such article will take place." 118 Many of the protective clauses analyzed immediately above Included disclaimers: nothing was deemed to affect the right of the contractants to protect the "vital economic and financial interests of the country 115.

Italy-Slam, December 3, 1937, Article 3, LOTS 1 8 9 , p. 255;

Netherlands-Siam, February 1, 1938, Article 8, U T S 193, p. 13; Canada-Haiti, April 2 3 ,

I 9 3 7 , Article 7, U T S

194, p. 5 9 .

116. Canada-Guatemala, September 28, 1937, Article 7, U T S 194, p.

65.

117. Persia-Czechoslovakia, April 30, 1929, Article 6, UiTS H O , p. 357; Persia-Economic Union Belgium and Luxemburg, May 9, 1929, Article 6, LHTS 110, p. 377; Germany-Persia, February 17, 1929, Article 6, LHTS 111, p . 2 6 3 . 118. USA-Economic Union Belgium and Luxemburg, February 2 7 , 1935, Article 12, UiTS l60, p. 27; Also: USA-Czechoslovakia, March 7, 1938, Article 17, LNTS 200, p. 87; Portugal-Siam, July 2, 1 9 3 8 , USA-Switzerland, January 9, 1936, Article 16, M T S 1 7 1 , Article 1 9 ,

p. 231;

UITS 200, p. 149; Union of South Africa-Netherlands,

February 20, 1935, Article 14, LHTS l60, p. 143,

A MODERN DEFINITION, CLASSIFICATION AND ANALYSIS

105

118

in abnormal or extraordinary circumstances;" the warning that "no arbitrary discrimination" shall take place if this course of action becomes necessary does not necessarily mean equality of treatment. A direct attack upon the problem of bounty-laden Imports is made possible by provisions reserving the right to restrict or prohibit t h e m . 1 2 0

119. Norway-Persia, March 8, 1930, Article 8, U T S 13^, p. 153; France-Greece, March 11, 1 9 2 9 , Article 9, LNTS 95, p. 401; Economic Union Belgium and Luxemburg-Switzerland, August 26, 1929, Article U T S 105, p. 9; Netherlanda-Roumanla, August 29, 1930, Article 3, U T S 108, p. 177; Great Britain and North Ireland-Turkey, March 1, 1930, Article 16, U T S 108, p. 4-07; Nether lands-Yugoslavia, May 28, 1930, Article 5, LNTS 1 2 9 , p. 73. 120. Rouaania Turkey, June 11, 1929, Article 10, U T S 112, P. 139 (provided equality applies).

VII Limitations on Most-Favored-Nation Treatment IN M A N Y W A Y S , the d e s c r i p t i o n of exceptions to, and limitations on the m o s t - f a v o r e d - n a t i o n clause w h i c h w i l l comprise the next three c h a p t e r s , is the m o s t significant aspect of the w h o l e a n a l y s i s . It w i l l become clear that the m a n y qualifications and exceptions are precisely what determine in great part the I n d i v i d u a l nature of each p r o v i s i o n for m o s t - f a v o r e d - n a t l o n treatment, and they have had a very r e a l effect u p o n the operation of the clause. N o e v a l u a t i o n of the policy of granting equality of treatment is feasible u n t i l deviations, real and apparent, permitted and prohibited, direct and indirect, are understood. Limitations differ from exceptions. The former define the "area of application;" to what territory does the m o s t - f a v o r e d - n a t i o n obligation apply? A r e all goods in any given bilateral trade included? A r e nationals, vessels, economic enterprise, consuls Included? Does the pledge of e q u a l i t y operate regardless of the origin of imports? A r e formalities covered by the clause? All t r e a t i e s — c o m m e r c i a l t r e a t i e s — a n s w e r these questions in a particular f a s h i o n . E x c e p t i o n are superimposed upon the l i m i t a t i o n s — t h e y exempt certain actions from equality of treatment as defined in treaties. Only rarely will an agreement h a v e n o apparent limitations w h a t e v e r . 1 Limitations vary, and clarity demands that they be examined separately. Two w e l l - d e f i n e d classes emerge: the direct and the indirect. It has b e e n insisted p r e v i o u s l y that each treaty creates a unique clause. A d d i t i o n a l l y , almost a l l favored n a t i o n clauses are limited in some fashion, w h e t h e r it be w i t h regard to articles, activities or t r a n s a c t i o n s . 2 Limitations of this kind are direct because they are expressed in the treaty 1. For example: Bulgaria-Greece, February 28, 1927, U T S 68, P. 59. This provisional accord hae no exceptions, limitations or restrictions. 2. This should not be confused with the "limited" or "conditional" form of the clause discuBsed in Chapter III; in that sense an unlimited" or "unconditional" clause might have a narrower range of application than the "limited" type.

LIMITATIONS ON M05T-FAV0RED-NATI0N TREATMENT

107

provlsion.3--the general and auxiliary clauses—which define equality of treatment. Indirect limitations may arise out of other provisions In a commercial agreement; but it is more than likely that they will be traceable to factors entirely outside the convention in which the clause is found. A. DIRECT LIMITATIONS

Every most-favored-nation clause has a territorial basis, whether it is 30 stated in specific reference to the clause, or in an article a-t the end of a treaty, or Is not mentioned at all. It is probably safe to say that as often as the clause will have the same territorial applicability as the agreement in which it is contained, it will have a narrower base. The distinction between positive and negative wording has at least some significance here because these sub-clauses refer to special problems and the omission of any provision governing them would doubtlessly throw reliance upon"traditional policy in the event of a dispute over interpretation or application. An illustration will make this clear. If the United States desired to Include within the purview of her equality of treatment obligation to one nation concessions and arrangements with Cuba, it would be necessary to provide for It in explicit fashion since all United States commercial treaties have definitely excluded favors granted to Cuba. One of the broadest clauses In this respect is illustrated by Article 9 of convention between Japan and Slam: "No other or higher duties shall be Imposed on the importation into the territories and possessions of either of the High Contracting Parties of ary article the produce or manufacture of the territories and possessions of the other..."3 Another way treaties state substantially the same thing is to provide that: the provisions of a given agreement shall apply to all the territories and possessions, belonging to or administered by either of the contracting parties.4 Such a pledge may be unilateral5 and 3. March 10, 192K, LNTS p. 192. Austria-Japan, August 16, I9I+O, Art. 18, U T S 126, p. 351; Latvia-Japan, July 1 9 2 5 , Art. 18, LHTS 80, p. 305. 5. Estonia-USA, March 2, 1 9 2 5 (exchange of notes), U T S k}, p. 292 (by the United. States); Latvia-USA, February 1, 1 9 2 6 (exchange of notes), LNTS 55, p. 3 (by the United States).

108

THE MOST-FAVORED-NATION CLAUSE

also more specific; it may state that a given treaty shall apply also to colonies of the Netherlands (Netherlands Dutch Indies, Surinam and Curacao), 6 to colonies, possessions, and mandates of Belgium, 7 to the Portuguese colonies, 8 to "imports into the Canary Islands and Spanish possessions," 8 to Greenland, 10 and to Liechtenstein^1 In many cases, countries controlling colonial areas or protectorates will agree that most-favored-natlon provisions may be extended to cover if the other party is notified to that effect. 1 2 Territorial limitations—repeated extensively-form a familiar pattern in commercial treaties. This includes the omission of Spitzenbergen 13 and the Isle of Jan Mayen 1 4 from the Norwegian application agreements, and, similarly, Greenland from Danish treaties. 15 6. Netherlands -Czechoslovakia, October 17, 1924, Art. 8, U T S 31,P. 95; Guatemala-Netherlands, May 12, 1927, Art. 8, ENTS 85, p. 32J; Brazil-Netherlands, September 16, 1931, (exchange of notes), U T S 125, p. 197. 7. Economic Union Belgium and Luxemburg-Canada, July 3, 1924, Art. 5, U T S 32, p. 37; Economic Onion Belgium and Luxemburg-Persia, May 9, 1929 (exchange of notes), U T S 177, P- 87 (subject to reciprocity) . 8. Hungary-Portugal, November 14, 1929 (exchange of notes), U T S 105, p. 287. 9. Spain-Sweden, May 1925, Art. 5, U T S 36, p. 325. 10. Brazil-Denmark, November 30, 1931 (exfchange of notes), U T S 128, p. 29. 11. Australia-Switzerland, November 4-22, 1938, Art. 10, LNTS 184, p. 65. 12. Great Britain and North Ireland-USSR, Art. 6, U T S 101, p. 409. 13. Chile-Norway, February 9, 1927, Art. 8, U T S 80, p. 325; Guatemala-Norway, December 20, 1938, Art. 10, U T S 198, p. 117. 14. Norway-Venezuela, February 18, 1938 (para. 6, exchange of notes), U T S 189, p. 205. 15. Denmark-Lithuania, June 21, 1930, Art. 23, U T S 114, p. 15; Denmark-Romania, August 28, 1930 (exchange of notes), U T S 108, p. 165; Brazil-Denmark, November 30, 1931 (exchange of notes), UTS, 128, p. 29; Bolivia-Denmark, November 9, 1931, Final Protocol, Ad. Art. 5, LNTS 147, p. 27; Denmark-Haiti, October 29, 1937, Art 5, U T S 190, p. 233; Brazil-Denmark, July 30, 1936, Art. 6, U T S 194, p. 81.

LIMITATIONS ON MOST-FAVORED-NATION TREATMENT

109

British treaties may apply only to "the United Kingdom and Northern Ireland,"16 and the Kingdom of the Netherlands may be defined for the purposes of a particular convention as Netherlands' "territory in Europe." 17 A more complex provision is found in a treaty between France and Switzerland; Article 21 provides that Articles 1, 2, 7, 8, 9, 15, 18, and 19 will apply to French colonies, protectorates and mandates, while Article 21 states that although Articles 5» 10, 11, and 12 (equality of treatment) do not so apply, nonetheless reciprocal most-favored-natlon treatment shall prevail regarding those articles. The end result of this arrangement is that some most-favored-nation clauses apply to French colonies, others do not, because Articles 6 and 13 do in fact provide for equality of treatment.18 There is another side to territorial limitations. The average clause bestows equality on a person or an object of one country when they come within the jurisdiction of the other. Does this mean that most-favorednation treatment is granted no matter where goods come from so long as they bear the nationality of the other contracting party? Different treaties answer in different fashion; obviously the scope of the clause will be affected in some measure, and the question of the' compatibility betweeh equality and indirect taxes is involved, too. Again, it is true that some treaties do not touch on this subject, providing only the trade of the contractants "shall not be subjected to other or higher duties or charges than those paid on the like articles the produce and manufacture of any other foreign country. Ml8 "Articles, the produce or manufacture of the territories of one of the High Contracting Parties, upon importation into the territories of the other, from whatever place arriving, shall enjoy the lowest rates of customs duty applicable to similar articles of any foreign origin." 20 The italicized phrase means, of 16. Great Britain and No. Ireland-Turkey, March 1, 1950, Article 1, LHTS 108, p. 1+07. 17. Ecuador-Netherlands, May 27, 1937, Article 13, U T S 194, P. 179. 18. July 8, 1929, Articles 20 and 21, UTTS 14, p. I89. 19. United Kingdcm-Finland, December 14, 1923, U T S 29, p.130. 20. Japan-Poland, December 7, 1922, Art. 5, LNTS 32, p. 66; Japan-Slam, March 10, 1924, Art. 9, UTTS 31, P. 192; United KingdomSpain, October 31, 1922, Art. 6, LNTS 28, p. 342; Great Britain and North Ireland-Latvia, June 22, 1923, Art. 2, U T S 20, p. 398.

110

THE MOST-FiVORED-NATION CLAUSE

course that goods of the two parties do not become "nationalized" by passing through a third country and are not, therefore, liable to possible indirect taxes. The same holds true of a tre-.ty between Great Britain and Spain, Article 6: "...Articles produced or manufactured in the territories of one of the Contracting Parties imported into the territory of other shall not be subject to higher duties than the lowest accorded to any similar articles produced or manufactured in any other foreign country. ...1,21 It is to be noted that this provision has nothing to say about the export point of the goods concerned. A provision may be more precise; for example, an article agreed to by Germany and Finland declares that each other's products will be granted most-favored-natlon treatment even when they cone from or through a third country.22 In contrast is Article 4 of a convention between Canada and France which contains as a basis of mostfavored-nation treatment the vords: "the same or similar products originating in and coming from Canada.1,23 An agreement may simply state that "goods which come from the territory of one of the High Contacting Parties shall, on importation to the other country, enjoy...at least as favorable treatment as that which is accorded... to goods from any third country."24 This type may also be more specific and certain articles may not apply to goods of one of the parties coming from a third nation. Most-favored-natlon clauses may undergo limitation in other ways. Commercial treaties often abound with schedules of duties appended to the general articles and when these treaties do not contain a covering clause pertaining to all customs duties the chances are that the obligation to grant equality of treatment will be confined to the items listed explicitly or implicitly. A 1938 agreement between Bulgaria and Greece definitely limits most-favored-natlon treatment to an appended list, 20 as is true of one between New Zealand and 21. 22. 23. 2b. 25. LNTS 3 6 , 26.

April 5, 1927, Art. 6 , LNTS 6 3 , p. 1 8 9 . Art. 10, June 26, 1926, LNTS 56, p. 203. Denmark-Finland, August 3, 1923, Art. X, U T S 21, p. J03 December 16, 1922, LNTS 21, pp. 37-38; Also Art. 5 . Poland-Sweden, December 2, 1924, FinaJ Protocol, III, p. 303. Exchange of Notes, LNTS 195, p. 27.

LIMITATIONS ON MOST-FAVORED-NATION TREATMENT

111

27

Switzerland signed the same year. Article II of a treaty between Spain and Hungary extends equality of treatment to the good3 named In Schedules A and B exported from Spain, while Spain grant3 similar treatment to Schedule D and not to Schedule C . 2 8 Another formula is: Czechoslovakia grants Spain a list of duties and any reductions to a third power; Spain grants in return a list and for all other Items the second column of the Spanish tariff will prevail. 20 Goods Included and excluded In a grant equivalent to most-favored-natlon treatment may be found in the same annexed list. 30 By indirection, at least, the clause is limited in this article: "The Portuguese Government will extend most favored nation treatment to the Norwegian goods enumerated in List B...." "The Norwegian Government will apply most-favored-natlon treatment to the Portuguese goods enumerated in List A...." 31 Most-favored-natlon treatment is mutually granted between Germany and Belgium "except to column three of Annexes I and II." 3Z In a Belgian-Finnish treaty" Finland undertakes not to claim the advantage of most-favored-nation treatment in regard to customs duties levied on any good3 not enumerated in List B...." 33 Definite narrowing of scope is seen in the following quotation (already cited in another connection) : 3 4 "Nevertheless, the Economic Union of Belgium and Luxemburg undertakes to grant Finland most-favored-natlon treatment without reservation in the event of Finland 1s granting the Economic Union of Belgium and Luxemburg all the abatements of customs duty which are granted by Finland to France and which are not specified In the above-mentioned list A." 3 S Portugal promises mostfavored-nation treatment to Germany vis a vis the article 2 7 . May 5, 1 9 3 8 , U T S 1 8 9 , p. 1 6 7 ; By Implication: GermanySpain, December 21, 193^, Art. II, U T S 1 6 5 , p. 307. 28. June 17, 1925, U T S 60, p. 69; also France-Turkey, June 16, 1937, Ar-. 1, LHTS 179, P. 195. 29. July 29, 1925, Arts. 1-6, U T S 60, p. 329. 30. Germany-France, March 31, 1927, Art. 2, U T S 66, p. 7. 31. Norway-Portugal, April 11, 1923, Art. I, LNTS 16, p. 392. 32. April 4, 1925, Art. k, U T S 37, P. 280.

12,

33. February 12, 1924, U T S 23, p. 1^1. 3U. See supra, Chapter 5. 35- Economic Union of Belgium and Luxemburg-Finland., February 192^, UTS 2k, p. 21.

112

THE MOST-FAVORED-NATION

CLAUSE

mentioned In treaties with Norway and the Netherlands.36 A common type of arrangement - more complex - is Illustrated by a Spanish-Swedish convention of May 1925. 37 Article 2 mentions the schedule to apply to Spanish exports and declares all other good3 to be subject to most-favored-natlon treatment; Annex B, according to Article 3, applies to Swedish exports but Sweden shall receive any concessions in this schedule granted to a third state and all other duties shall be charged the Spanish second column; Annex C applies quality to certain specified Swedish exports. Germany and Spain agree: Annex A governs imports into Germany - "no higher or other duties" no matter what Spain might enjoy under most-favored-nation treatment; Annex B consists of articles to receive straight equality upon entry Into Germany; most-favored-nation treatment Is granted by Spain to the articles listed in Annex C, but this i3 not to extend to reductions which exceed 20% below the second column of the Spanish tariff. 38 An Interesting agreement is one signed by Italy and Finland. Articles VII and VIII deal with import duties: Annexes A and B lay down reductions in rates by Finland and Italy, respectively; products from Italy listed in A and C shall receive mo3t-favored-natlon treatment and products from Italy listed in B shall be treated likewise.30 Clearly, not all treaties which revolve about a complexity of tariff schedules limit most-favored-nation obligations,40 Within the same pattern, a minimum tariff (or second column) Is frequently exchanged for most-favorednatlon treatment,41 but the two are not the same unless 36. March 20, 1926, Article 2, LNTS 53, p. 361. 37. LNTS 36, p. 325; France-Hungary, Oct. 13, 1925, Arte 1, 2, 3, U T S 1+8, p. 9; Germany-France, Feb. 2, 1926, U T S 48, p. 101. 38. May 7, 1926, Arte. 1, 2, 3, 4, LOTS 53, P. 321. 39. Italy-Finland, Oct. 22, 1924, LHTS 32, p. 151. 40. CF. Albania-Yugoelavia, June 22, 1926, Art. 9; U T S 91, p. 9; Auetrla-France, May 11, 1 9 2 8 , Arte. 1-2, IJTTS 88, p. 21; Germany-France, Aug. 17, 1927, Arte. 5, 6 - 8 , LHTS 76, p. 5; GermanyYugoelavia, Oct. 16, 1 9 2 7 , LHTS 77, p; 19. 41. Netherlande-Portugal, Feb. 27, 1924, Arte. 1-2, UITS 27, p. 110; Spain-Norway Oct. 7, 1923, Art. 1, LHTS 59, P. 47; CanadaFrance, Dec. 15, 1922, Arte. 1, 2, 3, 4, LHTS 21, pp. 37-38; FranceHungary, Oct. 13, 1925, Arte. 1, 2, 3, 4, LNTS 48, p. 9; GermanyFrance, Feb. 2, 1926, U T S 48, p. 101; Auetralla-France, Nov. 27, 1936 (exchange of notee), LNTS 177, p. 301.

LIMITATIONS ON MOST-FAVORED-NATION TREATMENT

11?

2

so stated.* In a convention between Spain and Slam this becomes clear; Slam grants equality to all Spanish exports; Spain does the same for rice and tin ore from Siam, other articles receive the second column of the Spanish tariff.*3 Hungary pledges "the lowest tariffs" to Estonian products but in return the Estonian "general tariff" means that "mo3t-favored-nation treatment shall not apply."4,1 Most of the British commercial treaties negotiated In the middle 1930*3 grant only a general schedule in return for the application of the clause to British trade. 45 Most-favored-natlon rights are sometimes waived. In a Protocol of Signature Poland waives certain duties in a treaty between Finland and Great Britain (Sept. 29, 1933), and Finland waives the duties on rubber products set forth in a Polish-Swedish agreement (Oct. 21, 1933); both would otherwise have been entitled to the benefit of said duties under the operation of the most-favorednatlon clause. 46 Limitations are not always broad in nature. An example Is the brief agreement between France and Sweden which provides that wines and sparkling wines shall not be subjected to less favorable treatment than fruit beverages as regards administrative and fiscal regulations by the Swedish Wines and Spirits Monopoly. 47 Equality of treatment Is confined to Portugese wines (so far as goods are concerned), in a treaty between Norway and Portugal. 48 Finland and Lithuania contract as follows: It 1b understood, however, that the goods of the two states shall enjoy reciprocally only the advantages granted by the general tariff and not any advantages outside the general tariff which 42. Gee Ch. VI. 1*3. Aug. 3, 1925, Art. XI, U T S 55, p. 39; Portugal-Slflan, Aug. 14, 1925, LHTS 55, p. 57; Netherlands-Slam, June 8 , 1925, U T S 5 6 , p. 57. 41+. Arts. 9, 10, Oct. 19, 1922, U T S 30, p. 355. 45. With Poland, Feb. 27, 1935, U T S 162, p. 181; with Italy, March 18, 1935, LHTS 160, p. 289; with Netherlands, Dec. 18, 1935, LNTS 1 6 5 , p. 255; with Latvia, July 17, 1934, UTTS 154, p. 25; with Estonia, July 11, 1934, U T S 152, p. 131; OF. Spain-Uraguay, Jan. 2, 1935, LHTS 164, p. 95. 46. Finland-Poland, June 30, 1934, U T S 1 5 3 , p. 29; Also Austria-Greece (exchange of notes), Sept. 15, 1933, U T S l6l, p. 2 5 I ; Germany-Finland, March 24, 1934, (Final Protocol, Ad. Art.8) U T S 149, p. 343. 47. France-Sweden, March 13,1933 par. Ill (3) U T S 142, p. 131. 48. Nov. 13, 1931, U T S 129, p.. 455.

114

THE MOST-FAVORED-NATION CLAUSE

are or may be granted to other states under comnercial tariff conventions.4S

Finland and Greece name, respectively ten Greek and eleven Finnish products to which the clause will apply. Finally, It has happened that in a complex trade treaty, no attempt Is made to guarantee equality of treatment to ordinary import trade despite the fact that Its application includes nearly everything else.50 B. INDIRECT LIMITATIOHB In this group are measures by no means peculiar to the non-tariff trade controls of the 1930's. These will be considered first. 1. SANITARY PROVISIONS. As will be shown in the next chapter, sanitary provisions (veterinary restrictions, diseases harmful to plants and animals, public health) constitute legitimate exceptions to the most-favored-natlon clause. It 13 perhaps not surprising that they have been carried to the point of discrimination. Employed in this manner, they provide effective Indirect protection against undesired imports. This would seem to be the purpose of the Importation of Carcasses Order of 1926, which, together with subsequent amending orders, effectively prohibited the Importation into Great Britain of any cattle, sheep, or pigs ,5X Section 306 (a) of the United States Tariff Act of 1930, prohibiting the importation of all kinds of meat from countries where rinderpest and foot-and mouth-disease exist, apparently was designed "to afford economic proection to the American livestock Industry."52 France is reputed to have resorted to sanitary and veterinary measures to circumvent without repudiating the Franco-Italian Commercial Treaty of 1932 which carried with mo3t-favored-nation obligations. Another example is the Argentine wrapping restriction placed upon the Importation of oranges from Paraguay, one of the chief exports of the latter country to the Argentine. , Similar manifestations of indirect protectionism could be cited at length, but enough has 49. Oct. 6, 1 9 2 8 (exchange of notes), U T S 82, p. 71. 50. Finland.-France, July 13, 1931, DTTS 2 9 , p. 449; EstoniaFrance, Jan. 7, 1922, U T S 6 2 , p. 9 . 51. Bailey, loc. clt., p. 431 52. Bidvell, The Invisible Tariff. (New York, 1933), p. 213.

LIMITATIONS ON MOST-FAVORED-NATION TREATMENT

115

been said to suggest the potential Inroads upon equality of treatment made possible by the use of this type of regulation.53 2. REFINEMENT OF TARIFF CLASSIFICATION. Differentiation between imports of the same type of commodity from different countries has long contributed to the possibilities of wide circumvention of the most-favored-nation clause. The practice of sub-dividing into twenty categories products which normally would be admitted under one or two classifications I3 not a recent one, although the evils of it seem to grow greater. It is probably not true that these developments always result from conscious efforts to avoid the effects of most-favored-natlon treatment; scientific progress had rendered narrower tariff classification inevitable - the number and kind of goods in international trade has become more complex. While refinement has become a definite policy, the object has been, of course, to create sufficient diversification so that tariff concessions can be generalized at a minimum sacrifice to the whole tariff structure. 54 In some countries - notably the United States domestic manufacturers may protest any classification of competing imports if they disagree with the rate assessed by the collector.ss In some cases It has been possible to avoid giving benefits to third nations (entitled to equality) at all. Minute distinction between imports have been drawn to absurdity. The classic example appeared in Item No. 103 of the German Conventional tariff of 1902, which accorded a special rate to "larg^ dappled mountain cattle or brown cattle, reared at a spot at least 800 peters above sea level." 58 By this provision Germany was able to charge a very low duty on this particular variety of cattle in favor of certain farmers in Southwestern Germany, and in favor of Imports from Switzerland without fear of flooding-the general market 53. Consult Bidvell, op. clt., Chapters 6, 7, 8. Higglnson, Tariffs at Work, p. 35. 55- United States, Customs Administrative Act of 1938, Section 516 (b) See Bidvell, op. clt., p. 1+0. 56. Reciprocity and Commercial Treaties, p. lt-31. Duties fixed by reciprocal trade agreements are exempt frctn this process. For an analysis of German practice in treaties of 1904-05, see Farva, Les Effets da la clause de la nation la plus favorlaee, pp. 167-73.

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THE MOST-FAVORED-NATION CLAUSE

under operation of the most-favored-natlon clause. From 1892 on, Germany was able to avoid the most-favorednatlon obligation in the Treaty of Frankfort by increasingly refining her tariff rates. The A c t of 1902, mentioned above, Increased the number of items from 387 to 1446. 5 7 The narrowing of customs nomenclature was used frequently and cleverly in A m e r i c a n trade agreements with Switzerland, Belgium and Sweden as a means of preventing an extensive application of the equality of treatment p l e d g e s . 5 8 In the Swedish agreement, the American tariff on pocketknlves was lowered, but only 011 "knives w i t h etched steel handles valued at over six dollars per dozen." The rate on flax in the Belgian agreement was reduced from one and-one-half cent to one cent per pound, but the reduction applied only to flax valued at ¿340 a ton or more. The chief supplier of flax was the United Kingdom whose flax was only worth $80 per ton. A special effort - a successful effort was made to exclude Japanese trade from concessions embodied in the Anglo-American trade agreement through reclassification. 5 9 By the time of the latter agreement 398 new classifications had b e e n introduced into the American tariff, a n d undeniably, substantial discrimination was accomplished in the Anglo-American agreement. In 1927 there were 169 different kinds of cotton piece goods named in the tariff of India; 5,000 synthetic chemicals were listed in the British Safeguarding of Industries Act of 1922; the Italian schedules mention 252 varieties of iron and steel c h a i n s . 6 0 . Possibilities for discriminatory treatment in such classifications are a3 wide as the variation between the products of different countries. Distinction may be made between competing products of diverse origin, but serving the same needs, for example, cotton seed, olive, palm and coconut oils. 57. Ibid. Bidvell, "Yankee Trader in 1936," Yale Review, June 1936, pp. 718-19. 58. See Bidvell, p. 40. The Invisible Tariff. 59. Diebold, New Directions In Our Trade Policy, p. 80. The beat account of this la contained in an excellent study by Carl Kreider, The Anglo-American Trade Agreement, (Princeton, 1942), pp. 212-218! 60. League of Nations, Memorandum on Discriminatory Tariff Classifications, II. Economic and Financial, 1927, II, No. 27, p. 4.

LIMITATIONS ON MOST-FAVORED-NATION TREATMENT

117

Articles may be taxed according to the way In which they are packed. The duty on milk may vary with Its butter content. Wines can be differentiated according to alcoholic content. The scientific progress, already cited, as partly responsible for unintentional or necessary refinement of customs categories, also brings new competition between different articles and discrimination becomes easier. All methods of assessment, whether specific or ad valorem, leave the Ideal of equality unattained when they are not applied to identical goods. It must not be assumed, however, that all tariff classification is aimed at nullifying the most-favored-natlon clause. In addition to the reasons hitherto set forth, it might be asserted that the division of goods into classes must always result in some discrimination.01 Furthermore, classification can be used to prevent discrimination. Actual discrimination due to the application of ad valorem or specific duties to whole classes of articles is actually diminished by the introduction of classification. Some of the simplest definitions may be dlsclminatory if the rates are maladjusted. It requires no fineness of classification to separate cottonseed from coconut and palm oils, but the duties may be easily shifted to put one of these oils in an unfortunate competitive position. Nevertheless, tariff classifications are looked upon as a serious source of discrimination.02 The mostfavored-nation clause can have no effect in removing such Inequality because it is caused not by the application of tariffs but by their determination. 3. PENALTY DOTIES. The conflicts caused by Invoking the penalty provision of the American Tariff Act of 1890 have been recounted elsewhere. Penalty duties applied against Colombia, in view of the treatment extended to Argentina, were outright discrimination. This weapon, Incorporated in nearly all tariff acts, can be used to circumvent the most-favored-natlon clause. One of the best examples of this was the penalty duty placed on German salt by the United States in I 8 9 O . 6 3 Under that 61.

Ibid.,

p.

5.

62.

Ibid.., p.

7.

63. This Is properly defined as a "contingent" duty - Imposed on Imports from nations levying duties on like Imports from the

118

THE MOST-FAVORED-NATION CLAUSE

law salt was to be admitted free unless foreign countries exporting It placed a duty on American salt. Germany imposed a tariff on the importation of all salt, not American salt alone. "No escape seems possible from the conclusion that to penalize salt from a country merely because its laws provide for a duty on salt from all countries, including the United States, is a discrimination prohibited by every form of the mo3t-favored-nation clause."04 In most cases., penalty duties are discriminatory when imposed under conditions similar to those indicated above. Otherwise, such duties merely represent the withdrawal of most-favored-nation treatment in retaliation against bona fide discrimination. Usually penalty duties are countervailing in nature. COUNTERVAILING DUTIES. The protests against countervailing duties have been based primarily upon the claim thatthey are a violation of the most-favored-nation clause. Anti-bounty, compensatory duties have played a prominent role in the history of the most-favored-nation clause. Because of the Important questions of interpretation raised by this controversy, it is well to consider it at some length. A consideration of countervailing duties must necessarily entail an examination of the sugar bounty issue and of the American and British application of bounty countervailing duties, since these two phases of the problem have been almost the only occasion of diplomatic discussion. Oddly enough, it was only after most-favored-nation treaties and export bqunties had been In contemporaneous existence for over 200 years that the claim was made that the two policies were compatible. Some historical precedents will provide a useful background. Sugar bounties first became an important problem in the middle of the Nineteenth century. At this time it was freely acknowledged in England and other countries that the imposition of countervailing duties and equality of treatment were incompatible.65 The Footnote continued United States; "countervailing" duties, on the other hand, are Imposed on Imports frcm nations which aid their exports with bounties and subsidies. 6k. Moore, Digest, V, 27k. 65. Fuchs, The Trade Policy of Great Britain and Her Colonies Since i860 (London, 1893).

LIMITATIONS ON MOST-FAVORED-NATION TREATMENT

119

Sugar Convention of l86it66 provided that each country was free to impose any additional duties it saw fit on bounty-fed sugar from non-signatory states. But it has been pointed out that this is hardly to be taken as an assertion of the compatibility of countervailing duties and the most-favored-nation clause since no obligation was placed on the signatories to impose duties and any one of them could regain its right to do so (if they were contrary to treaty obligations) by denouncing or obtaining a revision of these treaties. 67 In 1871* Great Britain removed her tariff on sugar. The sugar producing British Colonies suffered severe competition and petitioned for countervailing duties against bounty-fed continental sugar. In 1880, however, the British Foreign Office took the view that such a policy would be a violation of most favored nation obligations. 68 Despite further agitation in l88l and 1884, the government continued to maintain that these duties could not be used while most-favored-nation treaties were in force. The unratified Sugar Convention of 1888 required each of the signatory powers to prohibit the import of, or levy countervailing duties against, bounty-fed sugar. Article VII stated definitely that most-favored-nation clauses in other treaties should not be cited in an attempt to evade the stipulation above, even by countries which having once become a party to the Convention subsequently retired from it. 6 9 M. Visser reasons, that this last provision shows it to be the intention of the Convention that the penal clause was to be applied only against signatory countries which failed to keep their pledge not to grant bounties. 70 Hence the conclusion emerges that the 1888 Convention was not a formal recognition of any harmony between anti-dumping duties and equality of treatment. Of the countries represented at the Conference, Russia, Belgium, Denmark, Sweden, France and the Netherlands held that countervailing duties would be contrary to their treaty obligations. Only four, 66. Article XIX; Signed and ratified by Great Britain, France, Belgium and the Netherlands "but never made effective.

See Fuchs,

op. cit., p. 81; Gregory, op. cit., p. 370. 6 7 . Tisser, op. cit., p. 166, note. 6 8 . Fuchs, op. cit., p. 8 7 . 6 9 . Tiner, Pumping: A Problem in International Trade. (Chicago, 1923), P. 306.

70. Tisser, op. cit., pp.

168-69.

THE MOST-FAVORED-NATION CLAUSE

120

Great Britain, Germany, Spain and Austria held the opposite v i e w . 7 1 lAter in the same year Great Britain actually reversed her position by announcing that she could not put the agreement into effect without first terminating or revising her most-favored-nation treaties. In 1902, the Brussels Sugar Convention established an important precedent in favor of the compatibility of countervailing duties w i t h the most-favorednatlon c l a u s e . 7 2 This convention contained a penal clause similar to the one embodied in the 1888 Convention, and none of the signatories made a n attempt to revise its commercial treaties after 1920. As M. Vlsser points out though, the position taken by the Convention was dictated by economic rather than jurldiclal considerations. 7 3 Undoubtedly the growing Importance and seriousness of the sugar bounty question rather than any new arguments resting on principle caused those nations which had previously denied the compatibility of countervailing duties and most-favored-nation treaties to reverse their policy. Great Britain's attitude on this legal question was apparently governed by the sentiments of the political party in power at the moment. The Conservatives, who were inclined toward protection, supported countervailing duties, while the Liberals, w h o were free traders, condemned them as Inconsistent w i t h liberal commercial policy. The Tariff Amendment Act of 1899, at the insistence of Joseph Chamberlain, British Secretary of State for the Colonies, passed under a conservative ministry, levied countervailing duties equal to foreign bounties on sugar imported Into India. 7 4 Russia protested this was a violation of equality of treatment. The reply given by Lord Salisbury for Great Britain was the first definite and unqualified commitment of the government to the proposition that countervailing duties were not incompatible w i t h the most-favored-nation clause. In the reply it was pointed out b y the British Government that the Russian system of repaying excise taxes was equivalent to a bounty; that it was the Intention of the most-favored-natlon clause that goods should enjoy 71. 72. 73. 7^.

Ibid., p. 1 6 7 . Viner, op. cit., p. 307. Visser, op. cit., p. 171. Hornbeck, op. cit., p. 641.

L I M I T A T I O N S ON M O S T - F A V O R E D - N A T I O N

TREATMENT

121

equality of treatment, but not preferential advantages; and that when an artificial preference was produced by the direct legislative act of one party to a most-favorednation agreement, the other government might "redress the balance of trade which had thus been artificially disturbed by discounting the bounty or the legislative act producing the official stimulus."75 Chamberlain was at this time in favor of imperial preferences and inclined toward supporting outright tariff protection. M. Visser has called attention to the fact that his views on the compatibility of countervailing duties and the most-favored-nation clause had changed with the shift in his political and economic affiliations.78 In l88l when he was President of the Board of Trade in a Liberal Cabinet, he said: "There are many ways besides bounties in which governments can and do encourage or discourage particular Industries. None of these have hitherto been thought to call for retaliation by His Majesty's government, yet they are open to the same kind of objection as sugar bounties."77 The Brussels Sugar Convention was signed by Great Britain in 1902 (while a Conservative government was still in power). In 1907, the Liberals came to power again and withdrew Great Britain from all obligations under the penal clause of the Convention of 1902. Several treaties entered into during this period by Oreat Britain Indicate that some elements in power remained unconvinced of the compatibility of the most-favored-natlon clause and anti-dumping duties. In several new treaties, a provision was Included which divorced the obligation to grant most-favored-natlon treatment from measures applicable in either country to articles enjoying a bounty in the other.78 It is significant to note that none of the signers of the Convention of 1902 ever applied bountycountervailing- duties to any other product than sugar.79 75. Note to the Russian Government, July 15, 1899» Parliamentary Papere, C cerne re lai No. 1 (1903); also Moore's Digest, 5, 307. 76. Vlner, op. cit., 309. 77. Cited in Parliamentary Debates, Commons, June 15, 1899,

col. 1219. 7 8 . Hertslet, Commercial Treaties, XXVII, 1022 (the Great Britain-Portugal Treaty of August 12, 191U, Article VII). 79. Several of the countries vhich Joined, the Brussels Convention later signed commercial treaties vith Russia in which the

122

THE M O S T - W A V O R E D - N A T I O N

CIAUSE

"It Is scarcely permissible to cite as authoritative the interpretation given by the Brussels Convention on one phase of most-favored-nation obligations and to reject as of no weight because erroneous its interpretation of other phases." 80 Furthermore, Russia was admitted into the Convention in 1907 with the special concession that her subsidized sugar exports should be free within certain limits as to quantity, which is, of course irréconciliable with any construction of the most-favored-natlon clause, and therefore weakens the force of the Convention of 1902 as an authoritative source of moat-favorednation interpretation. In 1894 the United States laid countervailing duties on bountied sugar. 81 Germany protested that a bounty was an internal affair and that the attitude of the United States would render the effects of the mostfavored-natlon clause illusory by subjecting the exporting party to arbitrary duties which It was the object of the clause to prevent. 8 8 Secretary of State Gresham held that the Act of 189^, in respect of anti-dumping duties, was in violation of the treaty obligations of the United States. 83 President Cleveland thereupon asked that the countervailing provisions of the Act be repealed, but Çongress failed to do so. With this exception, the United States always maintained, at least until after 1923, that countervailing duties were compatible with the most-favored-natlon clause. The Dlngley Act of 1 8 9 7 provided for additional duties to the net amount of the bounty of articles so subsidized. More protests followed $long the same line as in I89H. Secretary of State Olney abandoned Mr. Gresham 1 s position to hold that such a policy was not Inconsistent with the mostfavored-natlon obligations of the United States. 84 Footnote continued most-favored-natlon clause stated that bounties were not to be made the pretext for differential treatznent. Cf. F. Thibault, "conflits entre la convention sucrière de Bruxelles et les traite's de commerce," Revue d'économique politique, XXIII (1909), 509 ff. 80. Viner, op. cit., p. 311. 81. The United States had since 1090 levied countervailing duties on bounty aided Imports. 82. The legal basis for ccmplaint was the most-favored-natlon treaty of 1 8 2 8 between the United States and Prussia. 8 3 . United States, Foreign Relations, I89U, p. 2 3 6 . 84. Moore, Digest, V, 306; U. S. Foreign Relations, 1897 p. 178.

LIMITATIONS ON MOST-FAVORED-NATION TREATMENT

123

The decision of the Supreme Court In Downs v. United States 85 Is cited In connection with discussions of the compatibility of countervailing duties with mostfavored-nation obligations to prove that the two are compatible.86 But it has been pointed out that the decision did not touch upon the question of treaty obligations. 87 The Court might have deemed itself powerless to declare countervailing duties invalid even though it regarded them a3 violations of the most-favored-natlon ti-eaties to which the United States was a party because the enactment of the anti-dumping provision was subsequent to the conclusion of the treaty and was, therefore, controlling under municipal law. Germany, AustriaHungary, Denmark, and Russia, all continued to protest the American policy to no avail. Germany and Russia both retaliated, a very significant fact in view of the support given by these two nations to the legality of countervailing duties under the Convention of 1902. Legislation concerning countervailing duties now effective In the United States is contained in section 303 of the Tariff Act of 1930, which provided that the Secretary of the Treasury could levy, In addition to the duties otherwise Imposed by the act, a duty equal to the net amount of any bounty or grant bestowed directly or indirectly upon the manufacture or production or export of any article Imported into the United States. After 1936, advantage was taken of this section more frequently, but previous to that time such duties were ordered on only eighteen occasions.88 Perhaps the most noteworthy application of countervailing duties were the orders of June 4, 1936, and March 18, 1939 against German export subsidies.88 Not only did this action have a"noneconomlc flavor" 00 but It led to some Interesting litigation.81 The United States Court of Customs and Patent Appeals In the case of John T. Bill Co., Inc., v. The United States held in 1939 that contingent duties Imposed 85. 187 u. s. 496 (1897). 86. Hornbeck, op. clt., p . 643; Reciprocity and Crrmwrclal Treaties, p. 434; Fuchs, op. clt., p. 87. 87. Viner, op. clt., p. 313. 88. Bldwell, The Invisible Tariff, p. 88. 89. Ibid. pp. 89-96, for the extent of these measures. 90. Dlebold, Nev Directions In Our Trade Policy, pp. 98-9, 91. The full weight of this action consisted of the Imposition of countervailing duties of 25$ on all dutiable Imports from Germany In 1939.

THE MOST-FAVORED-NATION CLAUSE on imported German bi-cycle parts by the Collector of Customs violated the most-favored-natlon obligation of the United States in the 1922 treaty with Germany, and also that the treaty provisions were not superseded by the Tariff Act of 1930. 92 Thus the Appeals Court took the same position as the State Department had maintained in 1934.03 it is apparent that officially the United States has now taken the position that contingent duties contravene the most-favored-nation clauses. From the foregoing it is evident that there has been a good deal of shifting of ground, and even when the compatibility of countervailing measures and equality of treatment has been alleged, exceptions have been taken which indicate a lack of conviction. No country has ever admitted the validity of countervailing duties when they were levied on its own exports. A survey of the official arguments presented by governments reveals a decided failure to establish a convincing case. Writers on International law and the mostfavored-nation clause have differed as much as nations in their opinions on this question. In general, the European authors have insisted that anti-bounty duties conflict with the requirements of the principle of equality of treatment.04 Most American authorities have been non-committal, doing little more than expounding American policy.05 Among the American writers, Dr. Stanley Hornbeck stands almost alone in support of the legality of antidumping duties in the light of the most-favored-nation clause. He states that "surely the most-favored-nation clause ought not be Invoked to forbid these countervailing duties—for the clause owes its existence, if not its origin, to practical economic necessities...00 This theory 92. CAD 57, 2 7 , CCPA (Customs 2 6 , 104 F . (2nd) 6 7 decided May 2 9 , 1929).

This is the first clear-cut decision on the issue.

93• House of Representative, Ways and Means Committee, Hearings on H. E . 8430, 73rd Congress, 2nd Session, pp. 314-17. Testimony of Francis B. Sayre. 94. Visser, op. clt., pp. 174-76. 95. Professor Charles Cheney Hyde has taken a more definite view.

American. Journal of International Law, III (1909), 59. 9 6 . Op. clt., p. 406.

Professor Tiner says that even Dr.

Hornbeck does not unqualifiedly commit himself (See Tiner, op. clt., p. 318).

But it is difficult to accept this in the light of the

above statement.

LIMITATIONS ON MOST-FAVORED-NATION TREATMENT

125

w o u l d seem to mean that any limitation upon most-favoredn a t i o n treatment must be tolerated simply on the grounds of economic necessity regardless of the original purpose of the clause. Mr. Hornbeck cites H e r o d as looking u p o n countervailing duties as "both equitable and l e g a l . " 0 7 H e r o d , however, while pointing out the legality of countervailing duties under international law and their economic desirability, does not definitely say whether such duties are reconcilable w i t h the most-favored-natlon clause or n o t . 9 8 One rather ingenious argument employed is that for a nation to admit all Imports on equal terms is to discriminate against those countries w h i c h do n o t pay bounties in favor of those w h i c h d o . 8 0 There are two implications here. First, a n a t i o n adhering to a policy of equality of treatment must levy a countervailing duty; it has no option, for if it does not, then it follows under the reasoning outlined above that it la discriminating against the most-favored-nation. Second, the counter duty must be so imposed as to leave the relative positions of all nations concerned the same as they were before the latter duty was imposed. In regard to the second point, policies of nations toward countervailing duties have actually been far short of strict equality of treatment. For example, the U n i t e d States under the tariff acts of 1890 a n d 1894 penalized only bounty-fed sugar and Imposed upon It a flat rate additional duty regardless of different bounties in exporting countries. A n d after 190?, practically the entire w o r l d admitted bounty-fed articles on the same terms as other articles w i t h the exception of sugar. Furthermore, there is no historical basis for the assumption that a n a t i o n Is either obligated or permitted under its most-favored n a t i o n pledges to adjust the comparative situation of foreign nations. A n argument of this nature leads to utter confusion. The profound economic inequalities of nations are commonplace knowledge. To say that the most-favored-natlon clause implies the obligation to redress these differences Is reading more Into that instrument than was ever Intended. A logical interpretation of the most-favored-nation 97. IMI, note 9 8 . Herod, Favore! Natlon Treatment, p. 120, ff. 99. Hornbeck, op. clt., p . 6^5; Moore, Digest, V, 282.

126

THE MOST-FAVORED-NATION

CLAUSE

clause m u s t lead to the c o n c l u s i o n that it a p p l i e s solely to the t r e a t m e n t r e c e i v e d b y g o o d s , b u s i n e s s e s , n a t i o n als, v e s s e l s , a n d o f f i c i a l s a t the h a n d 3 of a f o r e i g n nation. Once the p r o p o s i t i o n is e s t a b l i s h e d that the m o s t - f a v o r e d - n a t l o n clause g i v e s the r i g h t to treat n a tions on the b a s i s of a c l a s s i f i e d d i f f e r e n t i a l status a c c o r d i n g to their e c o n o m i c p o s i t i o n , the w a y is o p e n for the d e s t r u c t i o n of the e f f i c a c y of the c l a u s e . G e r m a n y , in her p r o t e s t a g a i n s t the c o u n t e r v a i l i n g d u t i e s I m p o s e d by the U n i t e d States in 189^, s t r u c k u p o n this very w e a k n e s s in the a r g u m e n t w h e n she a r g u e d that "the U n i t e d States c o u l d w i t h the same j u s t i f i c a t i o n a s s e r t that G e r m a n m a n u f a c t u r e r s in a n y p a r t i c u l a r i n d u s t r y p a i d lower taxes than the m a n u f a c t u r e r s of o t h e r countries, a n d then, in order to b r i n g a b o u t a s o - c a l l e d e q u a l i z a t i o n , levy a d i s c r i m i n a t i n g d u t y o n the G e r m a n p r o d u c t c o n c e r n e d , o n its I m p o r t a t i o n into a n A m e r i c a n port."100 I n a d d i t i o n , e v e n if the m o s t - f a v o r e d - n a t i o n clause dees p e r m i t or r e q u i r e e q u a l i z a t i o n by d i f f e r e n tial duties of the d i f f e r e n c e s in the c o m p a r a t i v e a d v a n tages in the e x p o r t a t i o n of goods b y v a r i o u s f o r e i g n n a tions, "it does n o t follow that b o u n t y - c o u n t e r v a i l i n g d u t i e s e q u a l to the a m o u n t s of the f o r e i g n b o u n t i e s w i l l a c h i e v e such e q u a l i z a t i o n of d i f f e r e n c e s . " 1 0 1 Countervailing duties have also been reconciled w i t h the m o s t - f a v o r e d - n a t i o n clause o n the g r o u n d that a n a t i o n is o b l i g a t e d to e x t e n d e q u a l i t y of t r e a t m e n t o n l y "under like c i r c u m s t a n c e s . " The c h i e f w e a k n e s s of this p o s i t i o n is that c i r c u m s t a n c e s are n e v e r i d e n t i c a l i n e v e r y d e t a i l a n d this i n t e r p r e t a t i o n w o u l d a l l o w clrcum-v e n t l o n of treaty o b l i g a t i o n s at e v e r y turn. I t seems r e a s o n a b l e to suppose that if this h a d b e e n the i n t e n tion (that is, that the clause w o u l d a p p l y o n l y In cases w h e r e goods w e r e I m p o r t e d u n d e r like c i r c u m s t a n c e s ) some m e n t i o n w o u l d h a v e b e e n I n c l u d e d i n the f o r m u l a of the clause to that e f f e c t . Of course, some t r e a t i e s c o n t a i n m o s t - f a v o r e d - n a t i o n clauses limited to c e r t a i n c o n d i tions of i m p o r t a t i o n , b u t s u c h a n i n t e r p r e t a t i o n c a n n o t , o b v i o u s l y , be r e a d into a t r e a t y u n l e s s it is e x p r e s s l y provided. C e r t a i n l y one of the c l e v e r e s t d e f e n s e s of c o u n t e r v a i l i n g d u t i e s has b e e n a d v a n c e d by the F r e n c h jurist, M . T h i b a u l t , w h o c l a i m s that if a n a t i o n g r a n t s 100. U. S. Foreign Relatione, :894, p. 23 101. Viner, op. cit., p. 320.

LIMITATIONS ON MOST-FAVORED-NATION TREATMENT

127

a bounty while receiving most-favored-natlon treatment It has destroyed the basis of equality upon which that treatment r e s t e d . 1 0 2 His argument is premised upon the existence in many commercial treaties of clauses prohibiting bounties. The absence of these clauses in some treaties is explained as being indicative of the fact that in these cases the parties could be trusted to carry out thia obligation honorably. In other words, bounty clauses were Included only when one or the other of the parties was accustomed to employing the'bounty as an instrument of commercial policy. Export bounties are, therefore, he reasons, a violation of the most-favorednatlon clause and can be penalized accordingly. The evidence to back up this theory is exceedingly thin. To prove the point it must be shown that the presence or absence of a bounty clause In a commercial treaty i3 due to one cause, namely, the presence or the absence of a contracting party which did or did not lay export bounties on its foreign trade. A cursory glance at commercial treaties and a comparison thereof reveal at once that the inclusion or exclusion of a given provision follows no definite formula. Commercial treaties of the United States, Great Britain, and Russia contain no bounty clauses whatever. 1 — 3 Is it to be understood then, that these countries never had trade relations with other nations who levied bounties, or that their cocontractants could always be relied upon never to violate their most-favored-nation obligations? In every case of omission of the bounty clause has there also been an absence of bounty policies, and where a bounty clause ha3 been contained in a treaty can It be shown that one of the signatories always subsidized Its exports? Clearly the answer to these questions is in the negative, and yet they must be proven true if the general argument is to have any weight. The conclusion is inescapable that the presence or absence of a bounty clause In any commercial treaty has been due to the need, or the lack of need, for independent and additional pledges; such clauses have not been employed as "explanatory or precautionary addenda" to the most-favored-nation c l a u s e . 1 0 4 102. Thlbault, op. clt., p. 503, ff. 103. treaties, 10U. es of all tion.

Vlner, op. clt., section on bounty clauses In commercial pp. 166, ff. As a matter of fact, out of 607 most-favored-nation clausvarieties only two or three mention bounties as an excep-

128

THE MOST-FAVORED-NATION CLAUSE

Thus far the discussion has been limited to the countervailing duties, and from the foregoing it is evident that much debate has arisen as to the compatibility of these duties with the most-favored-nation clause. As regards anti-dumping duties in general, however, and their compatibility with most-favored-nation treatment, there has been no diplomatic clash.10-5 The British Safeguarding of Industries Act of 1921 provides that the dumping duties must not be applied in any Instance where they would conflict with treaty obligations. "But it is apparently the position of the British government that the dumping-duties proper are unquestionably not in conflict with most-favored-natlon obligations, whereas the 'exchange-dumping' provisions are." 1 0 0 The United States since 1921 has issued anti-dumping orders against most favored nations with no serious protests. The compatibility of anti-dumping-duties with the most-favored-natlon clause is less questionable than in the case of countervailing duties because dumping duties are applied on products being sold at a certain price regardless of origin. No classification of countries results therefore from the imposition of dumping duties, only a classification of goods without reference to countries. If an anti-dumping law requires or permits the designation of articles by their country of origin or exportation, then there results also a classification of countries. The American anti-dumping law of 1921 provides that the dumping duties become applicable to "dumped imports" only if these are of a type and are Imported from a country specified. A country thus specified has a clear case for 105. Viner, op. cit., p . 327.

Subsequently Great Britain an-

nounced. that because of most-favored-nation obligations the act could only be applied to Germany, France and Austria. 106. Ibid. Exchange dumping provisions consist of levying an ad valorem duty ( in the case of the 1921 law) on goods being sold into the United Kingdom at prices which by virtue of depreciation in value in relation to sterling of the currency of the country in which the goods are manufactured are below the prices at which similar goods could be profitably made in the United Kingdom. Austria-Great Britain and No. Ireland, May 23, 1924, Art. 6, LNTS 35, p. 18; Great Britain, No. Ireland-Spain, Oct. 31, 1922, Art. 2, LNTS 28, p. 3^6; also, Bolivia-NetherlandB, May 3°, 1929, Art. 10, LNTS 133, P- 133; Great Britain and No. Ireland-Panama, Sept. 25, 1928, Art. 8, IiiTS 90, p. 311; measures against bounty-fed Imports are excepted from most-favored-nation treatment in EstoniaUnited Kingdom, Jan. 18, 1926, Art. 5, LNTS

P- 209.

LIMITATIONS ON MOST-FAVORED-NATION TREATMENT

129

107

protest under most-favored-natlon treaties. In conclusion, it may be said that a rather farfetched interpretation of the most-favored-nation clause is necessary if it i3 to be reconciled with countervailing duties, especially when the clause appears in its unconditional form. No support is forthcoming for the claim that the two are compatible from interpretations of the clause in the period when it became an underlying feature of commercial treaties. The pledge not to impose "any higher or other duties" than are Imposed upon the like articles of any other third nation precludes such duties for any purpose whatever unless definite provision is made for them. When a treaty is ambiguous and does not clearly reveal the Intention of the parties concerned, that treaty 13 to be interpreted in the light of the considerations which guided those who negotiated it. 1 0 8 Apparently there is no support from this source either. The most-favored-natlon clause and export bounties both historically precede the first countervailing duty. Two approaches to the problem of countervailing duties and the most-favored-natlon clause seem practical. Since most commercial treaties make no special provision for anti-bounty duties, one alternative would be to make a specific application of the clause, either excluding or including these duties. For example, the BelgiumRoumania Treaty of May 29, 1906, Article IV: 1 0 9 "II est entendu que la clause du traitment de la nation la plus favorise'e stlpulee par la presente convention... n'exclut pas...la perception de droits supplementalres en compensation de primes d'exportation ou de production." Here it is undeniably clear that countervailing duties are to be considered consistent with the mostfavored-nation clause. In the event that no provision of this nature exists, the solution is not to violate the treaty in order to secure freedom of action; if the basis of a particular convention is altered by the acts of one of the contracting parties, the other party has the legal right to denounce the accord or petition for a revision to eliminate objectionable features. The adoption of measures of redress like countervailing duties amounts to a tacit admission that there are only two 107. Viner, op. clt., p. 5 2 9 . 108. See Chapter Four. 109. G. F. Von Martens, N.R.G. XXXV, p. 2 6 7 .

130

THE MO ST-PAV ORED-NATION CLAUSE

possible alternatives: the admission of Incapacity to remedy the bounty evil, or the Imposition of countervailing duties regardless of most-favored-nation obligations. This ip obviously not the case. Granted that bounties are violations of the principle of equality of treatment, 1 1 0 surely a counter-violation is not a justifiable course. It is Important, of course, that nations be free to take steps to discourage bounties, but it is even more important that the value of the most-favorednation clause as an instrument for the elimination of discrimination be preserved.

110. CulbertBon, International Economic Policies, p. J2; Moore, Digest, V. 282.

Vili Limitations on Most-Favored-Nation Treatment Continued

THE ANALYSIS OF indirect limitations on most-favor-ednation treatment is continued with an examination of an important set of influences which have left their mark upon the clause and which will certainly influence it in the future. Some implications of this have already been noted in another connection.2

World economic collapse from 1929 to 1932 resulted in widespread use of new non-tariff trade controls. Neo-mercantlllst devices, such as exchange controls, clearing agreements, Import quotas and state monopoly purchase, in effect created conditions of commercial discrimination. By superseding tariffs as the most significant method of trade restriction, these measures substantially reduced the area within which the practice of granting most-favored-natlon treatment can minimize inequality of trading conditions. Universally regarded as temporary at the outset, the latter rapidly developed into more enduring features of commercial 1. The material In this chapter is substantially the same as that presented, in two articles by the author: "Commercial Policy as Reflected, in Treaties from 1931 to 1939,'' American Economic Review, December, 19^0; "The Most-Fayored.-Nation Clause and Recent Trade Practices," Political Science Quarterly, March, 19^0. 2. See Chapter VII. 3. On this general subject, see the brief treatment in Margaret Gordon, Barriers to World Trade, (New York, 19^1,, pp. 370-382; League of Nations, Trade Relations Between Free Market and Controlled Economies (Geneva, 19^3); League of Nations, Cmmmerclal Policy In the Interwar Period: International Proposals and National Policies (Geneva, 19^3

132

THE MOST-FAVORED-NATION C L A U S E

policy.* Their popularity was perhaps due in no small part to the evasions of the most-favored-natlon clause they have made possible. 5 The subsequent analysis is based in part upon a study of 510 bilateral conventions, treaties and exchange quotas betveen states for the period 1931-1959.° This group is broken down by means of the accompanying table into various cro3s-classiflcatlon3 by topics and kinds of provisions, and certain conclusions will be drawn. Provisions w h i c h are characteristic of the new trend in commercial policy will be examined in some detail and some further general conclusions as to the effect of the new regime upon'the most-favored-natlon clause w i l l be Indicated. E v e n though this group of treaties is not exhaustive, it represents almost double the number of similar negotiations in the period 1919 to 1930. One effect of the unsettled economic relations of the 1930'3 has been to necessitate many and frequent agreements on trade and commerce. Of the 510 agreements, 137 were modifications of existing treaties. These modifications were n o t only changes w i t h i n the broad pattern of agreements already in force; they also entailed alterations of a fundamental nature. As can be seen from Table I, w h e n the total is broken down into component figures representing the several types of provisions found in this group, as well as the geographic distribution of agreements containing these provisions, some noteworthy facts emerge. But a caveat should be entered against interpreting the table too literally. Aside from the qualifications set forth in the explanation w h i c h accompanies the table and w h i c h must be considered in any interpretations drawn therefrom, the data summarized should be interpreted as providing evidence on the character and content of recent commercial treaty policies. To be most useful, the calculations presented here should be set over against treaty practice in, say, the period 1890-191**. The table should also be looked at as a w h o l e . League of Nations, Quantitative Trade Controls (Geneva, 19^3), P. 17. 5. Ibid, p. 33. 6. This figure probably constitutes veil over one-half of all such negotiations during these years. The particular agreements cited are the most important and hence are believed to be satisfactorily representative.

LIMITATIONS ON THE MOST-FAVORED-NATION CLAUSE

133

The following facta seem clear. Clauses relating to most-favored-nation treatment were Included In 227 agreements, or two In every five; actual tariff rates or provisions concerned specifically w i t h tariffs appeared in 1 6 8 ; ninety-four were clearing or payment accords; quota provisions, either definite or general, were Incorporated in 1 8 5 of the group; clauses relating to foreign exchange control or the relation of various national currencies were found In 79; treaties providing agencies for the supervision of trade between the contracting parties numbered 27; and clauses leading directly or indirectly to bilateral trade balancing occurred in 59. Despite the qualifications mentioned above, some valid conclusions can be drawn. First, the most-favored-nation clause, hitherto a common and accepted feature of commercial treaties (it is included in some form in approximately 90$ of the agreements negotiated before 1931) appears in only 42% of the agreements. The importance of this lies not so much in the fact that proportionately fewer most-favorednation agreements have been negotiated, but in the fact that more agreements in the nature of strictly bilateral bargains, and in which equality of treatment was impracticable, have been concluded. Second, tariffs, certainly the raison d'être for pre-1929 trade treaties, were Included in only one-third of this group of agreements. It w o u l d be misleading, however, to assume that all other agreements were concerned with bilateralism, exchange problems, and quotas; many were merely mostfavored-nation accords forming the category just mentioned. A t the same time, the 168 treaties concerned with tariffs also include some agreements which contained quota and exchange provisions, and in these, tariffs were relegated to a rather minor role. It seems reasonable to reiterate that tariffs are no longer the most important barrier to International trade. The geographic distribution of treaties containing certain types of provisions contributes more by way of verification than new information. Thus the tendency of most European nations to employ the most-favored-nation clause w i t h less frequency than other nations since the w o r l d depression is borne out by the table. France, Great Britain, Germany, Italy and the Central European a n d B a l k a n 3tates account for only one-quarter of the total number of instances in which any country was a party to a n agreement containing some form of most-favored-nation

134

THE MOST-FAVORED-NATION CLAUSE TABLE I CLASSIFICATION o r PROVISIONS OF 5 1 0 COMMERCIAL T R E A T I E S — 1 9 3 1 - 1 9 3 9 » Provisions

Countries Central Central and Europe South and Balkans America

All others

Total of each type

Per cent of total treaties

59

129

138

27

3

18

17

3

16 3

23 4

57 11

62 10

12 2

57

89

215

227

44

7

7

18

22

4

3

11

13

18

3.5

3 2

2 7

7 26

8 31

1.5 6

3

15

27

64

79

15

11

4

13

11

51

61

12

8

4

6

4

61

45

9

0 2 7

12 1 3

5 1 1

9 2 13

5 2 2

43 14 13

46 13 20

9 2 4

32

19

35

15

43

24

182

185

36

18

19

30

28

8

70

27

136

168

33

V Intergovernmental cooperation in trade relations

0

4

10

0

1

13

2

24

27

5

VI Provisions to balance trade bilaterally

1

14

8

3

5

20

10

57

59

12

0

13

18

4

12

42

3

96

94

18

U.S.A.

Great Britain

Germany

France

Italy

11

6

14

13

8

36

0

4

2

5

0

2

13 0

12 0

0 0

2 1

1 1

24

22

16

21

10

0

7

4

0

1

7

1

1

0

0

0

13

1 6

0 4

3 2

0 2

20

IS

9

5

IS

9

5

0

2

5

2 0 0

16 4 1

20

IV Tariff rates and provisions

I Most-favored-nation clauses applying to: 1. Tariffs only 2. Quotas, exchange controls, only, etc. 3. Both tariff and other controls 4. Details missing TOTAL

II Exchange control: 1. Use of proceeds of reciprocal trade 2. Allocation of exchange for imports 3. Stabilization of exchange rates 4. Others TOTAL

m Quota provisions: 1. General provisions only 2. Specific provisions only 3. Both general and specific 4. Other 5. Details missing TOTAL

VN

Gearing and accords 1

payment

A. T o determine the total number o] agreements containing a certain provision, the total number of instances is divided by two. The figures in the column headed "total of each type" are not the actual arithmetical sum of the figures

LIMITATIONS ON THE MOST-FAVORED-NATION

135

treatment, although these countries participated in a proportionately greater share of the total number of agreements examined. And the United State.s, though represented by a smaller number of treaties than Great Britain, France, Germany, and Italy, nonetheless was a party to more most-favored-nation agreements than any one of them, which fact substantiates the position of the United States as the foremost exponent of equality of treatment today. Perhaps even more significant is the indication that Germany, France, Italy and the Balkan group were less prone to apply the clause to quotas and exchange controls. This is undoubtedly the result of the pursuance by these nations of commercial policies which have necessitated the abrogation or violation of previous most-favored-nation obligations. The new measures of trade control were not confined to any one country or area of the world. The tabulated summary proves that quotas, exchange controls, and bilateral trade balancing have been a frequent subject of treaty negotiation by most countries whether because of their own individual policy or that of other nations. Footnote continued

B.

C. D.

E.

in the horizontal line corresponding to each category of provisions. Rather, the totals in each case are one-half of the actual sum. Thus in interpreting the data, the figures which appear in the squares under the heading of various regions and countries mean one thing, and the totals mean another. For example: the figure "43" opposite the "Total of Quota Provisions" and under "Central Europe and the Balkans" indicates the number of instances in which a nation such as Roumania or Hungary was a party to an agreement containing a quota provision of some type. Similarly, the figure "89" opposite the "Total of Most-Favored-Nation Clauses" and under "Central and South America" indicates the number of instances in which a nation such as Brazil or Ecuador was a party to a treaty embodying some form of the most-favored-nation clause. In neither of these cases could the figure cited ("43" or "89") be taken to indicate the number of treaties because when two Balkan nations have signed an agreement containing quotas, it is recorded twice—once for each nation. Also, if Great Britain and Argentina signed an accord specifying quotas, it is recorded once under Great Britain and once under Central and South America. Hence each type of provision is recorded twice. For obvious reasons, the various categories are mutually exclusive only within themselves and'not vis-à-vis other categories. One most-favored-nation clause, for example, if it laid down the conditions for administering quotas and exchange controls, would be recorded under the first, second, third and fourth groups of provisions. Furthermore, one commercial treaty may contain tariff rates, quotas, clearing arrangements, most-favorednation provisions, and bilateral trade balancing stipulations. Also certain provisions found in what are technically known as clearing or payments agreements are placed under the heading of exchange control provisions. The various classifications of provisions have been interpreted very broadly, for the sake of analysis. Almost any provision which could reasonably be connected with exchange control, for instance, was placed in that group. It is important to remember that the same country may appear over and over again in the same category, and that the same treaty, as noted above, may figure in several categories. For example, in the figure "35" opposite the "Total of Quota Provisions" under "France," agreements with Sweden alone, or with some other single country may make up five or six of the total. Brazil's agreements containing most-favored-nation clauses may amount to 15 of the total "82" under the Central and South American heading, and these may not be with separate nations. The emphasis of the table is on frequency more than on exact relationships and quantity, Comparison between the totals in any category under given countries is not legitimate because the table does not indicate the total number of treaties to which each country was a party. Comparisons can be made only in general terms. Finally, treaties not examined in this compilation might change the results of individual comparisons.

136

THE MOST FAVORED-NATION

CLAUSE

In addition, the frequency of all commercial treaty negotiations as well as the employment of certain types of provisions generally correspond to the international economic position of nations or their avowed method of conducting foreign trade relations. Upon examination of the provisions recorded for the United States, the liberal trade policy followed by that nation is immediately apparent. There is a substantial number of most-favorednatlon clauses applied to non-tariff trade restrictions, no specific exchange control features, only two specific quota provisions,7 no clearing agreements, and only one case of bilateral trading, a barter agreement with Great Britain. On the other hand, the complex and state-controlled trade relations of Germany and the Balkans are confirmed not only by what has been said above, but by the figures showing that almost all of the treaties providing for intergovernmental control of trade and administration of agreements were contracted by this group. Two additional factors which do not appear In the table are important. First, the duration of a commercial treaty generally reflects the expected stability of the trade which it governs. If the treaties of this period are any criterion, international economic exchange has been in a state of almost constant fluctuation. Of the 218 treaties specifying a time limit 162, or 7 were concluded for one year or less, and very few treaties of longer than one year were entered into by the major economic powers. Mo3t agreements have been of brief duration. Second, the provisions regarding the termination of recent commercial treaties show that nations have preserved a maximum of autonomy in matters of policy by making it possible to denounce conventions on comparatively short notice; 119 provided for three months' notice; and 4 3 provided for 3lx months' notice. Only 13 were required to continue in effect one year before denunciation becomes valid, although this la3t was the usual practice until recently. B.

NON-TARIFF TRADE CONTROLS

1. IMPORT QUOTAS. The quota system in its pre-1940 form was adopted largely because tariffs were ineffectual in stopping Imports of goods from countries with depreciated 7. In treaties with France and the Netherlands. See, however, Diehold, New Directions In Our Trade Policy, pp. 78-80.

LIMITATIONS ON THE MOST-FAVORED-NAT±ON CLAUSE

137

currencies and because, In the absence of adequate export markets, restriction of Imports was the only possible way to achieve a favorable balance of trade.8 Furthermore, the tariff rates of most nations were consolidated in most-favored-natlon treaties which could not be denounced except on long notice.9 All but three of the twenty-five nations on the European continent had therefore resorted to import licenses or quotas by 1932.10 Nations oould not or would not allow the normal operation of the principle of equality of treatment regarding their imports.11 According to the table presented earlier, quotas were a slightly more frequent subject of negotiation or treatment in agreements than were tariffs. This is a phenomenon peculiar only to the period under consideration. Prior to 1931 quotas were hardly a prominent restriction on the movenrant of goods between nations.18 It should be noted that almost one-half of the quota provisions enumerated were general in scope, that is, they laid down no specific quota terms. Nevertheless, this in no way minimizes the importance of the total figure; on the contrary, it proves that quotas have become sufficiently entrenched as an Instrument of commercial policy to move nations to prescribe conditions for their application whether they exist or not. A clear illustration of the way in which mostfavored-natlon treatment is complicated by these quota restrictions may be found in connection with the German butter tariff.1 In February, 1932, Germany made an 8. League of Nations, Remarks on the Present Phase of International Economic Relations, II Economic and Financial, 1937) II B. No. 9, P. 12. 9. France In particular had consolidated 72# of her rates. Ethel B. Dietrich, "French Import Quotas," American Economic Review, December, 1933, 10. U.S. Department of Commerce, Trade Information Bulletin, No. 812, 1933, P. 3. 11. Particularly true In the case of France who was a party to more quota treaties than any other country from 1931 to 1939- See, B. P. Ducheman, The Tariff Policy of France, National Industrial Conference Board, Memorandum No. 5, 1933, p. 12. Among a handful of treaties containing quota provisions: Germany-Denmark:, March 19-20, 1926, IHTS 57, p. 131; Germany-Finland, August 28, 1930, UTS 111, p. 327. 13. "World Trade Barriers In Relation to American Agriculture," letter from the Secretary of Agriculture, Senate Document No. 70 (Government Printing Office, Washington, 1933), p. 7*+, footnote 26.

138

THE MOST FAVORED-NATION CLAUSE

agreement with Finland that it would admit an annual contingent of 5>000 tons of butter from Finland at a duty of 50 Reichsmarks per quota. This duty wa3 lower than that of any German tariff on butter at the time; therefore, the concession was generalized to countries with whom Germany had most-favored-nation agreements. This arrangement caused opposition in Holland, Denmark and some other countries which exported considerable quantities of butter to Germany. Since the imports from Finland were small in comparison with those from Holland and Denmark, the quota of 5>000 tons allowed a larger proportion of butter from Finland, but a relatively small proportion of the Imports from Holland and Denmark, to enter at a reduced rate. According to the latter, this was a violation of the spirit of the most-favored-natlon clause. In addition, Holland and Denmark had another grievance. Shortly before the agreement with Finland was signed, Germany had imposed an anti-dumping duty of 36 Reichsmarks per quintal on butter imported from countries not on the gold standard. This applied to countries having most-favored-natlon treaties with Germany and was added to the regular duty. Thus as a result of the anti-dumping duty and the quota arrangement, no less than four different rates of duty on butter imported from countries having most-favored-nation treaties with Germany were in effect. There is no accepted principle of quota allocation which can be called consistent with the mostfavored-natlon clause.1* The difficulty of harmonizing quota regimes with most-favored-natlon treatment is again Illustrated by the major principles of allotment so far adopted by the various nations which Impose quotas,15 In the first place, as can be seen from the above example, the equal allocation of total Imports among all supplying countries is unfair in that it favors imports from relatively small and possibly high cost countries at the expense of those which are normally principal suppliers. The practice of permitting a total amount of Imports without allocation Is technically les3 contrary to the clause than any other method; however, it is seldom used because of the obvious advantage it confers on nearby nations. Proportionately allotting Imports on the basis of a "representative period" is 14. Quantitative Trade Controls, p. 25. 15. Excluding those of a purely arbitrary nature.

LIMITATIONS ON THE MOST-FAVORED-NATION CLAUSE

139

undoubtedly the most equitable plan of all, 18 although the rapidity with which changes take place In production and marketing conditions make It almost impossible to determine from the past what allocations best meet the current needs of all countries. This method can result in Intentional or unintentional discrimination. For example, assume that country A and country B have been exporting automobiles to country C. Country C decides to impose a quota based on a three-year average. The accounts show that country A's exports for the preceding year and the two previous years were at the rate of 8, 6, and k, respectively, per annum, or a total of 18 for three years. The corresponding record for country B indicates that its exports were at a rate of 3, 5, and 7, or a total of 15 for the same period. Evidently A's average is 6, B's Í3 5. Hence, the quotas are now fixed in this ratio. As a result, A exports 20$ more to C than does B. But a glance at the figures 3hows that before the quota, A's product was on the decline, and B's was becoming more prominent. An actual case bordering on this point was the choice of a base period for British colonial textile quotas; a period was chosen when Japanese exports were not yet extensive. Aside from the difficulty of applying quotas in such a way that no country will be placed at a disadvantage, a fundamental difference between most-favored-nation 16. The "basic period" formula is expressed in the Italian-Swedish accord of June 2k, 1935,* wherein Italy promises to take Swedish goods to the extent of 80$ of the certified Imports of each canmodlty in 191U (LNTS l6l, p. 23). Other base years or series of years are also used, depending upon the nations concerned and the trade affected. Often the basic period varies with different items within the same treaty. Furthermore, the representative period may be laid down simply as a working principle with no definite date prescribed. In the agreement between France and Great Britain (Great Britain, Treaty Series, France, No. 1 (1936)) Cmd 1+595) allows France the right to choose the base period but guarantees Great Britain "the full share-which is mathematically attributable to the United Klngdom--ln accordance with the proportion of total foreign importations" (Art. 3), during that period. On« author says: "This formula appeared to be equivalent to a guarantee of most-favored-nation treatment...," F. A. Halght, A History of French Commercial Policies (New York, 19^1), p. 175- This probably overstates the case a little. 1. League of Nations, Economic Committee, The Most-Favored-Nation Clause, Official Document, C. 379, M. 250, 1936 II B., pp. 14-15.

140

THÈ M03T-FAVORED-NATION CLAUSE

treatment and quotas Is that the former is particularly applicable In a time of expanding world trade, whereas the latter belongs to a state of stagnation or diminution. The clause, by subjecting all countries which supply a given ccoimodlty to the same customs treatment, allows free competition between these countries, but the quota systems, by filing the quantities which may be imported., crystallizes the situation and. thereby stereotypes the competitive relationship between the countries concerned. It must be conceded that from the point of view of equality of treatment, there are certain unobjectionable quotas: those which have no other purpose than to regulate the traffic in certain goods between neighboring zones in adjacent countries, and second, those Imposed in conjunction with governmental measures which regulate or control the production, market supply or prices of domestic articles. 17 But by and large quotas limit the effectiveness of the most-favored-nation clause and they have developed from emergency defense weapons to premeditated trade barriers generally aimed at the country whose exports have the greatest penetration. 18 2. EXCHANGE CONTROL. The regulation of foreign exchange transactions, with its influence upon the flow of trade, has also created treaty clauses designed to nrescrlbe the terms of its operation. At least 79 agreements, or of the total, deal with it in some manner, apart from those agreements arising out of special difficulties of payment transfers, i.e., clearing agreements. The table also shows that clauses pertaining to exchange control have become an Integral part of many commercial treaties concluded by nations which do not necessarily employ this type of control, and which do not experience difficulty in discharging their financial obligatlons-namely, the United States, Great Britain and France. 1 8 In general, the conclusions drawn concerning quota restrictions hold true of the imposition of exchange controls; again the problem Is one primarily of allotment among various nations. Exchange control is usually set up in the first instance to restrict outward payments for purposes other than the import of commodities, viz., exports of capital, tourist expenditures and 17. s. H. Bailey, op. clt., p. 4-34.

18. Quantitative Trade Controls, p. 17. 19. Nearly all the reciprocal trade agreements contain similar exchange control provisions.

LIMITATIONS ON THE MOST-FAVORED-NATION CLAUSE

l4l

other invisible exports. Whatever may have been the original purpose of foreign exchange control, 20 however, it tended rapidly to be applied to the vhole group of exchange transactions from tourist traffic to merchandise trade. 81 Since the effect of the control is to restrict new movements of capital, the amount of gold and foreign exchange available to countries applying such control becomes chiefly dependent upon the balance of trade. Exchange restrictions, therefore, lead directly to the curtailment of Imports for the control authority must distribute exchange for different purposes, for different commodity Imports, among different nations and among competing business firms. These decisions are all more or less arbitrary and the opportunity to protect domestic industry or to give priority to certain commodités is obvious. Debtor countries, for instance, have not been slow to use exchange rationing as a bargaining weapon, with the aim of giving preference to the trade of those nations to which they are not indebted, or to which they are indebted to a less degree. The Runclman-Roca Treaty between Great Britain and Argentina may be cited as a case in point. 22 A distinction also is usually made between "essential" and "non-essential" imports; the nation unfortunate enough to export "non-essentials" is hardly placed on an equal footing with other nations. After exchange control was adopted in Denmark, the importation of American apples fell off considerably simply because apples were not Included among the necessaries of life by the Danish Exchange Control Commission. Some nations have made a practice of allotting foreign exchange in favor of imports from those countries which purchase their exports, or with which they are on particularly friendly terms. In the case of Roumania, it was frankly stated that the "general principle of exchange control is based on the direction of the import trade through preferential issuance of import permits to 20. In the 'beginning, for example, exchange control in Germany was not to interfere with the most-favored-nation clause. See Ellis, Exchange Control in Central Europe, p. 158 ff. 21. League of Nations, Report on Exchange Control, Official Document; C. 232, M. 131, 1938 II A, p. 23. On the effect of German exchange control under the "New Plan," consult Basch, The Danube Basin and the German Economic Sphere, ( New York, 19^3), P• 171• 22. Great Britain, Treaty Series, No. 2 ( 193M ;

V+92.

142

THE MOST-FAVORED-NATION CLAUSE

countries with which Roumania has a favorable trade balance. 1,23 Other nations have U3ed exchange control as a retaliatory measure. 24 Managed exchanges also afford the possibility of governmental action to raise or lower Internal prices vis a vl3 the rest of the world, a process which is bound to effect discrimination toward some nations, depending on prevailing economic conditions. All in all, exchange control has offered a more effective and less dangerous--from the point of view of incurring resentment—method of discrimination than would be possible with tariffs. 25 3. CLEAKING AGREEMENTS. Closely allied to exchange control, and resulting from it3 application, are clearing agreements. Such agreements are designed to make it possible for creditor countries holding blocked balances to obtain payment for goods already delivered, to continue their exports and to secure at least partial repayment of financial claims as regards debtor countries. The plan adopted by most nations was that of bilateral clearance to eliminate foreign exchange transfers insofar as commodity transactions between any two nations cancelled one another. In order that a clearing agreement may have its desired effect, it should provide a favorable trade balance for the debtor nation; in most instances, exactly the reverse Is true for the reason that the artificially high rate of exchange found in the average clearing agreement acts as a brake on exports and as a stimulus to imports as far as the debtor country is concerned. Almost Invariably a clearing agreement operates to deprive the debtor country of a surplus of foreign exchange necessary to purchase goods from third nations. Consequently, trade tends to flow in the direction of the other party to the agreement at the expense of other countries. 26 Therefore, the relation between the creditor country in an arrangement of this sort and any other third country is one of ever-widening inequality. 23. 2k.

Ethel Dietrich, World Trade (New York, 1939), p. 131. Trade Information Bulletin, No. 812, p. 1933.

25. League of Nations, Trade Relatione Between Free Market and Controlled Economies, (Geneva, 19^3), p. 15. 26. League of Nations, Enquiry Into Clearing Agreements, II Economic and Financial, 1935, I B. 6, p. 12.

LIMITATIONS ON THE MOST-FAVORED-NATION CLAUSE

143

Although clearing agreements are apparently merely a mechanism for effecting International payments, they have also been employed as a means of arbitrarily directing the flow of trade. Many contain a clause designed to restore the balance of trade between the parties, in which case a hidden preference must 6x1st since the general price level is no longer the deciding factor. For example, Article X of a clearing agreement between Hungary and Belgium, March 26, 1932, provided that the latter would endeavor to increase the importation of Hungarian p r o d u c t s . 2 7 Purposely or otherwise, clearing agreements result in indirect discrimination. 4. IMPORT MONOPOLIES.28 Another component part of the galaxy of restrictive measures may be mentioned briefly. Import monopolies enable the central purchasing agency of a state to transfer its patronage from one nation to another without violating the most-favored-nation clause in its orthodox form. Germany set up a corn monopoly in 1930 because she wished to Increase her import duty on corn, but was prevented from so doing because of a commercial most-favored-nation treaty w i t h Y u g o s l a v i a . 2 9 In the case of Italy, what amounted to a global Import monopoly was concentrated In the hands of the UnderSecretary for Trade and Exchange, from w h o m permission was necessary to Import goods, since this was the only way importers could obtain foreign exchange. 30 A n enlightening example of the difficulties involved in the operation of most-favored-nation relations between two countries, one of which employs central purchasing control, is provided by the experience of Great Britain and the Soviet Union. Lord Runciman, speaking of the dissatisfaction with the working of the clause in regard to commercial relations w i t h Russia, remarked:

27. LHTS 136, p. 407. 28. Import monopolies were most striking in Germany and Russia, tut were growing in the Netherlands, Latvia, and the United Kingdom. See Chalmers, "Foreign Tariffs and Trade Controls During 1934," Commerce Reports, February 9, 1935, P. 4. 29. World Trade Barriers in Relation to American Agriculture, P. 63. 30. William Welk, "Italy's Modern Commercial Policy," American Economic Review, XXVII (March 1937), 101 et. seq.

144

THE MOST-FAVORED-NATION CLAUSE

It is Impossible to work a normal most-favored-natlon clause as an automatic piece of commercial policy when, on the one side you have a private individual acting aa a trader, merchant, broker, shipowner, and so on, and on the other side a state which can control the 31

whole of the commercial transactions into and out of a country.

It Is readily evident that a state acting as sole purchaser could take measures which would largely nullify the effects of a particular treaty. The pledge of equal tariff treatment Is useless If a nation's exports are to be excluded on the basis of an arbitrary decision by the Import monopoly of the other contracting party. There is no equality when one of the two contracting parties to a commercial agreement discriminates against the importation of products of the other by manipulation of internal marketing conditions quite apart from any tariff .changes. Realizing these possibilities, Great Britain insisted upon the insertion of a modified clause in the temporary trade agreement with Russia in 1 9 p r o v i d i n g for the Immediate resumption of negotiations in the event that the Soviet economic organ was creating or maintaining prices which would tend to limit the desired effects of the arrangement.32 C. COMMERCIAL POLICY The cumulative effects of the action and interaction of the foregoing measures were noticeable In the changing structure of world trade. The object of commercial policy was no longer to make mutual concessions varying according to the economic needs of each nation, but was rather to regulate trade between two nations on a basis of rigid equality in the value of commodities exchanged. Reciprocity and autonomy had become the current guiding principles of trade relations prior to the outbreak of World War II. 1. BILATERALISM AMD RECIPROCITY.33 There are, of course, degrees of bilateralism; at one extreme is a mere recognition of the principle, at the other is barter. At any 31. Parliamentary Debates, Crrmmons, vol. CCLXXXVI, Columns 1291-1292, March 1, 1 9 3 4 . 32. Ethel Dietrich, "The New Model Trade Agreements," Journal of Political Economy, XLIII (1934), 605. 33. Gordon, op. clt., pp. 392-427; 367-370; 382-392, for an excellent survey of recent bilateral bargaining trends. See, also, League of Nations, Network of World Trade, (Geneva, 1942).

LIMITATIONS ON THE MOST-FAVORED-NATION CLAUSE

145

rate the tendency in recent commercial treaties toward forcing trade into rigid channels between pairs of nations is unmistakable - so much so that by 1935 it was estimated that 70^ of the world's trade had become bilateral.34 Fifty-nine treaties of the group discussed above contained bilateral trade balancing provisions.35 Europe hA3 become increasingly Isolated from the normal channels of International trade: two-thirds of all trade agreements in 1933-1934 were intra-European.36 Typical of the new commercial philosophy was the decree of the Argentine government in July, 1934; It specified among other things that import restrictions should stimulate trade with nations which were good customers of Argentine products. 37 A mild expression of bilateralism is found in Part I of the protocol to a treaty between Great Britain and Denmark which pledges both nations to keep in view the balance of trade between them. 38 The same rule prevails in an agreement signed by Great Britain and Estonia, and in addition Estonia recognizes that the existing disparity in their balance should be readjusted by an increase of British sales in Estonia. 39 In June, 1933 > Albania and Greece concluded an accord whereby the importation of Albanian merchandise into Greece is regulated so that the value thereof will be superior to the value of Greek exports to Albania by 20% during the first three-month period after the agreement and 15$ thereafter.40 More extreme than the above illustrations is this passage from a Belgian Estonian treaty of January 13, 1938: "The High 34. Folke Hllgerdt, "The Approach to Bilateralism: A Change in the Structure of World. Trade," Index, August 1935, P. 176. 35- Included In this calculation sire those expressly of this nature; others, notably clearing and compensation agreements, ultimately lead to the same end.

Not all of these agreements bilatera-

lize all of the trade between the contracting parties. 36. Henry Chalmers, "European Trade Agreements and the Operation of the American Trade Agreements Program," Official Report of the 21st National Foreign Trade Convention, 1934, p. 5 8 . 37. Etienne Fougere, 'Bilateralism: Dangers of the New Tendency in Treaty Policy," World Trade, November 1934, p. 3. 3 8 . April 24, 1933, LNTS 193, 1933-1934, p . 129. 39- July 15, 1933, Para. 4 of an exchange of notes. 40. Revue des lois, décréta, et traités de conmerce de 1'institute international du çramwrce, (September 1933)>

2

53.

146

THE MOST-FAVORED-NATION CLAUSE

Contracting Parties agree that it shall be their object to achieve equilibrium In their commercial exchanges, this being a fundamental principle in their economic relations."" One of the outstanding examples of trade balancing between major economic powers is the temporary commercial agreement between Great Britain and the USSR, February 16, 1934, which entails a gradual balancing of trade over a period of years. Article 3 provides that the payments of the USSR in the United Kingdom shall bear to the proceeds due the USSR In the year ending December 31, 1934, the proportion of 1:1.7; in the year ending December 31, 1935, 1:1.5; in 1936, 1:1.4; In 1937, 1:1.2; and subsequently, 1:1.1, 42 Germany has been the most prolific source of barter arrangements, the essence of bilateralism. Only a few instances can be cited here. Germany exchanged barbed wire, nails, Diesel trucks, hardware, and pharmaceutical products for Nicaraguan cotton, coffee, rubber, and hides. 43 In the previous month the same two countries bartered 20,000 bag3 of coffee and an equivalent amount of German hardware and medical supplies.44 On February 11, 1939, it was announced that Mexico would give Germany $2,000,000 worth of oil in payment for machinery and 10,000 ton3 of newsprint. 45 Nor has barter been confined to Germany, Italy and other totalitarian states: On June 24, 1939» the United States and Great Britain completed an exchange of 85,000 tons of Malayan rubber for 600,000 bales of American cotton. 46 In addition, Turkish tobacco has been exchanged against Austrian-manufactured goods; Brazilian coffee against Polish rails; Argentine maize against Spanish rails; and American wheat against Brazilian coffee. 47 A special 41. IUTS 1 8 5 , p. 6 5 . Almost Identical wording: France-Venezuela, August 8, 1958, Revue, December 1938, p. 400. 42. Great Britain, Treaty Series, No. 2 (1934) Cmd. 4567; See Taeca, World Trading Systems, pp. 151-152, for a statement on British bilateral policy. 43. Ibid., February 1 9 , 1939, Section III, p. 4. 44. New York Times, March 28, 1939, P. 545. Ibid., February 11, 1939, P. 1. 46. Ibid., June 24, 1929, p. 1. 47. League of Nations, Review of the Principal Tendencies of Present Commercial Policy, Conf. M. E. II, London, June 2 6 , 1933.

LIMITATIONS ON THE MOST-FAVORED-NATION CIAUSE

147

type of barter system, still governed by quotas and by compensating arrangements, was established between France and Roumanla, Poland and Jugoslavia. 48 Aside from direct barter, there are at least three ways of achieving balanced trade. First, it may be agreed that the foreign exchange accruing from the sale of goods between two nations can be used only to purchase each other's products.40 Second, equilibrium is preserved by a provision that if one nation has a favorable balance it will allow importation from the other until the deficit has been made up. 5 0 A third method consists of an obligation by the contracting parties to refrain from imposing normal trade restrictions, i.e., quotas, etc., when the balance of trade is favorable to one or the other.51 Perfect balance Is not always anticipated in the agreements which fall In this category; the advantage may be as much as 50$ in favor of one country, but the underlying principle of bilateralism nevertheless operates. 52 The effects of all this can be seen clearly in Eastern Europe where countries were literally forced to import from Germany (usually on the Reich's terms categories and price) in order to liquidate credit balances held within the latter country by exchange control. It was also necessary to sell certain goods to Germany in order to preserve desired trade. Fundamentally, this situation grew out of a credit-debit relationship between Germany and her neighbors - more particularly, the straitened economic conditions of the latter. 53 German exports to Roumanla, Turkey, Yugoslavia, Greece and Bulgaria were 48$ greater in 1937 than they were in 1929, though German foreign trade as a whole had declined over 50$. 54 Exports to Germany from Bulgaria 55 48. rbld., March 1, 1939, p. 1. 49. Greece-Sweden, January 17, 1935, Art. II, LNTS 157, P. 9. Great Britain and North Ireland-Italy, March 18, 1935, LHTS 160, p.

289.

50. Finland-Greece, July 27, 1934, Art. Ill, LNTS 153, p. 43; Italy-Sweden, June 24, 1935, para. 4, LNTS l6l, p. 23; Italy-Norway, July 2, 1935, LNTS 162, p. 317. 51. Poland-Great Britain and North Ireland, February 27, 1935, Art. 2, IHTS 162, p. 180.

148

THE M03T-FAVORED-NATION CLAUSE

were of her total In 1937, as against 29fo in 1929. 55 In 1936, Turkey's exports to Germany were 51$, while only 5$ went to England, formerly a good customer.56 This same trend held true of Germany's trade with certain South American nations. 57 Clearly bilateralism has only been made possible by a great change in the nature of commercial treaties and by violation—actually or in spirit—of the mostfavored-nation clause. The methods of promoting bilateralism are varied, but they all have the common characteristic of being discriminatory.58 Both the means and the end of bilateralism are discriminatory.59 Import quotas, clearing agreements and other practices have become active bargaining weapons. 00 Agreements have been negotiated on a quantitative basis; Increases in, or withdrawals of quotas and exchange allotments or imports, are granted in accordance with counter-advantages offered by another country in the form of Increased quotas, guaranteed purchases of national products, release of blocked exchange or a combination of all. France,61 for example, usually retained 75$ of a given aggregate quota for bargaining purposes and the Netherlands62 employed two quota schedules, one to be applied to countries which have granted her some reciprocal favor. Conventionalized quotas and exchange agreements permit such 55. World Economic Survey, 1937/38, League of Nations, II Economic and Financial, 1938, IIA. 13, P- 185. 5 6 . MoBely, loc. clt. 57. Review of World Trade, 1935, League of Nations, II Economic and Financial, II, A. 14, p. 66. 5 8 . Ibid. 59. Frank Graham, Protective Tariffs, (New York, 1934), P. 9960. Henry Chalmers, "Foreign Tariffs and Trade Controls," Commerce Reports, February 9, 1935, P- 4. 61. Sweden-France, February 17, 1937, U T S 1 7 6 , p. 2 6 9 ; France-Portugal, Revue, vol. 8, September 1932, p. 218; F. A. Haight, A History of French Commercial Policies (New York, 1941), pp. 173-177. This quota bargaining system was designed to open the whole question of reciprocity as most-favored-nation treatment. Italy was the first Important country to employ quotas as a method of reprisal. See Heuser, Control of International Trade, (London, 1939), p. 43. 6 2 . Netherlands-New Zeland, December 22, 1937, I M S 1 8 5 , p. 330.

LIMITATIONS ON THE MOST-FAVORED-NATION CLAUSE

149

measures to exist side by side with the most-favored-nation clause. 03 From 1932 on, Great Britain entered Into special treaties providing for the reciprocal purchase of definite quantities of goods from the Argentine, Norway, Sweden, Estonia and Latvia.84 The advantages resulting from these agreements have not been generalized to those nations entitled to most-favored-nation treatment from Great Britain. Demands for reciprocity, particularly from South American and African countries led Japan to Impose levies on exports to nations with which Japan had an active (that 13, favorable) trade balance, the proceeds being used to encourage imports from them. 65 Quotas have on occasion been employed to allow certain Importers to make use of blocked exchange balances In other countries. This was the case when Yugoslavia extended the quota of German imports in order to profit by the accumulation of blocker marks In Germany. 86 Governments have always exerted an influence upon international trade, but the extent to which this has been carried since 1931 forms a new chapter In the economic life of mankind. Obviously, quotas, exchange controls, and trade balancing imply comprehensive supervision of foreign trade by national agencies. It is Inevitable, therefore, that the many agreements here analyzed should have one thing in common. They presuppose, In most cases, the strictest kind of regulation of the movement of goods between the parties concerned. Hence a new type of treaty provision, establishing inter-governmental cooperation and control, has evolved. An example 13 given by Article 16 of a clearing agreement between Germany and the Netherlands, December 5, 1934: "To ensure as far as possible the smooth operation of the payments 6 3 . As it does in the treaty between the USSR and Great Britain, Arts. 1,2, Great Britain, Treaty SerleB, No. 11 (1934), Cond. 4^67. See also F. A. Halght, French Import Quotas (London, 1935), P. 9*+. 64. World Economic Surrey 1933/34, P. 204. Argentine-Great Britain and North Ireland, December 1, 1936 (Argentine No. 1, 1936, Cnd. 5324); Great Britain and North Ireland-Estonia, July 11, 1934, LNTS 152, p. 131j Great Britain and North Ireland-Norway, May 15, 1933, IflTS 145, p. 187; Great Britain and North Ireland-Sweden, May 15, 1933, LHTS 140, p. 317; Great Britain and North Ireland-Latvia, July 6, 1933, U T S 142, p. 217. 6 5 . Review of World Trade, 1935, P. -66. 66. World Economic Survey, 1935-36, p. 203.

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THE MOST-FAVORED-NATION CLAUSE

system, the tvo Contracting Parties shall regulate the movement of the exchange of goods as required." 07 That commercial treaties now give rise to complex difficulties Is proven by the presence of clauses providing for joint cooperation in the solution of such difficulties.68 The final protocol to an accord between Germany and Sweden, August 28, 193^, goes even further In stating that each government shall set up a special committee to engage In "permanent direct consultation" with the other. 89 Often a mixed body consisting of delegates from both parties 13 created to keep trade under rigid surveillance and to propose "such measures as are calculated to influence trade in the direction agreed upon." 70 Falling short of this more or leas complete control are a number of provisions which can result only in more drastic regulation. Two nations may, for instance, exchange lists of products in which both are interested in order to have regard for "normal currents of trade between their respective territories ." Further indication of the extent to which treaties of commerce have changed can be gained from the fact that of 120 commercial agreements concluded in 1933-1931* only thirty contained an exchange of tariff concession.71 By 1937 there were 170 clearing agreements and numerous exchange control agreements72--most of them beyond the scope of most-favored-natlon treatment. These various types of trade arrangement contain effective .but concealed preferences and discriminations. Given the aim and weapons of the new model trade treaties and commercial policies, the application of the most-favored-nation clause must be avoided because the arbitrary diversion of 67. LNTS I60, p. 123. 68. Hungary-Yugoslavia, May 15, 1933, Art. 4 IifTS 1 ^ , p. 323. 69. LNTS 154, p..259; Similarly, Germany-Latvia, December 1935, LHTS 166, p. 93; Germany-Hungary, February 21, 195k, LNTS 171, p. 327; Germany-Netherlands, June 6, 1931*. 70. Austria-Hungary, December 31, 1932, LNTS 169, p. 289; SpainYugOBlavia, May 15, 1936, U T S 170, p. 175. In order to give effect to the foreign trade monopoly of its government, the Soviet Union established a "Trade Delegation" in the country of the other contracting party to its canmercial treaties, the purpose of said delegation being to regulate the trade of the Union with that country. Cf. Latvia-USSR, December 1933, IJJTS 11+8, p. 163. 71. Henry Chalmers, in Official Report of the 21st National Foreign Trade Convention, 193U, p. 58. 72. World Economic Survey, 1937/38, p. 161.

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trade could not be accomplished under conditions of e q u a l i t y of treatment. In the f a c e of them, any third n a t i o n ' s t i t l e to most-favored-natlon treatment on t a r i f f rates s u f f i c e s l i t t l e . 2. PREFERENCES AND REGIONAL agreements. Another recent tendency i n commercial p o l i c y which has s e v e r e l y l i m i t e d the e f f e c t s of most-favored-nation treatment has been the development of regional p r e f e r e n c e s . I t w i l l be r e c a l l e d that the attempt of the League of Nations, and of economic conferences held under i t s auspices, to obtain univ e r s a l agreement on regional exceptions to the mostfavored-natlon clause f a i l e d . 7 3 The second Conference with a View to Concerted Economic Action (November, 1950) and the Commission of Enquiry f o r European Union (May, 1931) both admitted that p r e f e r e n t i a l treatment of c e r e a l s (and t h e i r d e r i v a t i v e s ) from Roumania, Bulgaria, Hungary, Yugoslavia and Poland vas a derogation of the clause, a l b e i t a l i m i t e d and temporary o n e . C e r t a i n r e g i o n a l agreements have m a t e r i a l i z e d , however, and because there has been no universal approval of l e g a l exceptions on this basis, they are v i o l a t i o n s of the mostfavored-natlon clause. A l l p a r t i e s to B r i t i s h t r e a t i e s have approved the Ottawa system as an exception to mostfavored-natlon treatment, Including the United States. Of course, there have always been recognized r e g i o n a l exceptions to the c l a u s e ; 7 5 but the recent trend toward the establishment of p r e f e r e n t i a l regimes i s f a r more s i g n i f i c a n t than these accepted cases. In 1931 Austria and Hungary established mutual preferences and avoided the e f f e c t s of g e n e r a l i z i n g concessions by financing t h e i r trade through national bureaus on 3uch favorable terms that I t amounted to a subs t a n t i a l reduction in t a r i f f s . 7 6 What i s considered by many the outstanding r e g i o n a l V i o l a t i o n of the clause i s the B r i t i s h system of imperial preferences set up In 1932. The conclusions of the Imperial Economic Conference 73. Certain Central European countries played an important role in this attempt. See Baach, The Danube Basin and The German Economic Sphere (New York, 19^3), pp. 32, 33. League of Nations, Economic and Financial, 1932, I I , 52. 75« Eichard Riedl, Exceptions to Moet-Favored-Natlon Treatment, Report to the International Chamber of Comnerce, 1931. 76. Jacoh De Haas, The Practice of Foreign Trade (New York and London, 1935), P. 75; Gordon, op. c i t . , p. W+9j Note 52.

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regarding the relation between lntra-commonwealth preferences and the most-favored-nation clause in commercial treaties are worth quoting: Each government will determine its particular policy in dealing vith this matter, but the representati /es of the various governments on the committee stated that it was .their policy that no treaty obligations into which they might enter in the future should he allowed to interfere with any mutual preferences which governments of the Commonwealth might decide to grant each other and that they would free themselves frcm existing treaties, if anjr, which might so interfere. They would, in fact, take all the steps necessary to Implement and safeguard whatever preferences might he so granted. In the second place attention was drawn to recent tendencies in foreign countries to conclude regional agreements between themselves for the mutual accord of preferences which were designed as being exclusive, and not to be extended to countries which were not parties to, or did not adhere to the agreements. On this point there was general agreement that foreign countries which had existing treaty obligations to grant most favored nation treatment to the products of particular parts of the commonwealth could not be allowed to override such obligations by regional agreements of the character in question.77 It would be difficult to find two consecutive paragraphs which are more contradictory than those cited above. The second paragraph is, In essence, a strong Indictment of the very thing which the Ottawa Agreements turned out to be, namely, exclusive preferences—seemingly in violation of the unconditional most-favored-nation clause. There can be little doubt that, coming when they did, the Ottawa Agreements were a severe blow to the unconditional clause. 7 8 It is difficult to reconcile the alleged legitimacy of the imperial preferences with the British attitude toward M. Briand's plan for European Union, which obviously implied some sort of low tariff or even free trade area in Northern Europe and the easing of difficulties In Northern Europe. In its official commentary on the suggestion, the government declared that "It would cause conflict with the whole spirit of the most favored nation clause' if it were open to any 77. Report of Imperial Economic Conference, Ottawa, 1932, Cmd. lf-174,pp. 17-18; see also Proceedings and Copies of Trade Agreements, pp. 10-11. 78. Sir Andrew MacFaydean, "international Repercussions of the Ottawa Agreements," International Affaire, January-February, 1935, p. Ul.

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countries to conclude arrangements with each other which they did not extend to other countries."78 On the same ground, Great Britain joined Prance and others in defeating the preferential tariffs envisaged by the Ouchy Convention of 1932.80 On the other hand, when an Agrarian Fund, which was actually a glorified bounty on eastern Buropean agricultural products, was proposed by the 8 t r e s a Conference of 1932, Great Britain said she would "not object to the temporary suspension of the most-favored-natlon clause."81 By 1932 France had granted virtual preferences on wheat from Yugoslavia, Hungary, and Roumanla, and on corn from the latter. Mutual exports and reduced railroad rates operated to put the trade of Italy, Austria and Hungary on a special footing. Preferentially low export credits achieved a concealed preference in these so-called Brocchi Agreements. As the paralysis of international trade became more severe, regional agreements continued to form an escape in 1933. Chile and Argentina agreed to preferential treatment of each other's Imports in June of that year. The Montevideo Conference of 1933 adopted a resolution approving the exchange of special commercial favors among neighboring states as an exception to the most-favored-natlon clause.88 Essentially the same thing was done by the Balkan states--Yugoslavia, Roumanla, Albania, Bulgaria, Greece, and Turkey--in an agreement in 1933.83 Due to the development of new restrictions, preferential quotas tended to replace tariffs as the subject of these negotiations. Such arrangements (involving measures to avoid claims based on the clause) were exemplified by the Rome Protocols of March and May, 193^, comprising openly preferential Import duties and quotas for Austrian 79. Economist, February 27, 1952, p. IA9. 80. The United StateB would probably have recognized this—as It had tho "Baltlo" and "Danubian" clauses. Whidden, Preferenfces • and Discriminations In International Trade, (New York, 191+5), P- 1581. Kaiman de Buday, "StreBa and After," Nineteenth Century and

After, November, 1932, p. 55^. Cf. Benham, op. clt., p. 2hS. 82. U.S. Department of United States of America to American States, Conference 57-275. 83. Kerner and Howard,

State, Report of the Delegates of the the Seventh International Conference of SerleB, No. 19 (Washington, 193^, PP. The Balkan Conferences and the Balkan

Entente, 1930-1935 (Berkeley, 1936).

15^

THE MOST-FAVORED-NATION CLAUSE

and Hungarian exports in the Italian market. 8 4 Estonia, Latvia, and Lithuania formed a group in 1931* which involved the conclusion of bilateral preferences not to be shared by any other countries. 8 5 The Little Entente, through its Economic Council established in 1933» set up "drawbacks" for the cereal and animal exports of Roumanla and Yugoslavia to Czecnoslovakla and, in general, facilitated the expansion of their mutual trade at the expense of other markets. 8 8 In 1936 and 1937 Czechoslovakia concluded preferential agreements with Austria and Hungary. In the summer of 1937» the Oslo Convention was ratified; the Netherlands, Belgium and Luxembourg abolished all quotas for the benefit of the other signatories, and Denmark, Norway, Netherlands Indies, Sweden and Finland agreed not to raise tariffs or Impose new restrictions. This treaty, handicapped by the existence of most-favored-nation agreements and the unfavorable trend of world trade, was finally abandoned In July 1938. Throughout this whole movement, of which only a brief review has been given, there was a noticeable strengthening of regional economic units already in effect, to the disadvantage of outside nations. Measures were taken to Increase trade within the Belgian, French and Dutch empires. There are other cases which are not so tangible. Some of the trade control measures discussed above, firmly entrenched as commercial weapons, have made possible spheres of economic influence which have no conventional basis. Insofar as closed economic regimes have been established during the past eight years, equality of treatment has been progressively restricted. C. SUMMARY

Indirect limitations will be observed to be of two types. The first would Include countervailing duties, for example. They are specific. Sometimes there is a provision for them in commercial treaties, sometimes not. But these extra charges directly alter the rates of duty, and for reasons already stressed, violate the pledge not to Impose "higher or other duties" which is 8U. Baach, The Danube Baa In and, the German Economic Sphere

(Hew York, 19*+3), PP. 159-165. 85. Ethel Dietrich, World Trade, p.,2U8. 86. For an excellent account of thlB attempt, see Baech, q p . c l t . , pp. 153-159.

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embodied In the most-favored-nation clause. The second type is more elusive; they constitute what might be termed a n "unfavorable condition" for equality of treatment, expressed in both philosophy and new measures of trade control. Theoretically, the w o r l d still accepted the most-favored-nation clause in 1939- That same world, however, arbitrarily diverted trade, wilfully discriminated against the trade of interested third parties, centered the control of trade in the hands of government, and insisted on autonomy in all matters of foreign trade. The effect of the frame of mind alluded to above has nothing whatever to do with violations of the clause in the eyes of international law. The connection is more subtle than that. Prior to 1931, the flow of trade was determined in the m a i n by the functioning of the price system. Furthermore, trade agreements served as a medium through w h i c h the movement of goods was expanded. B y 1939 much, although not all, foreign trade was directed not by price differentials or other purely economic considerations, but by governmental control for political or national purposes. It should be stated, however, that in many cases this was attributable to a persistent n e e d to preserve the economic life of the nation, to stabilize currencies, to safeguard domestic markets from foreign price declines and to maintain employment. Recent commercial treaties as a rule do not allow for the expansion of trade because they precisely define, both quantitatively and qualitatively, the trade between the contracting parties. The structural nature of commercial treaties has been basically transformed; by and large, instead of setting up a broad framework of general conditions of trade, they have become narrow directional channels of control. A l o n g w i t h this change in treaty structure has come a change in the underlying philosophy of trade negotiations. The international trade carried on by most countries before 1939 represented a series of exclusive bargains between governments on the basis of Strict reciprocity. The principle of bilateral bargaining was by this time as fully important (if not more so), as the principle of equality of treatment w h i c h up until 1 9 2 9 1930 could rightly be called the foundation of commercial treaty relationships. The conclusion seems Inescapable that m a n y nations, particularly European, considered their freedom of action and ability to negotiate with Individual nations without regard to their trade relations w i t h other nations more vital than protection against discrimination in foreign markets.

IX Exceptions to the Most-Favored-Nation Clause

THERE HAS GROWN up through the historical development of the most-favored-nation clause a body of recognized exceptions to the generalization of favors required by the clause; that is, certain conditions and circumstances are accepted as rendering the clause inoperative. While these privileges have undoubtedly been used as mere pretexts for discrimination, it is probably true that as a whole, exceptions have arisen out of practical necessity and do not represent—at least in principle and as in the case of the limitations analyzed in the previous chapter--a narrowing of the scope of equality of treatment beyond what is justifiable in the handling of special circumstances. Nearly all commercial treaties, especially those containing detailed definitions of the clause, also Include a separate article setting forth exceptions.2 Exceptions pertaining to frontier traffic, customs unions, domestic laws and policies, and sanitation problems appear 30 frequently that they may be termed general exceptions which would be considered operative whether so stated in a given agreement or not. 3 1. The analysis here Is once again based on an examination of 8 5 1 treaties of which 607 contain mention of the most-favorednation treatment In one f o m or another (1920-19^0) 2. Simple clauses, of course, do not contain this article; but the less detailed complex group contains briefer articles—usually only embracing the "frontier" and "customs union" clauses. Treaties with no exceptions listed: Economic Union Belgium and LuxemburgYugoslavia, December 16, 1 9 2 6 , U T S 70, p. 371; Spain-Greece, August 7 , 1927, U T S 91, p. 121; China-Portugal, December 19, 1 9 2 8 , LNTS 107, p. 93. 3. Where most-favore the controversy between Mr. Peek and Mr. Hull exemplified the two opposing views on the subject of bargaining.28 Mr. Peek campaigned for an abandonment of the unconditional clause In order that the United States might retain its bargaining power and engage in rigid bilateralism.26 The opposite view was advanced by Mr. Hull who claimed that the unconditional clause was a necessity for successful tariff bargaining.27 In all probability, opposition to a most-favored-natlon bargaining program for the United States was caused by the memory of unfortunate experiences with exclusive reciprocity treaties embodying the conditional clause. It vas, perhaps, forgotten that even in the minds of negotiators of conditional treaties it was expected that concessions made to one nation might in due course be extended to another. At any rate, Mr. Hull's eventual victory and the subsequent policy of the United States have added further proof for the contention that the clause is compatible with tariff bargaining on a large scale. £5. For a good account of this conflict and Its effects on the Reciprocal Trade Agreements Program, see Henry Taeca, The Reciprocal Trade Agreements Program of the United States, (London, 1939), pp. 82-92. 26. George Peek and Samuel Crovther, Why Quit Our Own? p. 220. 27. Cordell Hull, "Restoration of International Trade," U.S. Department of State, CT""'erclal Policy Series Ho. 11, Washington, 1935, P. 5.

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Two assumptions underlie the present argument. First, that the obligation to extend tariff reductions to countries entitled to equality of treatment makes all such reductions impractical; and second, that no state is willing to purchase concessions which are to he extended to others. The compelling reply is that the unconditional most-favored-natlon clause can be reconciled with tariff bargaining by means of a simple formula: "ordinarily no concession is made to any country except in respect of articles Imported chiefly from that country."ZB This is, or course, the "chief supplier" device now an outstanding feature of the American trade agreements program. A study was made of dutiable imports into the United States from twenty-nine nations which furnished over 96# of the total dutiable imports in 1931. Taking for each country those items of which it was the "chief supplier," it was found that the value was 71$ of the total dutiable imports from the twenty-nine nations. 20 Canada, to cite an illustration, supplied all but 6% of the Imports upon which the United States lowered tariff rates. 30 By restricting our concessions in the main to such commodities in the case of each country, we not only retain sufficient 'bargaining advantage so that the last country in the group will still desire a trade agreement with the United States after the concessions granted to the other countries have been generalized to it, but also avoid subjecting domestic producers to undue competition frcm countries other than that entering into the trade agreement.

The "chief supplier" formula is not a fixed rule, and American practice has deviated from it on several occasions.32 Such deviation cannot, incidentally, penalize the country or countries which are the chief sources of supply because of the operation of the unconditional clause. Actually, the generalization of favors granted 28. Benjamin Wallace, "Tariff Bargaining," Foreign Affaire, July, 1933, P. 62k. 29. Tariff Bargaining Under Most Favored Nation Treaties, p. 930. The U. S. Department of State, p. 28. The Midwest and the Trade Agreement Program, Commercial Policy Series, No. 27, Washington, 1936, p. 28. 31. Francis Sayre, The Way Forward (New York, 1939 >, P- 106. 32. Henry Tasca, Reciprocal Trade Agreements Program of the United States, p. 139-

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to one nation does not shatter the tariff wall. The amount of the reduction of tariffs extended freely to third parties will usually fall short of 30$ of the total trade involved. Several factors can be cited. 33 To begin with, the same concession can be sold twice. Suppose the United States reduces duties on an Import item, two-thirds of which comes from one country. This concession would hardly be extended gratuitously to another supplier or other suppliers in the absence of an agreement to that effect. Therefore, the other suppliers would have to bargain in order to enjoy the reduction in duty. Hence the United States does not give away any bargaining power on one-third of the imports of said item but, in fact, retains the entire 100$ of the imports of a particular product for bargaining purposes. Second, on the average, probably not less than 70$ of dutiable importations would be directly covered by bargaining with the chief supplier, the remainder being affected by the concession of the same reductions to other suppliers under the clause; but some products are Included in the average figure (70$) "whose sources are so scattered that bargaining concerning them seem3 improbable." 34 For example, there are certain by-products whose output is not easily increased: in 1931 imports of sausage came from many sources of which the mo3t important producer supplied only 14$. In addition, tariff reductions which are extended under most-favored-nation treatment are extended gratuitously only in the short run, not in the long run, because in the meanwhile the United States is compensated by other contracts. Incidental advantages thus tend to balance each other. Unless negotiators are very inept there can be no great discrepancy between incidental concessions and benefits over a period of years. Furthermore, another method has been used to limit the value of concessions to third countries - particularly in the Anglo-American trade agreement of November 17, 1938 - namely, tariff reclassification. 35 Reclassification consists of new commodity descriptions, new value brackets, and making reductions in duty apply to one season of the year only. Vfhen "ge.ieral imports" 33. Benjamin Wallace, op. clt., p. 626, ff. 3U. rbld., p. 626. 35. Carl Krelder, The Anglo-American Trade Agreement (Princeton, 19^2), p. 204.

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finally are developed into "imports for consumption," particularly with reference to catch-all or basket items, the amount of trade included in gratuitous concessions i3 again reduced. One Important purpose served by this process is, of course, to "segregate the leading supplier."30 It is clear at once that these two methods, in combination, offer numerous and subtle ways of discriminating against trade which competes in the domestic market and also of eliminating the sharing of concessions by third countries. Favoring certain sources of supply against others is obviously contrary to the principle of equality of treatment and is capable of being practised at the same time that the unconditional clause is employed in commercial treaties. But this possibility it is, Indeed, more than a possibility37 - of the abuse of devices designed to reconcile the clause with tariff bargaining should not Indict most-favored-nation treatment. If the implications of the clause are avoided by unwarranted tariff specialization on items of interest to one nation it does not necessarily mean that the whole structure of equality of treatment as practised by a given state must fall. It does prove, however, that high protective tariffs and the clause become dual aspects of commercial policy on the basis of a struggle between domestic Interest groups who profit from inequalities In the tariff at home and domestic interest groups who profit from equality in tariffs abroad.30 What the balance between the two groups will be at any one time is unknown, but the chances are that the former group will concentrate on individual Items and agreements rather than on an attack against the unconditional clause a3 the basis of a country's trade policy.38 The "chief supplier" formula and tariff reclassification may be so employed as to be a justifiable accommodation to the undue strain on bargaining which sometimes results from the granting of unconditional mostfavored-nation treatment. If carried too far, discrimination arises. It Is a matter of degree, then. The clause is not a complete guaranty against discrimination,40 and 36. Ibid., p. 209. 37. Ibid., p. 211; pp. 212-216. 38. See Chapter XII. 39. This has been the tactic of protectionist groups in the United States. ¡tO. See Chapter XII.

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neither is it true that a country can carry the refinement of tariff classifications to the point where the clause becomes an absurdity without incurring retaliation. Finally, recent treaty provisions furnish a practical solution of different kind, in the form of an "escape clause." 4 1 Thus Article XIX of the treaty between the United States and Great Britain provides that: Each High Contracting Party reserves the right to withdraw or to modify any concession granted In any territory of that High Contracting Party on any article enumerated and described, or specified, in any of the Schedules annexed to this Agreement, or to Impose quantitative regulations on the importation of any such article Into that territory If, as the result of the extension of such concession to other foreign countries, any such country obtains the major benefit of the concession, and if in consequence imports of the article concerned Increase to such an extent as to threaten serious injury to producers in the territories of that High Contracting Party.42 B. THE-tf>ST-FAV0RED-NATION CLAUSE AND TAR33T STRUCTURES Different policies regarding tariffs and contractual methods appear to be generally associated with different ideas of most-favored-natlon treatment. In other words, there is a definite relation between the type of tariff employed by a nation and its choice of a form of most-favored-nation t r e a t m e n t . 4 3 For example, a nation which adheres to a single line autonomous tariff 4 4 may use the conditional clause for the simpe reason that the autonomy which is implied by the single line tariff would be partially vitiated by the unconditional clause. Such a policy was pursued by the United States from 1 7 7 8 to 1923, and was logical from its point of view since it took no active part in tariff bargaining except in isolated instances in the latter part of the nineteenth century. The American policy from 1923 to 193^ affords an Instance of a single line tariff combined 41. The United States in 19^0 terminated a concession on handkerchiefs in Item 1529 (b) of Schedule II of the agreement with Switzerland of January 9, 1936 because the number of handkerchiefs "appliqued" by hand or having drawn work made by hand" imported into the United States increased from 1,767,000 in 1936 to 18,460,000 in 1938 and 9,865,000 in 1939- Department of 8tate, Bulletin, Vol. Ill, 19^0, p. 480. U2. November 17, 1938, LNTS 200, p. 29343. Gregory, op. cit., ? n 5 7 1*1+. An autonomous tariff means the setting of rates by unilateral action; a conventional tariff is one established by treaty. See D. Serruys, Commercial Treaties: Tariff Systems and Contractual Methods, II Economic and Financial, 1927, II 26.

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THE MOST-FAVORED-NATION

CLAUSE

w i t h the unconditional clause. Single line conventional tariffs, that is, autonomous tariffs subject to reduction by agreement, ordinarily are employed in conjunction with the unconditional clause. The reason is obvious: if the contracting parties h a d to take into account not only the special considerations in w h i c h they were more specifically interested, but also had to review the whole of the previous concessions (as w o u l d be the case under the conditional form of the clause) In achieving a tariff bargain, It la quite probable that no conventional tariff would, under present-day circumstances, ever be realized. Purely conventional tariffs and maximum-minimum tariffs also are accompanied by the unconditional interpretation of most-favored-nation treatment. The latter type is Intended to combine tariff bargaining w i t h autonomy, and hence the conditional clause could n o t be effectively applied without taking away that autonomy. Again, the reason is simple: a maximum-minimum tariff is not subject to negotiation; it is settled by law, not by treaty. Thus the conditional clause w o u l d be impractical because it necessitates negotiations on the basis of the exchange of equivalent concessions w h i c h are set forth in a treaty. The maximum-minimum tariff has' meant in m a n y cases a restricted application of the unconditional clause since there are two sets of rates, and only nations who have made concessions are entitled to the minimum rate. France employed this system after I 8 9 2 precisely for the purpose of avoiding a widespread application of the unconditional interpretation. In many cases this objective has been facilitated by two methods. First, a nation may cease to grant her whole minimum tariff as a condition of most-favored-nation treatment and have recourse to a system of intermediate duties between the two tariffs. Thus France in 1927 limited h e r mostfavored-nation treatment de facto to the imposition of minimum rates on all products which were of importance to the export trade of the other contracting party. Second, Spain granted her minimum tariff to all nations entitled to share it by treaty, and also granted conventional reductions in the minimum tariff (up to 20$) w h i c h were available to all countries w h i c h enjoyed most favored n a t i o n treatment. The conventional tariff, (that I3 where rates are all, or mostly all, established by agreement), the opposite of the autonomous tariff, results in the formation

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of the tariff by negotiation. De facto, reciprocal concessions are obtained b y means of commercial treaties based o n the unconditional most-favored-natlon clause. Despite the fact that a p e r i o d of excessive protectionism, growing specialization of duties, a n d the risk that tariffs may be set too h i g h for bargaining usually precede the negotiation of conventional tariffs, it is w i t h in such a system that the mo3t-favored-natlon clause has its w i d e s t scope. This system combines a wide range of bargaining power w i t h general tariff stability and the guarantee of equality of treatment w i t h o u t impairing the efficacy of any one of these elements, whereas, the single line autonomous tariff, the single line conventional tariff (with occasional reductions by agreement), and the double tariff (with or without multiple rates) have inherent defects aside from the important fact that they do n o t permit, or rather, do not result In as wide a n application of the most-favored-natlon clause. The fact that there are m a n y different manifestations of the general tariff systems described above operating simultaneously in the commercial relations of nations, has undoubtedly reduced the effectiveness of the most-favored-nation-clause. There has never been, a3 was pointed out earlier, any universal agreement among nations regarding the scope of most-favored-natlon treatment. Consequently, each nation has w o r k e d out Its own policy w i t h i n the limits of the particular tariff system employed. Since each nation's tariff system is a direct response to the character or needs of its economy and politically vocal interest groups, every system, whether falling into the same category or not, differs in some respects. I n some cases, the difference is so slight as to offer only minor obstacles to a n efficient operation of the mo3t-favored-natlon clause; In others serious Impediments to tariff reductions by agreement result. It should be noted, however, that this weakness is not the fault of the clause, per se, but arises from diverse tariff policies of w h i c h it is the link. The chief handicap confronting the clause from the diversity of tariffs comes from the conflict between two distinct types of method, i.e., the autonomous and contractual, that is to say, between those nations which establish or reduce their rates by negotiation, a n d those nations which maintain a single schedule of rates set up by law, not by agreement.

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THE MOST-FAVORED-NATION CLAUSE

States which refuse to negotiate tariff matters claim mo3t-favored-nation treatment as a right beyond discussion, as a preliminary to any negotiations or treaty. On the other hand, states which conceive the tariff as a flexible instrument attach more value to agreements than to the jurldiclal guarantee of mostfavored-nation treatment when it is not accompanied by tariff advantages; in other words, the moat-favorednation clause is subordinate to an agreement on tariffs. Here is a fundamental distinction which has had a profound Influence upon the practice of granting most-favored-natlon treatment. The clause is assumed to be separate from tariff bargaining, or it is assumed to be an integral part of such bargaining. High tariff systems doubtless discouraged bilateral agreements after an auspicious beginning on the reduction of tariffs by this method had been made in 1927. 45 The existence of two fundamentally different tariff systems - the. contractual and the autonomous - led to "an awkward stalemate" when nations Imposing high tariffs refused to make any concessions by agreement and at the same time claimed the benefits resulting from all other conventional tariff arrangements. 48 Prom 1923 to 193^ the United States maintained a high single line autonomous tariff from which no reductions were made by commercial treaties. Most European nations engaged in mutual tariff reductions which were generalized through the unconditional most-favored-natlon-clause. Because the United States granted the same customs duties to all nations alike, it demanded in turn the privilege of sharing the concessions exchanged by other nations. This situation not only hindered bilateral tariff reductions, it caused widespread dissatisfaction with the clause Itself. The sharp division of opinion between countries representing contractual and autonomous tariff systems was revealed by the Economic Committee of the Leaque of Nations on June 18, 1929 when it pointed out that the critical stage had been reached in the matter of the tariff reduction and stabilization. 47 On one hand, most-favored-nation 45. Sir Arthur Salter, Recovery: The Second Effort (New York, 1933) p. 175^6. J. H. Richardson, Economic DlBarmHm«nt (London, 1932), pp. 8l, 82.

League of Nations, Commercial Policy in the Interwar

Period: International Proposals and National Policies, (Geneva,

19^2), p. 160. 1+7. Recommendations of the Economic Committee Relating to Com-

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treatment was deemed to be a right beyond dispute; on the other, more value was attached to actual tariff agreements than to the juridicial guarantee of mostfavored-nation treatment unaccompanied by tariff advantages.48 In an attempt to deal with this problem, the Economic Committee stressed the necessity of defining the scope of the clause and of setting forth a reasonably complete body of rules regarding the clause in general. Clearly, then, the most-favored-natlon clause should be accompanied by tariff bargaining in order to be effective. And yet the distinction should be made that the clause does not require bargaining. If all nations adhered to 3ingle line autonomous tariffs, a mostfavored-nation policy without bargaining would cause no conflict. But when nations engage In bilateral tariff reductions, they may call it discrimination to demand that these reductions be shared without making reductions in return. Obviously it is unfair for a nation to insulate Itself from discrimination and then raise its tariff alike against economically strong and weak nations on the pretext of treating all nations equally. To reiterate, the problems noted briefly above are not created by the clause Itself; rather they occur when several basically different types of tariff systems operate In international economic relations. Generally, a compromise arises from the conflict of two systems referred to the autonomous and the contractual. The former is usually revised if prohibitive duties or discriminations are leveled against It. The latter admits in theory, at least, that a commercial agreement could not be arrived at without the granting of most-favored-nation treatment. The effect of the tariff system employed by a Country upon Its policy of equality of treatment varies. It depends in the last analysis upon the form which the system takes and what its purpose is; the possibilities Footnote Continued. morclal Policy, II Economic and Financial, 1929, II No. 1 5 .

The

Economic Committee had "been studying the most-favored-nation-clause since 1927: first report, June 1928; second report, January 23, 1939; League Document C. 20, M. lU, 1929 II. 1+8. Joseph Jones, Tariff Retaliation (New York, 193*0, P-

2

52.

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THE MOST-FAVORED-NATION CLAUSE

are manifold. If autonomy Is desired the single or maximum-minimum system is used, a n d either a conditional or limited unconditional clause accompanies It. If the tariff system is designed merely to obtain a guarantee of equality, then there w i l l be no bargaining unless It is necessary to obtain that guarantee and the unconditional form of the clause w i l l prevail. If the conventional tariff is adhered to, a broader application of the mostfavored-nation clause can be generally expected. Whatever else may be said, the form of the tariff system encompassing the clause will greatly Influence Its scope.

XI Evaluation and Criticism of the Most-FavoredNation Clause—Continued

RECENT TREATY PRACTICE Indicates that for the time being at least, the conditional clause remains in limbo; it Is no longer, and has not been for some time, on an equal footing with the unconditional clause despite the fact that It appears in some treaties of commerce still in force.1 Because the clash between these two forms has played so prominent a role in the history of the mostfavored-nation clause and because the conditional form might possibly be revived in the unsettled period ahead, brief discussion of the relative merits of the two forms is in order. The chief difference between the two is, of course, that under the conditional clause the generalization of concessions Is contingent upon the receipt of concessions equal to those exchanged by the original parties to a commercial treaty; there is no 3uch qualification attached to the unconditional clause. Judging from the history of the clause, the unconditional wording has been by far the more popular. From the twelfth century to the present the unconditional clause has dominated mo3t commercial agreements with the exception of American practice from 1778 to 192? and the period 1827 to i860 in European experience.2 During the era after 1827, the unconditional clause was not abandoned; European nations alternated their policy between the two forms, using the conditional clause in 1. Out of 625 most-favored-nation agreements In force on January 1, 1933, only W3 were conditional. Extent of Equal Tariff Treatment in Foreign Countries, p. 11. 2. Stanley Hornbeck, The Moat-Favored-Natlon Clause In Commercial Treaties, University of Wisconsin Bulletin, Vol. 6, 1910, p. 3k2. These dates should be taken to represent only rough partitioruB In time, not specific points of change.

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CLAUSE

their treaties w i t h the U n i t e d States and South A m e r i c a . In the i860'3, E u r o p e a n tariff and commercial p o l i c i e s w e r e radically transformed; m e r c a n t i l i s m waned, a n d the a d o p t i o n of liberal trade policies became almost u n i v e r sal. The C o b d e n T r e a t y signed by France and E n g l a n d In i860 w a s the signal for the negotiation of many c o m m e r c i a l a g r e e m e n t s e m b o d y i n g the unconditional clause w i t h a w i d e r scope of a p p l i c a t i o n than at any time in its history. F r o m i860 to W o r l d W a r I this form of the clause enjoyed its greatest ascendency. W h i l e this situation changed somewhat after 1919» the c o n d i t i o n a l clause never really took root again. Furthermore, most students support the u n c o n d i t i o n a l clause as the true representative of the p r i n c i p l e w h i c h underlies m o s t favored-nation treatment.3

But the introduction of the conditional clause In 1778* should not be considered a step backward in the development of the most-favored-natlon clause since die clause was than limited in scope, and for technical reasons did not compare with unconditional m'ost-favorednatlon treatment as we know it today. And through the years the conditional clause ha3 also had the approval of various writers.5 The conditional most-favored-nation clause has been, however, quite unsatisfactory In operation. Eloquent testimony to this fact is the abandonment of this form by the United States in 1923. It is significant, too, that once Europe abandoned widespread application of the conditional clause after i860, it never returned to it despite increased protectionism from 1870 on until the present day. In fact, though, European nations alternated between the two forms because of the interpretation employed by the United States in Its trade agreements. The reasons for this are important. Inevitably the conditional form of the clause has led to the very 3. League of Nations, Recommendations of the Economic Committee Relating to Cnmnerclal Policy; League of Nations, The Moat-Favored.Nation Clause; International Chamber of Commerce, Carnegie Endowment, Joint Committee, Improvement of Commercial Relatione Between Nations; Vlsser, op. cIt., and Culbertson, International Economic Relations U. Extensive use of the conditional clause did not emerge until some years later. 5. Hornbeck, op. cit.; D. McKoveki, The Most-Favored-Nation Clause In C""""erclal Treaties, Historical Outline, Moscow, 1917; Egard Allix, op. clt.

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discrimination w h i c h it is designed to avoid. Each agreement negotiated involves a consideration of all concessions granted In previous pacts, i.e., concessions £ r o praeterito, along w i t h those suggested in the contemplated agreement. N o t only this, but each bilateral arrangement concluded may impinge upon concessions granted in others, and negotiations must be reopened to restore the status quo. Hence, If any given agreement alters the rate of duty on oranges, then the parties must negotiate w i t h any other n a t i o n w i t h w h o m previous rates on oranges had b e e n established. In the meantime the concessions granted become a discrimination against all third countries. The conditional clause thus tends to degenerate Into a complicated system of bilateral treaties and endless negotiations. E a c h conditional treaty sets up a new set of trade conditions exclusively for the two countries concerned. Endless bargaining a n d discrimination are not the only difficulties connected w i t h the conditional interpretation of most-favored-natlon treatment. More than any other feature, the necessity of determining what constitutes an "equivalent concession" has proven a source of conflict. Since the trade relations of any two nations are not identical, It becomes a matter not of providing identical concessions, but of giving "equivalent" considerations. For example, Country A makes a reduction in its duty on w h e a t in return for County B's reducing its tariff on steel. Country C, let us assume, does not Import steel but nevertheless wishes to share the reduced duty on wheat. It is entirely up to A what shall constitute a n equivalent for the reduced duty on steel. Numerous problems complicate the picture. How important 13 the reduced steel rate in relation to the other factors of A's export trade? If C grants w h a t A accepts as a n equivalent, by w h a t standards are the prices paid by B and C to be judged equal? Should the price not be equal In both cases, then obviously either B or C has b e e n discriminated against. If C makes w h a t it feels to be a n equivalent offer and it is rejected by A, cannot C claim discrimination? It is evident that A has it In its power to declare that C is incapable of providing a n equivalent, in w h i c h case C must open negotiations based upon other conditions. So far as B is concerned, the process m a y begin all over again. Professor Gregory has pointed out another disadvantage. 6 A conventional tariff based upon the 6. Ibid., p. U27.

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THE M03T-FAV0RED-NATI0N CIAUSE

conditional most-favored-natlon clause Is practically an impossibility. There i3 no excluslveness about a conventional tariff; it means in essence that the rates are established by treaty, so that each country knows in advance what the duties will be. Combined with the conditional clause, however, the rates are different for each country, and the system becomes nothing more or less than a series of isolated agreements. The common practice In such a system is to grant conventional duties to all countries with which treaties are negotiated, but the conditional clause would require equivalent compensation. In this case what criterion would be adopted for the measurement of the equivalent? To simplify the problem again, assume Country A enters into agreements with B, C and D. According to normal conventional procedure, the rate which is accorded B, C, and D, would be the rate given to any other nation concluding an agreement with A. When Country E wishes to negotiate, what Is to be the equivalent concession required of it? With the employment of a strict conditional interpretation, the favors extended by B, C and D will probably not be Identical. Therefore, is E's price to be that paid by B or C or D? In the event that E can match the concessions granted by, say, B, then C and D can hardly be on a conventional basis with B and E. To all intents and purposes, a conventional tariff is beyond attainment. From the foregoing it is evident that the conditional clause is Impractical, leads to discrimination, and is not compatible with the tariff bargaining systems employed by most countries after i860. Moreover, there are far graver objections from a theoretical point of view. Equality of treatment means that all nations shall be placed on an equal footing. Equality can have only one meaning in this case. Added qualifications alter the principle. And the purpose of this principle is to minimize discrimination through the application of the mo3t-favored-nation clause. Considering the essence of most-favored-natlon treatment, American courts and statesmen of the nineteenth century maintained an untenable position. Actually what the former American policy meant was that foreign nations could share concessions granted provided they were willing and able to pay the original (or an equivalent) price paid by the nation which first obtained the favor. In this one-sentence analysis, equality of treatment ends with the word "provided." The conditional clause does not grant equality, but the

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opportunity to purchase equality. Ill the first place, e v e n If a n a t i o n succeeds In purchasing the favors granted. to another nation, we have seen that It Is Impossible to determine accurately w h a t the equivalent shall be, w h i c h means that a n a t i o n attains equality b y placing Itself either In a more or less favorable position in regard to the n a t i o n w h i c h first obtained the concession. Hence equality is purchased by inequality, and the two nations have not b e e n treated equally by the grantor. Aside from this, w h a t special advantage Is forthcoming upon the extension of conditional most-favoredn a t i o n treatment? It has b e e n said that in reality nothing is granted except the opportunity to purchase equality or pseudo-equality. But is this essentially a different condition than w o u l d prevail without the qualified clause? The ability to negotiate on the same basis as other nations Is n o t a right conferred by the mostfavored-nation clause; it is Inherent In the sovereignty and equality of states in the eyes of international law. Certainly If a n a t i o n h a d been capable from the point of view of having economic bargaining power of negotiating w i t h the United States in the last century, it w o u l d have done so regardless of enjoying conditional equality of treatment. The A m e r i c a n policy before 1923 was a n attempt to reconcile reciprocity w i t h most-favored-natlon treatment. Reciprocity is substantive bilateralism. Equality of treatment, to repeat, Involves more than two nations; its premise Is that a n y third n a t i o n shall not be discriminated against. Equality of treatment is not the exchange of satisfactory concessions between two nations. The American theory of "concession for concession" and "give a n d take" was based upon a different conception of equality. This equality w a s the result of a n attempt to preserve the utmost autonomy on the one hand, while preserving the semblance of fair treatment on the other. Time after time, conflicting clauses were Incorporated in A m e r i c a n treaties. The treaty of 1828 w i t h Prussia furnishes a n example. Article V of that treaty specified that neither of the contracting parties should Impose any duties w h i c h w o u l d n o t equally extend to the like products of all other nations. This is truly a n unconditional pledge of most-favored-natlon treatment. Article IX, however, contained the conditional clause. Obviously it is inconsistent to promise absolute equality of treatment on the one h&rid, a n d on the

216

THE MO 3T-FAVORED-HATION-CIAU3E

other to give the other party the opportunity to purchase any future concessions. Article V is in this case immediately violated w h e n the United States grants a reduction in tariffs to any other nation. Furthermore, the United States claimed that Article IX took precedence over the modified Article V . Most-favored-nation treatment is thus w i t h d r a w n In the same treaty w h i c h ostensibly guarantees it. The conditional clause is simply an exception to equality of treatment. Concessions are rarely, and were not w h e n the United States adhered to this policy, given "freely." It follows that most-favorednatlon treatment is extended only w h e n favors are granted without compensation, otherwise the other party must enter Into new negotiations to place Itself on a n equal footing w i t h other nations. It is obvious that the basic difficulty of operating under a regime of conditional agreements is that every bilateral concession made by a nation to any other nation presents every other interested government w i t h a somewhat awkward problem of discrimination against its trade, which in the national interest necessitates immediate settlement but which in the nature of things w i l l require extended negotiations if satisfactorily settled at all. Proponents of the conditional clause maintain in its defense that If a nation has paid for a n advantage received, it has not been favored and, therefore, the advantages concerned could not come within the scope of most-favored-nation treatment. This reasoning is faulty. It is Inconceivable that the clause should apply only to gratuitous favors; the whole effect and purpose of the clause w o u l d be destroyed. The very existence of the clause represents the desire of nations to protect themselves from the potential discriminations arising out of tariff negotiations between other nations and to avoid the repetition of previous concessions in every new commercial treaty. After all, the important fact is that a nation has b e e n placed In a more favorable position as regards other nations, not how it achieved that position. Experience shows that gratuitous favors are the exception rather than the rule in commercial relations. The chances are that w h e n a nation freely extends a concession to another country It w i l l not be reluctant to act accordingly w i t h other countries, hence there Is no need of a mostfavored-nation clause. Where the most-favored-natlon principle is chiefly effective is In generalizing bilateral concessions in order that no n a t i o n is

EVALUATION AND CRITICISM

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discriminated against. Remove this characteristic, and the whole structure of equality of treatment falls to the ground. It has been pointed out that actually the conditional clause Imposes no conditions; It Is merely descriptive, it merely distinguishes one of two ways of according most-favored-nation treatment. One writer states: "That is the purpose of the form of the clause as conditional or unconditional - to provide for the payment of the consideration, and to describe the method of payment."7 The same writer goes on to say that the unconditional form postpones payment until the nation granting the favor has an opportunity to strike a balance by obtaining another favor from the nation which received the first. The obvious fallacy here lies in placing too much emphasis on the granting of concessions. To repeat, It is not how a nation attains a favorable position as regards tariff treatment that is important; it is with the fact that it ha3 done so that the unconditional clause Is concerned. In the case of the conditional clause, payment Is Important; In fact, it does not take effect until equivalent compensation is forthcoming. In addition, there is this vital distinction between the two forms in the matter of "method of payment." Looking at the problem from the broad viewpoint of equality of treatment, an exchange of concessions between two nations under the conditional clause constitutes discrimination against other nations until subsequent negotiations rectify this condition; on the other hand, reciprocal favors granted under terms of unconditional most-favored-natlon treatment do not constitute such discrimination since they are immediately applied to all other nations entitled to share them. To classify conditional and unconditional most-favorednatlon treatment on the 3ame basis by a remote connection with the manner in which reciprocal concessions between nations are generally leveled off, is therefore far-fetched. The conditional clause demands payment, while the unconditional clause may Indirectly result In "striking a balance" at some future time, although, be it noted carefully, this is not an essential condition to the operation of the latter. Strictly speaking, the conditional most-favored nation clause has little to recommend 'it if the purpose 7. Conroy, "American Interpretation of the Most-Favored-Nation Clause," Cornell Law Quarterly, April, 1927, p. 335.

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THE MOST-FAVORED-NATION CLAUSE

of most-favored-natlon treatment is kept in mind.. It inevitably results in bilateralism for the reasons described above, and bilateralism is the antithesis of equality of treatment. From the point of view of policy alone, the conditional clause has the virtue of preserving a greater degree of autonomy in a nation's tariff policy. Whether this is an advantage or disadvantage depends upon the aims of the commercial policy of a particular nation. It may be truthfully said that the United States succeeded in retaining freedom of action regarding its tariff policy during the nineteenth century, but it did so at the price of endless controversy over treaty interpretation.B It may be stated in defense of the limited, that is, conditional clause, that it is theoretically more effective in preventing wholesale increases in tariff rates. Usually the conditional clause implies separate commercial arrangements with other nations, and an increase in rates would mean a series of new negotiations since other nations would hardly countenance favors on their part when the original conditions of such favors are removed. Under a conditional most-favored-nation regime, tariff increases might take place in isolated instances, an unfortunate situation so far as discrimination is concerned, but of some merit if the general level of tariffs only is considered. In the last analysis, however, the conditional form of the pledge of mostfavored-nation treatment is in practice a meaningless pledge, conferring no genuine rights on the country receiving it and imposing no real obligation on the country granting it. But it must not be supposed that the conditional clause always results in discrimination or that the unconditional clause always results in perfect equality. Enough has been said to indicate that given the object of most-favored-nation treatment, the conditional clause là incapable of achieving that end. It must be remembered, nevertheless, that even the unconditional most-favored-nation pledge is subject to numerous "conditions" in its application; this is not 8. Diplomatic controversies are recorded with France, l8l51831, (Moore, Digest of International Law, T. 2 5 8 , ff); with Austria, (Ibid., p. 261); with Great Britain, 1884-1886, (Ibid., pp. 269-271); with Germany, (Hornbeck, American Journal of International Law, H I , pp. 802-827); also, Reciprocity and C""""erclal Treatiea (cited), pp. 9-10; pp. 399, ff.

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the same, though, as requiring equivalent concessions before mo3t-favored-nation treatment can be claimed. I n d e e d the two concepts are completely Incompatible; n o n a t i o n can successfully employ both formulas, for one unconditional treaty nullifies any number of conditional treaties. If favors are granted to one n a t i o n unconditionally, they m u s t be extended on the same basis to all other nations, w h i c h renders the conditional pledge superfluous. The conditional clause requires that nations negotiate i n order to place themselves on a n equal footing w i t h other nations, a situation w h i c h w o u l d undoubtedly prevail in the complete absence of most-favored-nation policy. Thus in reality, such a pledge contributes nothing to the smoothness of Intern a t i o n a l commercial relations. O n the contrary the unconditional clause has advantages w h i c h far outweigh lt3 disadvantages which were briefly considered above in connection w i t h some of the arguments leveled against it. One of the outstanding merits of this form of the clause is that it i3 completely in line w i t h the orthodox theory of comparative advantage. Unqualified (unconditional) equality of treatment means that though trade barriers exist, the world's economic resources w i l l be utilized in the m o s t effective manner possible under prevailing conditions. In other words, the most-favored-natlon clause allows competition to continue in spite of trade barriers. Discrimination, b a s e d u p o n exclusive preferential bargaining, leads further a w a y from the principle of comparative advantage, diverts trade from Its most productive channels and lowers the real income of the world. The point becomes clear w h e n it is realized w h a t was happening to international trade prior to 19^0. In a n earlier chapter It was suggested that m u c h of this trade was not then w i t h i n the scope of most-favored-natlon treatment. As a consequence, trade has become bllaterallzed, normal channels have b e e n diverted, a n d primitive barter has replaced the exchange of goods on the basis of comparative cost. The n e t result of these abortive tendencies has b e e n to reduce international trade, both in quantity a n d value. W i t h o u t equality of treatment, the circumstances w h i c h endow a n a t i o n w i t h a special advantage in a certain field of production are of no avail since superiority of whatever nature can be nullified b y tariff preference. This is hardly a n academic consideration.

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THE MOST-FAVORED-NATION CLAUSE

The origin of the most-favored-nation clause rested largely in the necessity for preserving a fair competitive relationship between trading nations. Not only is discrimination undesirable, but the motivating force behind most International trade, that of making and selling a product on the most efficient basis, is destroyed if it is permitted to continue. It is significant to note that universal vitiation of the doctrine of comparative advantage has never been tolerated over a long period of time. Much of the criticism of the clause has its roots in the dislike of competition which the clause cannot and should not prevent. Indeed, it is when competition appears to be most disastrous to a nation that it is willing to abandon equality of treatment. The application of uniform rates to imports of similar commodities regardless of their country of origin leads to the imports being drawn from the countries which are willing to provide them at the lowest prices. When a reduction in tariff rates is extended to all nations, the treasury's loss of customs revenue is offset by the consumers' gain in the form of lower.prices; when the reduction of duty is granted only to a country or countries providing but a fraction of imports, the loss in revenue is not offset by a corresponding gain to the consumers. Probably the greatest value of the most-favorednation clause in its unconditional form is its prevention of differential tariff treatment and discrimination, within, of course, the limits of its application. It need hardly be stressed that healthy international economic intercourse depends upon stability, particularly in the imposition of tariff barriers. The whole history of commercial policy Indicates that discrimination can only result in ,the disruption of trade, retaliation, and unnecessary conflict. The life-blood of most national economies stems from foreign trade. In order that external commerce may be pursued to the benefit of individual nations and the world as a whole, a relatively sound basis for the exchange of goods is needed. Under a regime of inter-connected commercial treaties in which tariff rates are consolidated for a long period of time on the premise of equality of treatment, private traders can plan in advance, can know the long run effect of foreign duties, and can be assured that the same conditions apply to the trade of their competitors. As is evidenced by the chaotic state of international trade

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before the w a r recently ended, nothing so hampers the exchange of goods as instability and different restrictions applied to the imports of various countries. Assuming a fairly broad application of the unconditional clause, the average exporter need not fear changes in tariffs, either in the form of increases or decreases, because he knows that such changes w i l l not affect his relative position. In Chapter One it was pointed out that international good will was a sine qua n o n for satisfactory economic relationships among nations. Clearly good feeling cannot exist w h e n nations treat the commerce of other nations in a differential manner. The tariff war between France and Italy In the last years of the previous century shows how trade diminishes w h e n two nations attempt to establish a commercial regime between themselves essentially different from their relations to other nations. To repeat, international trade made Its greatest progress at a time of unprecedented liberality of economic policies, at a time w h e n nations regarded themselves as components of a unitary w o r l d economy. It has been effectively demonstrated since that time that international trade moves most efficiently w h e n It moves among all nations w i t h some semblance of equality of treatment. The unconditional clause fosters good w i l l by removing the necessity for numerous administrative regulations such as determination of the origin of imports w h i c h w o u l d arise were all nations offered different tariff rates. A nation may not receive any substantial benefit from the generalization of favors incorporated in a particular commercial treaty, but It need not, as w o u l d be the case In the absence of equality, feel affronted by that treaty. These considerations may seem to the reader to be somewhat remote and general, but they are not. It is into this broad pattern that the particular merits of the most-favored-nation clause fit as pieces of a whole picture. The removal of endless tariff bargaining, the prevention of special bargains, the maintenance of competitive positions in international commerce, the prevention of artificial and diverted channels of trade, the amelioration of vicious circles of discrimination and retaliation, the recognition of the Interest of all nations in the commerce of any one, the simplification of the technique of foreign trade by the elimination of differential treatment, the element of stability

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introduced by equality of treatment, and the removal of Irritating practices regarding trade, all these can be the results of unhampered application of the unconditional most-favored-natlon clause. B. THE MOST FAVORED NATION CLAUSE M P QUANTITATIVE RESTRICTIONS ON TRACE

One of the basic assumptions behind the whole idea of equality of treatment is that trade moves between all nations as component parts of world economy. In brief, trade is, or ought to be, a multilateral basis. The principle also assumes that the conditions of trade between any two nations are not a matter of concern to those two alone. The phrase "any other foreign nation" (or words to that effect), contained in the most favored nation clause clearly Implies that a nation undertaking most-favored-nation obligations places Itself in a system of economic units each of which has a right to expect that its trade relations with that nation will be no les3 favorable than those of any other unit. Were trade essentially bilateral - that Is, isolated between pairs of nations - there would be no need for the clause. Under such conditions, the treatment of the trade of any third nation would be immaterial to the particular states involved. Finally, the practice of extending equality of treatment has been tacitly predicated on a world economy in which tariffs are the chief barrier to trade. These assumptions and necessary underlying conditions received a series of shocks in the 1930's. Trade was artificially bilateralized and tariffs became much less Important. Quotas, exchange controls, clearing agreements and monopoly purchase were not new,9 but the widespread influence and highly developed technique they have exhibited since 1931 present a significant phase in modern commercial policy. In short, the international trading system is not what it was when the clause reached the peak of its effectiveness and the new trade control devices constitute a body of commercial practices largely beyond the scope of existing most-favorednatlon obligations.10 The analysis of recent most-favored-natlon provisions shows also, however, that a substantial attempt 9. Grunzel, Economic Protectionism, (New York, I91U . 10. See Chapter VIII.

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has been made to bring these trade practices within the scope of the clause. What, then, has been the net effect upon equality of treatment? As of 19^0, probably 700 commercial treaties embodied favored nation clauses,11 and no nation had seen fit to abandon entirely their employment. Hence the principle of equality existed then, and still exists, in both theory and practice. Side by side with this principle, however, there prevailed universal discrimination, diversion of trade, exclusive bargaining, and retaliation. By and large, none of these phenomena are legal violations of mostfavored-natlon obligations; they violate the spirit, not the letter, of the moat-favored-nation clause. But such prevalent inequality of trade relations could only arise when the commercial treaties In which some measure of equality Is preserved are nullified or circumvented. Actually, this is what has happened. The pledge of equal treatment for "all matters affecting commerce" is useless If the allotment of foreign exchange can be a more effective barrier than any tariff. An assurance that two nations will face the same tariff wall is meaningless if one is able to penetrate that wall by means of a quota agreement. Of what value is uniform customs treatment when a nation's exports can be curtailed by the mere whim of a central purchasing agent? Is a nation eligible for most-favored-natlon treatment really protected when a clearing agreement can gradually cut down Its exports to a given nation? It is not sufficient to answer tha^t over one half of the world's trade Is still subject to the control of tariffs. 12 This Is practically the same as saying that one half of International trade Is moving under conditions of equality, and that hence commerce Is only fifty percent on an unsatisfactory basis. In a world that 13 still dependent, to a greater degree than ever, upon foreign trade It may be the margin of trade beyond the quota that Is the difference between profit and loss. If restrictions are to be effective, whether for legitimate or illegitimate reasons, it stands to reason that non-tariff trade controls must Influence the 11. A composite figure of the author's own estimate and one made In Report No. 119, Extent of Equality of Treatment in Foreign Countries, U. S. Tariff Commission, May, 1937, p. 11. 12. Extent of Equality of Treatment in Foreign Countries, p. 11.

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vital part of a nation's foreign trade. Were that part allowed to enter in a normal manner, the general purpose of these restrictions would be defeated. This fact is confirmed by the way in which import quotas were adopted in the first instance, as an alternative to higher tariffs. Since in 1931 most tariffs were still consolidated in most-favored-nation treaties, the implication may be drawn that quotas were deemed to be the more effective device, effective because they permitted the arbitrary and discriminatory diversion of trade necessary. It is not a case of tariffs and other restrictions each controlling one half of world trade; it is the control of the important half by the latter which counts, because it is that half which may bring about a flooded domestic market or drain small stocks of foreign exchange. In brief, a large proportion, the vital proportion, of international commerce is not governed by equality of treatment, and as a result, that which is so governed assumes less Importance than if it constituted the only trade, despite the fact that the most-favored-nation clause still applies to it. From the foregoing discussion, the question arises: do the restrictions mentioned fall within the scope of the most-favored-nation clause? There is some confusion over this problem, 13 and because it bears strongly on the future of most-favored-nation treatment, an examination of it is pertinent. To begin with, it should be made clear that in •the past the clause has been applied only to tariffs, not because all other restrictions were Intended to be excluded, but because tariffs were by any standard the most effective barrier to trade. To compare trade conditions before the war, for instance, with those which exist today is not to compare complete equality with complete Inequality. Equality of treatment is a matter of degree at best; it would Indeed be impossible to achieve full economic equality. The point is that in a world economy where tariffs are the most Important trade barriers, a greater degree of equality would be attainable. It Is only because discrimination and Inequality are more obvious under a regime of quotas, exchange controls, etc., that the whole question appears to Involve different principles. 13. See BecommenAatlons of the Economic Committee Relating to Tariff Policy and the Most-Favored-Matlon Clause, II Economic and Financial, 1933, p. 1.

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Two schools of thought prevail on the applicability of the most-favored-nation clause to non-tariff trade restrictions. On the one hand, it is maintained that the clause does not apply since not only have the existing commercial contractual obligations not provided for these new barriers, but equality of treatment Is impossible under their operation; 14 on the other hand, the contrary has been argued. l s Two further questions remain to be answered under the latter view. Is express stipulation in commercial treaties necessary? How are the new trade control measures to be administered If substantial equality of treatment ls to be achieved? There can be no grounds for denying that the most-favored-natlon clause should encompass these measures. The unconditional clause Is, to repeat, the legal embodiment of equality in commercial relations. Its origin wab the desire to prevent discrimination against the foreign trade of nations, and to this fundamental point attention must constantly be drawn. It is absurd to argue that weapons of manifest discrimination are beyond the scope of the clause. A principle of such historical background and acceptance cannot be arbitrarily limited in this fashion. If this interpretation were to be acknowledged, no future development of commercial policy, no matter what its effect on trade conditions, could be properly subject to most-favored-natlon treatment. Reductlo ad abaurdum, suppose that tariffs were one day abolished or replaced, the most-favored-nation clause would be entirely useless. Finally, the most-favorednatlon clause can never efficiently curb discrimination so long as policies outside of its scope constantly accelerate and exaggerate that which the clause minimizes. Whether or not express stipulation is necessary for the application of the clause will depend on the particular agreement. If the treaty applies the clause to "all matters pertaining to commerce" 1 0 or If It 14. B. Nolde, La Clause de l a nation la p l U B favorlsee et les tarlfs preferentlals, p. 80; Haight, French Import Quotas, p. 93; Ito, La Clause de la nation la plus favorlsee, p. 222. 15. Charles Rist, "CammentB on the Past and Future of the MostFavored-Hatlon-Clause in its Limited and Unlimited Forms," loo. clt., p. 120; League of Nations, Evolution of Commercial Policy Since the Economic CrlelB, II Econor c and Financial, I93U, II B. 1, P. 13. 16. International Chamber of Commerce, C™"P9rclal Treaty Policy

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contains one of the standard "protective" clauses which guarantee most-favored-natlon treatment for "import and export prohibitions and restrictions," then probably no further provision is required. On balance, express stipulation is desirable to prevent controversy. One reason why the clause has failed so glaringly is not because the above reasoning is Incorrect but because, outside of the American program, attempts to make it apply have been feeble. Criticism on this point would have more force if equality of treatment had been applied universally to quotas and exchange control and found wanting in effectiveness. It is perhaps more accurate to speak of "formulas" which link the clause with these trade controls: "previous representative period" and "fair and equitable treatment" for example. If quotas are within the scope of the clause - and they are, according to the position taken here - how are they to be administered if the equality of treatment principle is to be followed? There are three methods of imposing quotas: (l) equal quotas; (2) unallocated global quotas; and (3) proportional quotas. Under the first, absolutely equal quotas are granted at all times. This hardly results in fair treatment since it blocks imports from countries favorably situated economically. The second method is unsatisfactory for practical and administrative reasons, although it probably comes closest to complete equality. 17 It leaves a problem cf what is to be done with merchandise left at the border after the quota has been filled. Furthermore, this system penalizes countries located a greater distance away from the importing country. By far the most practical method is the proportional quota based on a basic reference period, in spite of the fact that the choice of a suitable base is difficult "in view of the rapidity with Footnote continued. and Trade Barriers, Report on a Special Committee of the American Section, Washington, 1933, p. 10; League of Nations, Draft Annotated Agenda, Monetary and Economic Conference, II Economic and Financial, 1933, II. Special 1, p. 23; The State and Economic Life, Sixth International Studies Conference, London, 1933, P. 68; League of Nations, Equality of Treatment in Present State of International Commercial Relations: The Most-Favored-Natlon-Clause, II, Economic and Financial, 1936, II B. 7, p. 25. 17. U. S. Tariff Commission, op. clt., p. 10.

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which, at the present time, changes take place in production and sales conditions in the various countries."18 Thus it is almost Impossible to discover among the statistics of the past a base which satisfied equally the needs of all nations. Moreover, quotas tend to stereotype a competitive relationship among countries. 18 In view of these objections, perfect equality is not attainable; however, the most-favored-nation clause should be combined with the proportional method to bring quotas within the scope of mo3t-favored-nation treatment. The same reasoning can be applied to exchange controls and monopoly purchases. Clearing agreements, even though resulting in indirect discrimination, are an offspring of currency difficulties, and would probably disappear with a solution of the latter difficulty. 20 Where official monopolies exist for certain commodities, as the French tobacco monopoly, or state control of foreign trade obtains as in the Soviet Onion, the application of the mostfavored-nation clause becomes more complicated. Probably a pledge is required to the effect that the central purchasing agency will be guided by the same considerations as would guide the average business man in his efforts to buy on the best terms. Of course, this is vague and permits of deviation, but a careful study should determine whether or not systematic discrimination is being practised. In connection with the whole question of the relation of the moat-favored-nation clause to non-tariff trade restrictions, a closer examination of the American policy in this respect is required, for it represents a concrete approach to the application of the principles outlined above. The most-favored-natlon policy of the United States Is the ortly example of an attempt to make a frontal attack on the more pernicious effects of these barriers by means of a revived and reinforced most-favored-nation clause.21 18. Equality of Treatment In the Present State of International Commercial Relatione: The Moat-Favored-Nation Clause, p. 14. 19. See Chapter VIII. 20. Enquiry Into Clearing Agreements. 21. The best and. most thorough analysis of this aspect Is found In Henry Tasca, The Reciprocal Trade Agreements Program of the United States, pp. 203, ff. The American program has not, of course, teen completely successful In applying equality of treatment to all types of trade controls: price and production controls still prevent

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C e r t a i n p r o v i s i o n s i n the trade agreements of the U n i t e d S t a t e s a r e s i g n i f i c a n t b e c a u s e t h e y s e e k a t once t o l i m i t the a p p l i c a t i o n of q u a n t i t a t i v e t r a d e c o n t r o l s and t o a p p r o x i m a t e c o n d i t i o n s o f e q u a l i t y I n t h e i r a p plication. To p r e v e n t t h e n u l l i f i c a t i o n o f f a v o r s g r a n t e d t o American e x p o r t s , i t i s u s u a l l y p r o v i d e d t h a t no q u o t a s a r e t o be imposed on s p e c i f i e d i t e m s . 2 2 Writt e n n o t i c e must b e g i v e n o f any q u a n t i t a t i v e r e s t r i c t i o n s i m p o s e d b y one o f t h e p a r t i e s ; i f no s a t i s f a c t o r y a g r e e ment i s r e a c h e d , t h e p a r t y whose e x p o r t s a r e a f f e c t e d may g i v e n o t i c e w i t h i n 15 d a y s and t h e e n t i r e a g r e e m e n t w i l l b e t e r m i n a t e d a f t e r 30 d a y s . 2 3 This a t l e a s t causes c a r e f u l pondering of the advantages of the agreement b e f o r e r e s t r i c t i o n s a r e imposed, a s i d e from the f a c t t h a t some e x c h a n g e o f v i e w s w i l l a l s o t a k e p l a c e . Recognit i o n o f the p o s s i b i l i t i e s of d i s c r i m i n a t i o n i n the t e c h n i q u e and a d m i n i s t r a t i o n o f q u o t a s i s e v i d e n c e d by a s e r i e s o f r e q u i r e m e n t s common t o U n i t e d S t a t e s t r e a t i e s : p u b l i c n o t i c e must b e g i v e n i f q u o t a s a r e i m p o s e d ; i f q u o t a s a r e a l l o c a t e d on t h e b a s i s o f n a t i o n a l c o n t i n g e n t s , t h i s must be s p e c i f i e d and i n f o r m a t i o n must be s u p p l i e d as to the e x t e n t of f u l f i l l m e n t ; p r o t e s t s over the p a r t i c u l a r d e t r i m e n t o f any g i v e n r e s t r i c t i o n w i l l be h e a r d s y m p a t h e t i c a l l y ; and most I m p o r t a n t , q u o t a s must be b a s e d on a p r o p o r t i o n o f t h e t o t a l i m p o r t a t i o n o f any a r t i c l e

Footnote continued e f f e c t i v e American competition. I l l i b e r a l elements have also crept into American commercial p o l i c y side by side with the trade agreements program. Agricultural subsidies and t a r i f f r e c l a s s i f i c a t i o n have obviously run counter to the professed alma of American p o l i c y . But i t i s s t i l l true that the trade agreements of the United States have consistently encompassed the newer methods of quantitative trade control within the unconditional clause. See Kreider, o p . c l t . , pp. 26-28, Chap. 12, and pp. 212-217; PP. 2kk-2k5. When Mr. Kreider says ( p . 244) that "American e f f o r t s to secure modifications of other B r i t i s h trade controls were not so successful," he i s speaking of the content of quotas, e t c . , not t h e i r reasonably non-discriminatory application. See also, Hugh 0. Davis, America's Trade Equality P o l i c y (Washington, 1942) Ch. V I I . 22. Treaty with Nicaragua, A r t i c l e VI (Treaty Information Bull e t i n , No. 7 8 , March 1936); U. S. Department of State, Press Release, March 11, 1936, p. 2. There are, of course, exceptions to t h i s . 23. Treaty with Finland, May 18, 1936, A r t i c l e V I I , UTS 172, P . 97.

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which the other country supplied during a previous period, n 3uch period to be such as to result In a fair and equitable allotment." 24 In some agreements, there is a mutual pledge to "facilitate as much as possible the exhaustion of the allotted contingents." 25 Prance and Great Britain employed quotas as a main device of commercial policy in the 1930's; the trade of these countries Is of obvious Importance to the United States. Together, these factors explain the presence in treaties with both countries of quota provisions not found in other agreements. Article VI of the French agreement 20 provides that unallocated global quotas are to be subject to import licenses which are to be issued on the basis of complete equality of treatment. Article I prohibits France from Imposing higher duties, fees or charges of any kind on the products listed in Schedule III except under the authority of the French legislation In force on the day of the signing of the agreement. The appended protocol deals with administrative procedure: consideration must be given to requests by the United States for the reallocation In the current quota of unused portions of the industrial quotas of the preceding period. If new quantitative restrictions on the importation of an industrial product, the United States is to be allowed a temporary quota based on imports during the previous year pending "conversations between representatives of the interested industries, with the object of reaching an understanding acceptable to the two governments, on the definite basis for calculating the quota to be allotted to the United States." Should no agreement be reached, the "previous representative period" is to be used. In addition, to thl3 standard (required in Article VI as a general provision), there is also a stipulation that in no case are the quotas allotted to be "less than 2k. USA-Brazil, February 2, 1935, Art. II, LHTS 166, p. 211; at least seven other agreements contain the same general formula. "Representative period" is defined as "a: series of years during which trade in a particular article was free fran restrictive measures of a discriminatory character and was not affected by unusual circumstances, such as, for example, a crop failure in the case of an agricultural product." (Preae Release, Weekly Issue, No. 288, April 6, 1935, P. 213). 25. USA-Netherlands, December 20, 1935, Art. X, IJiTS 178, P.239. 26. USA-France, May 6, 1936, IJiTS, 199, P. 259.

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10$ of total importations in those instances in which imports in the last year prior to the impositions of quantitative restrictions were equal to or greater than ten." To the "representative period" formula in Article V of the agreement w i t h Great B r i t a i n , 2 7 is added: "account being taken insofar as practicable in appropriate cases of any special factors which may have affected or may be affecting the trade in that article." The same article provides that in cases where one country is "a relatively large supplier" of any item of trade, the high contracting party imposing the regulation shall consult w i t h the other before the share to be allocated to such territory be determined. This marked a change in the "quota formula" w h i c h was first included in an agreement w i t h G r e e c e 2 8 two days earlier-'-a change w h i c h clearly indicates defects in the previous version. Provisions relating to exchange control and currency problems follow much the same pattern. It is worthwhile to quote In extenso, a typical treaty clause. The tariff advantagee and other benefits provided for in this Agreement are granted by the United States of America and Finland to each other subject to the condition that if the Government of either country shall establish or maintain, directly or indirectly, any form of control of foreign exchange, it shall administer such control so as to insure that the nationals and commerce of the other country will be granted a fair and equitable share in the allotment of exchange. With respect to the exchange made available for commercial transactions, it is agreed that the Government of each country shall be guided in the administration of any form of control of foreign exchange by the principle that, as nearly as may be determined the share of the total available exchange which is allotted to the other country shall not be less than the share employed in a previous representative period, prior to the establishment of commercial obligations to the nationals of such other country. The Government of each country shall give sympathetic consideration to any representations which the other Government may make in respect of the application of the provisions of this Article. 2 0

Sometimes a clause is inserted for the purpose of dealing w i t h wide variations in exchange rates w h i c h may 27. USA-Great Britain, November 17, 1938, LHTS 200, p. 293. 28. USA-Greece, November 15, 1938, Art. 2, LNTS 195, P. 1^5. 29. USA-Finland, May 18, 1936, Art. 10, LHTS 172, p . 97.

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prejudice the trade of one of two contracting parties. The first American agreement which definitely provided full, unconditional most-favored-nation treatment for all exchange operations (rules, formalities and rates) is one of a supplementary nature with Brazil, and this was the beginning of a series of agreements which marked the abandonment of the earlier formula.32 Special clauses also obtain "fair and equitable" treatment for exports of the United States by the agreement that government monopolies of centralized purchasing agencies "will be influenced solely by those considerations . . . such as price, quality, marketability and terms of sale, which would ordinarily be taken into account by a private commercial enterprise interested solely in purchasing such product on the most favorable terms."33 The United States had perhaps been more, systematic and uniform in its attempts to bridge the gap between equality of treatment and neo-mercantlllsm, but the effort has not been confined to that country alone. Great Britain, for example, has recognized the application of the most-favored-nation clause to quantitative controls over imports—even though it has violated this principle in clearing agreements.34 Thus iron and steel quotas were kept on a most-favored-nation basis by allotting to non-cartel countries the full amount they exported to Great Britain in 193^35 In the agreements with the United Sta-tes in 193636 and Germany in 1937,37 France specifically agreed to apply most-favored-natlon treatment to quantitative controls although she had in fact done so in 38

30. Art. XVIII of the agreement with Great Britainj this agreement omits other standard clauses on exchange control. 31. Quoted in Tasca, Reciprocal Trade Agreements Program of the United States, p. 239. 32. USA-Czechoslovakia, March 7, 1938, Art. 10, LNTS 200, p. 87. 33. USA-Canada, November 1 7 , 1 9 3 9 , Art. 8, LNTS 1 9 9 , p. 259; USA-Nicaragua, March 11, 1936, LNTS 173, P. l^l; USA-Great Britain and No. Ireland, November 17, 1938, Art. 8, LNTS 200, p. 293; USAFinland, May 18, 1936, Art. 9 , LNTS 172, p. 97. 3U. Tasca, World Trading Systems (Paris, 1939), p. 152 and footnote 2 9 . 35. Benham, Great Britain Under Protection (New York, 19^1), p. 181+. 36. May 6 , 1 9 3 6 , Art. 6 , and Protocol, LHTS 199, P. 259. This was the first instance of this kind in French treaties. 37. Cited in Halght, A History of French Commercial Policies, p. 176.

2?2

THE MOST-FAVORED-NATION CLAUSE

previous a g r e e m e n t s . 3 8 That other nations have applied the clause to new trade controls is evidenced by the analysis presented iij. Chapter S i x . 3 8 The foregoing lends support to the thesis that the most-favored-nation clause can be broadened to include restrictive measures w h i c h ordinarily result in d i s c r i m i n a t i o n — i n t e n d e d or otherwise. To say, however, that this recent and necessary expansion of the scope of the clause has prevented or w i l l prevent the corrosive effects of quantitative trade controls w o u l d be to mistake appearance for realty. It is still possible for say, Argentina, to pledge a "fair a n d equitable" allotment of exchange to United States exports or a rate of exchange as favorable as that available to other countries, while voluntarily (or in accordance w i t h the Runclman-Roca agreement of 1934) discriminating in favor of British e x p o r t s . 4 0 After all, quotas, exchange controls, monopoly purchase and kindred policies, all tend to undermine and destroy market forces as the central factor in determining the flow of i m p o r t s — a process w h i c h renders impossible true freedom of competition. 4 1 This is simply another w a y of saying that the "representative period" criterion and others like it are essentially static i n nature. One writer has said that the formulae discussed above "are better than n o t h i n g " ; 4 2 but perhaps it is n o t too much to assume that w h e n a certain amount of economic equilibrium is restored, the clause w i l l be 'even more effective in taking the discriminatory edge off these trade restrictions. The experience of the United States from 1935'to 1940 shows that modification in the wording of the expanded most-favored-natlon clause w i l l doubtlessly be necessary. Nevertheless, the restoration and developments of international trade and the rehabilitation of the principle of equality of treatment both hinge on the 38. Haight, op. clt., p . 175. See, for example, France's agreement vith Great Britain; Great Britain, Treaty Series, France, No. 1, (1936), Cmd. 4595. 39. Supra, chapter 6, section E . 40. Benham, op.-clt., pp. 137-138; Tasca, World Trading Systems, pp. 152-153. 41. Diebold, op. clt., p . 34. 42. Ibid.

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elimination of quantitative restrictions and channelized. trade. 43 The apparent trend toward multilateral commercial agreements may render these tasks easier.*4

43. Cordell Hull, U. S. Departanent of State, Prcee Releasee, Weekly Issue, Ho. 347, May 23, 1936, pp. 535-536. Percy W. Bldvell, A Ccnmerclal Policy for the United Nations, (Hew York, 1945).

XII Summary and Conclusion

It Is appropriate at the outset of this concluding chapter to draw together Into a single fabric the elements which comprise the nature of the most-favorednation clause. The discussion of the nature of the clause and the definition set forth in earlier chapters were a necessary prelude to the analysis which followed. But this is not sufficient. The pledge to grant most-favored-natlon treatment appears as a clause or clauses in International commercial agreements. Such agreements vary In the amount of detail and the degree of comprehensiveness. Thus the "covering" clause may be Identically worded in a oneparagraph exchange of notes and in a thirty-one article treaty, yet most-favored-nation treatment will be quite different in both cases. The "covering" clause is only a part of the definition of equality of treatment; the complete clause must be identified by every other provision relating to it in any given agreement. Only then is analysis possible. The "covering" clause will usually state that artloles which are the growth, produce or manufacture of the high contracting parties shall not be required (when exported or Imported) to bear any duties. Internal taxes, fees or exactions other or higher than those payable on like articles coming from, or destined for, any other foreign country. The "covering" clause may be couched In terms of "commerce" or "trade" or just "imports ahd exports." Whatever the wording of the "covering" clause in a complex treaty, it will be followed by two or three additional articles specifying application of the clause to nationals and their activities, business or private, In the territories of the contracting parties, to foreign corporations, or to ships and shipping. Import and export prohibitions and restrictions (sanitary and security measures, not quotas and exchange controls) are also treated in a separate article.

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Early in the agreement, especially If there la no "covering" clause, It may be made clear whether mostfavored-natlon treatment applies to the total trade between the contractants, or only to those Items set forth In appended schedules, or even to a certain type of trade, i.e., agricultural products. Another factor to be looked for is the territorial scope of the clause. Most-favored-natlon treatment may be extended only to goods coming from the territory of the other party or to goods of the other party regardless of their origin. The clause may or may not embrace colonial possessions and protected territories. The treaties of Imperial powers are not uniform in this respect. The general statement of most-favored-natlon treatment does not ordinarily Include customs formalities, warehousing fees, and so on, which are covered, if at all, in a special article. The potentialities of administrative protectionism are so obvious that the presence or absence of this article is an important feature of the scope of the clause. Also among the auxiliary clauses likely to be scattered throughout a treaty are those designed to safeguard the prerogatives of sovereignty, to protect a state against the excessive liberality of the clause, and to prevent circumvention of mostfavored-natlon obligations. Under International law a state would always have the right to preserve its security and to act for the safety, health and welfare of its people regardless of specific mention in a treaty. But other "protective" clauses are matters of policy and they can contribute much to the strength or weakness of the clause. The scope of most-favored-natlon treatment In a trade agreement will be importantly determined by the article listing the exceptions to it. Exceptions pertaining to frontier traffic, customs unions, public health and safety, moral and humanitarian measures are more or less routine and, relatively speaking, do not appreciably reduce the effective scope of the clause. On the contrary, imperial preferences and regional reciprocity in the form of the extension of tariff concessions to "special" nations for geographical or other reasons do not restrict its area of operation. Estonia, for example, excepts In her treaties any favors granted to the Soviet Union, Latvia, and Lithuania; the United States excepts tariff treatment given to her Cuban and Panama Canal Zone trado. Considering the comparative

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magnitude and importance of Estonia's trade with her immediate neighbors, the difference in the scope of the clause as employed by Estonia and the United States will be substantial. Interpretation and clarification of most-favorednation clauses are facilitated by explanatory articles which appear commonly in the final protocol of a treaty. Thus it makes some difference if equality of treatment as applied to railroad rates Is qualified by the proviso that it can only be claimed for the transport of similar goods in the same direction and over the same routes. And the treaty which in its protocol equates most-favorednatlon treatment with "national" treatment has a broader clause than one which does not. Actually, then, "the most-favored-nation clause" is a number of clauses put together in different combinations in different agreements. In this light, the statement made at the beginning of this study to the effect that a new mo3t-favored-natlon clause was established in each new trade accord becomes meaningful. There are other factors, quite apart from the particular document which legally embodies the clause, which will condition its nature, Among these is the tariff system with which the policy of equality is associated. That the unconditional most-favored-nation treatment granted by the United States in 1925 was not the same as it granted in 1938, was due in part to the fact that in the meantime it had shifted from an autonomous tariff to a semi-conventional tariff. Furthermore, the clause will not be as widely effective under a maximum-minimum-intermediate tariff system as under a maximum-minimum system. The most important limitations on the mostfavored-natlon clause center in the recent non-tariff trade controls. It is no exaggeration to state that all •ost-favored-nation obligations operative in 1939 on the outbreak of war were watered down in virtue of the minimizing of market forces in the flow of international trade. The United States is guaranteed unconditional most-favored-nation treatment in all its agreements since 193^> but whether American apples can penetrate the Swedish market when the Swedish government allocates foreign exchange on the basis of "national necessity" will be purely a matter of arbitrary action. Hence, a treaty which nominally applies the clause to quotas, exchange control, monopoly purchases and import licensing

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w i l l differ from one w h i c h does not; the success of the former w i l l depend on the kind of restrictive policy pursued b y other countries. It is clear that occasional quotas by the U n i t e d States or quotas Imposed because of genuine economic distress w i l l be administered somewhat differently than those imposed as the chief weapon In the commercial policy of a state determined to bilateralize Its trade. The International economic environment will, therefore, Influence the practice of granting equality of treatment irrespective of the scope of a particular clause In an agreement. The history of the clause from 1920 to 19^0 demonstrates that the adaptation to new conditons w i l l bring new wordings of the clause, but the substance of everyday economic relationships upon which any treaty rests w i l l always be significant. Another set of factors relate to national policy. The clause is one aspect of commercial policy w h i c h in turn is one aspect of foreign policy. National interests are usually attained only at a price, a price w h i c h may be reckoned in terms of its effect on a country's freedom of action. Treating all countries uniformly, w i t h consequent reduction in freedom of action, Is the price for a reasonably competitive international market. A nation's economic foreign policy is, however, seldom the result of clear-cut interest; pressure groups and diverse official opinions struggle for supremacy and policy will, accordingly, vacillate. The shifts a n d turnbacks in the commercial policies of Great Britain and France from 1870 to 19^0 substantiate this statement. In both cases, the most-favored-nation clause has at one time or another represented too great a restraint on freedom of action and the result has been a compromise w i t h principle. Clearly the most-favored-natlon clause is not like the law of nature: everywhere and always the same. W h a t it is--lts effectiveness, scope, and d e f i n i t i o n — will depend on how it is expressed in a trade agreement, on the prevailing international economic situation, on the tariff system of the nation employing the clause, and on the internal forces shaping the commercial policy. No one of these factors can be ignored in an analysis of the clause. Strictly speaking, it is inaccurate to speak of the most-favored-nation clause in the absolute. Apart from the realities mentioned, the clause Itself has no

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THE MOST-FAVORED-NATION CLAUSE

reality. The statement la often made that two nations grant each other most-favored-nation treatment. But this Is only a general statement; the important thing la how that treatment actually works out within the broad framework of the economic relations between the two countries. These possibilities may range all the way from blanket equality for all economic intercourse between them to special treatment of a limited number of products of trade. The bearing of this consideration upon an evaluation of the clause is obvious. No worthwhile measure of the relative efficiency can be forthcoming unless the scope of the clause and the conditions to which it Is to apply are known. Fortunately, the differences between the most-favored-natlon clauses of most treaties are not as great as Is theoretically possible. The most-favored-natlon clause has no Isolated existence; it has been a dynamic instrument of policy and in actual operation has been ever-changing In response to economic and political conditions. Six distinct periods or stages of development have characterized the growth of the clause from a sporadically used and limited treaty provision to a foundation of modern commercial policy. When the clause first appeared In treaties of commerce, it was used to guarantee equality of treatment for the rival trading cities of the Mediterranean In their commercial relations with the Arab princes of nothern Africa in the twelfth and thirteenth centuries.1 At the time the clause was unilateral in form. But as world trade expanded rapidly in the fifteenth and sixteenth centuries, economic relations became more complex. Commercial treaties became more necessary and frequent. No nation could afford to fall Into a position of disadvantage in the growing markets of its neighbors. The most-favored-natlon clause was employed more extensively to avoid a useless repetition of agreements. At first the reciprocal favors between contracting parties were limited to concessions granted to a specified nation or two, and consisted only of those existing at the time of the accord.2 Since nations could hardly risk the incurrence of future discrimination, the scope of most-favored-natlon treatment was later 1. Suzanne Baedevant, La Clause de la nation la plue favorisée (Paris, 1929), P. 8. 2. Ito, op. cit., p. 80.

SUMMARY AND CONCLUSIONS

239

broadened to include concessions granted after the signing of a given treaty.3 The custom of restricting the generalization of those favors accorded only to specified nations gave way to the inclusion of such favors granted to "any foreign nation vhatsoever. In the eighteenth century the modern form of the clause evolved; the phrase "most favored foreign nation" appeared for the first time, thus marking the second period in Its history. Throughout these initial periods of development, the "unconditional" wording was used. The third stage began with the "conditional" most-favorednatlon treaty between France and the United States in February, 1778.5 And this form dominated from 1825 to i860, even though the Influence of the 30-called American interpretation was felt before that time.0 This policy was virtually abandoned in the fourth stage of development which was introduced by the Cobden Treaty of i860. A wave of .liberal economic sentiment carried the unconditional clause to the height of its effectiveness. Until the First World War the clause remained the almost universal basis of a vast system of commercial treaties. In the fifth period, after the destruction of the pre-191^ economy by four years of war, the most-favorednation clause never regained its former position as the foundation of commercial treaty policy. Opposition to the clause had gained ground during the hostilities, and there was pronounced opposition to the incorporation of a most-favored-natlon clause In the fundamental law of the League. Commercial treaties were slow in Reappearing. France, which had denounced her most-favored-natlon agreements in 1918, successfully undermined any attempts 3. M. L. E. Visser,

La Clause de la nation la plue favorisée

dans le traite's de commerce," Bevue de Droit International, 2nd Series, IV, (1902), 70. Treaty between Great Britain and Denmark, February 13, l6i>0, Sir Edward Hertslet, Treaties (London, 1827), vol. 1, p. 181. 5. The Methuen Treaty before the time (1703; was "conditional," but not in the modern sense; however, see Edgard Allix, Lea Droits de Douane, (Paris, 1932), I, 6. Although the conditional clause was inserted in the Treaty of 1778 at French rather than American Insistence, it was peculiarly suited to the political and economic circumstances of the younger nation.

Vernon Setzer, "Did Americans Originate the Conditional Most

Favored Nation Clause?", Journal of Modern History, V (Sept. 1933), 319-323.

2^0

THE M O S T - F A V O R E D - N A T I O N

CLAUSE

to re-establish the pre-war status of the clause.7 In general, the existence of war-time trade restrictions, widespread reciprocity in trade policies, and pre-occupation with economic reconstruction all combined to prevent the resumption of most-favored-nation treatment in the immediate post-war period. With substantial recovery after 1925> however, the negotiation of most-favorednatlon treaties was resumed, although the scope of the clause was by no means as broad as it had been before 191^, and commercial treaties were usually concluded for short periods of time.8 It seemed temporarily as if the clause might recover its former position in 1927. The World Economic Conference stressed the necessity of a series of longterm treaties embodying the principle of equality of treatment. To this end It recommended that "it is highly desirable that the widest and most unconditional Interpretation should be given to the most-favored-natlon clause,"9 fhe year 1927 was "the year of commercial treaties," largely because of the impetus provided by the League conference. Prance broke with reciprocity and concluded an all-important most-favored-natlon agreement with Germany. Similar bilateral accords between other nations brought about numerous and substantial reductions in tariffs. The United States had already reversed Its policy in 1923. The unconditional clause seemed firmly intrenched again. But by 1929 it had begun to break down because of the existence of fundamentally different tariff systems, conflicting opinions as to its scope, the onslaught of the world economic and financial crisis and the resurgence of economic nationalism. The sixth stage of development, 1950 to 1959, has witnessed a general decline in the use of the clause and its eclipse by other instruments of commercial policy. The foregoing historical review Is overrlgld for the sake of clarity and brevity. Within these stages there have been decided shifts in the emphasis of 7. France vigorously opposed most favored treatment at the Genoa Conference of 1922. Despite this and other opposition, however, the Conference's final resolutions did not reject the clause. Cf. Arnold Toyribee, Survey of International Affairs, 1922 (London, 1923), p. 75. 8. Eugen Grossman, Methods of Economic Rapprochement, League of Nations, II Economic and Financial, 1 9 2 6 , II 6 9 , p. 8 . 9 . League of Nations, World Economic Conference, Final Report, II Economic, and Financial, 1927, Ho. b6, p. 3k.

SUMMARY AND CONCLUSIONS

241

commercial policy which have Influenced the effectiveness and extent of granting equality of treatment. For example, In the fourth stage, 1860-1911*, there were three subdivisions of Importance. The years i860 to 1870 were really the zenith, but from 1870, culminating In the. German and French protective tariffs of 1879 and 1892, respectively, the growth of protectionism undoubtedly modified the general use of the clause by limiting its scope. The refinement of tariff classifications which preceded a period of bargaining shortly after 1900 had much the same effect. Similarly, the decade after World War I was roughly divided into two parts. Before 1925, commercial policy was dominated by reciprocity and in the absence of treaties discontinued by the hostilities, the clause was more or less held in abeyance. After 1925, however, with partial recovery and stabilization achieved, the clause again becomes a common feature of new commercial treaties. In the sixth stage, a noticeable revival of complex trade agreements based on the unconditional clause took place despite the fact that the general tenor of the period was as described above. With respect to both 3cope and effectiveness, the most-favored-natlon clause has also passed through longer time periods of change, that Is, through different cycles. The clause, because it inter-relates the economic policies of nations, fares best when there Is general monetary and economic stability and the absence of quantitative restrictions on International trade. When the world economy suffers far-reaching dislocation, or when individual nations experience economic or financial difficulties, the clause Is usually abandoned or modified, sometimes directly as a result of a change in commercial policy, sometimes Indirectly as a result of changes remote from foreign trade policy. Hence, if a graph were drawn of the history of the most-favorednation clause, its presence in treaties and the nature of limitations upon it, dips in the graphic curve would have to be indicated after the Napoleonic wa^s, during the depression of 1873, after W.orld War I and for 19J0 to 1956, the most extensive drop of all. With few exceptions these downward movements (reflecting modification of the clause or a decline in Its use) correspond to periods of declining world trade. This is an important point. Under conditions of expanding international trade, the most-favored-natlon clause becomes more

242

THE MOST-FAVORED-NATION CLAUSE

prevalent In commercial treaties and more effective because it is the only instrument w h i c h can guarantee nations equality of treatment in their trade relations at a time w h e n freedom from discrimination is most necessary. Prior to W o r l d W a r I economic conditions were especially favorable to the growth of international trade: the minimal nature of quantitative restrictions on trade, the unhampered convertibility of currencies in the international market, and general economic stability embracing a truly worldwide trading area, all provided a situation in which international trade required equality of treatment. The depression of 1921-1924 w i t h its collapse of currencies a n d contracting w o r l d trade necessitated the adoption of restrictive measures as a result of which the clause either ceased to operate or could not operate successfully. Then during the years of recovery, 19251929, the clause reappeared in commercial treaties designed to facilitate increasing w o r l d trade. W h a t happened after 1929 has already b e e n discussed; international trade declined, differential tariffs arose, and measures of national self-sufficiency were taken w h i c h destroyed the conditions upon w h i c h a n efficient operation of most-favored-natlon treatment is premised. Clearly, equality of treatment as element of commercial policy is profoundly affected by the course of world trade, negatively or positively as the case may be. Another conclusion warranted by the present study is that the type of most-favored-natlon treatment has varied w i t h some nations, and remained practically constant with others. The reason for this will be understood with a statement of a proposition which has been implied throughout, namely, that the most-favored-natlon policy adopted by any n a t i o n w i l l depend upon the characteristics of its economy and the type of trade policy deemed necessary to protect and foster the development of that economy. Great Britain's application of the most-favored-natlon clause in her commercial treaties has been virtually uniform. H e r dominant position in a growing industrial civilization made a continuous adherence to the unconditional clause logical and satisfactory. After her abandonment of customs duties any other form of the clause such as the conditional would have been unfeasible. France, on the other hand, has undergone several changes in h e r most-favored-natlon policy. Prior to i860, France leaned more to the conditional than to the unconditional clause. After a brief

SUMMARY A N D CONCHJSIONS

243

p e r i o d of unrestricted most-favored-natlon treatment, the pressure of Internal interests, primarily agricultural, led to a drastic m o d i f i c a t i o n of France's policy, culminating in the maximum-minimum tariff of 1 8 9 2 . The primary purpose of this change was to avoid the effects of the unrestricted most-favored-natlon clause w h i c h was thought to place her at a disadvantage by limiting her freedom of action. A g a i n in 1918, France abandoned the unconditional clause and embarked upon a policy of reciprocity. This was abandoned In 1927 in favor of the old system of unconditional most-favored-natlon treaties. The same kind of shift wa3 effected in 1936 after several years 1 experience w i t h b a r g a i n l n quotas. Germany's policy of granting equal treatment to all foreign countries has, like Great Britain's, been characterized (unil 1932) b y the unlimited form except for the five-year period after the Versailles Treaty w h e n she was restricted in her tariff policy by the "economic clauses of that treaty. On the contrary, the United States has altered its most-favored-natlon policy three times, the last change affecting the practice rather than the theory. A s stated previously, the conditional clause underlay A m e r i c a n commercial policy from 1778 to 1923 w h e n the unconditional clause was finally adopted. It may be said that the conditional clause served the purposes of the U n i t e d States 30 long as it was a n e t importer and its primary aim was to protect a growing industrial system. W h e n the position of the United States in the w o r l d economy radically changed after the War, the conditional clause was Inadequate. The essential condition for a successful penetration of international markets, that is, the elimination of discrimination against A m e r i c a n products could only be achieved through the unconditional clause. Moreover, the unconditional clause unaccompanied by tariff bargaining achieved but little success, a n d i n 193^ the United States gave reality to its unconditional most-favorednation policy through a program of reciprocal bargaining. Nowhere In the history of the clause is there a clearer example of the modification of its use to conform to changing conditions than in the course of American practice. U n t i l 1923, there was evidently a n American theory and practice, and a European theory and practice of granting most-favored-natlon treatment. The American theory was that concessions should not be generalized

244

THE MOST-FAVORED-NATION CLAUSE

except upon the payment of equivalent concessions. In practice, however, the United States negotiated several unconditional treaties, and in many cases did not specifically Include the conditional wording of the clause in treaties afterwards interpreted as conditional. European nations have always maintained in theory that all tariff concessions should be Immediately and unconditionally granted to nations so entitled. But these same nations have negotiated conditional agreements, more notably with the United States and South America throughout the nineteenth century. It is interesting to note that at one time or another European nations and the United States have pursued the same policy with regard to equality of treatment but never at one and the same time. While the unconditional clause was predominant In the tariff policies of Europe, America adhered to the conditional clause. As the United States abandoned the conditional interpretation of 1923, Europe was In the throes of a period of reciprocity. In 1934, when the United States came over to the nineteenth century European system of most-favorednation bargaining treaties, other nations were drifting away from the unrestricted clause and were negotiating on a strictly bilateral basis. Despite all the changes In tariff policy and treaty forms, the most-favored-nation clause has been a fundamental factor in commercial policy for over 200 years. It is this fact which testifies to the necessity of equality of treatment. The need has been ostensibly greater at some times than at others, but the clause has never been completely abandoned, even In the 1930' s. It is difficult indeed to measure definitely the success of most-favored-nation treatment; it must have fulfilled its purpose satisfactorily in some degree or nations would not have retained it. Nevertheless, throughout the history of the clause It will be noticed that "preferences," "reciprocity," and the conditional form of most-favorednation treatment have been substituted occasionally for the unlimited clause. And it will be also noted that these devices have led frequently to special negotiations, constant bargaining, and actual inequality of treatment. The most-favored-nation clause has succeeded or failed depending in large measure on the trend of commercial policies. If these policies aim at the exploitation of economic advantages, the most-favored-nation clause represents a concession to inevitable international

SUMMARY A N D CONCLUSIONS

245

interest through its broadest interpretation. But, w h e n those policies have for their purpose the consolidation of economic advantages, equality of treatment must give way to the frantic zeal for autonomy in international economic relations. Another important consideration emerges, one w h i c h strikes deep into the whole set of problems raised by the presence of the most-favored-nation clause in commercial treaties. All controversies surrounding the clause arise from what might be termed its dual character. For political and economic reasons, states cannot countenance less favorable treatment of their exports than their competitors receive in a given foreign market; and, 3tates granting most-favored-natlon treatment expose their own industries to competition, the nature of w h i c h it is not always impossible to foretell. Accordingly, there is a conflict inherent in the efforts of each nation to obtain the benefits of the clause from other nations while at the same time endeavoring to mitigate the working of the clause in its own territory. This conflict is usually resolved by compromise, that is, a compromise between complete equality and a certain amount of discrimination. Extensive granting of most-favored-nation treatment results inevitably in a definite loss of autonomy and certain nations have restricted their most-favorednatlon policy for precisely this reason. This, then, is a substantial part of the price which must be paid for equality of treatment. The attempt to prevent this loss of autonomy from doing harm to the internal economic system accounts for numerous restrictions placed upon the clause. In one treaty the clause may only apply to a specified list of imports, or, to put it the other w a y around, certain imports may be excepted from equality of treatment. In another treaty special exceptions to the clause may be enumerated in order to protect vital economic interests. Or there may be indirect attempts to differentiate between nations without actually violating the obligations of the clause. Nations will minimize their duties under the clause as far as possible without drawing complaints or reprisals from other nations. The above remarks are borne out by the course of most-favored-natlon treatment since 1950. The clause has been progressively restricted because the desire to protect national economies has overshadowed the desire for equality of treatment. Driven by the pressure of economic distress, nations have recovered their freedom of action

246

THE M03T-FAV0RED-NATI0N CLAUSE

by providing that most-favored-nation treaties can be denounced on a few days' notice, by restricting the scope of the clause, by deconsolidatlng tariff duties, and by abandoning their positions as component parts of a unified world market. Can this be interpreted as anything but the recognition that the price of equality of treatment 13 too great, that the ability of a nation to take any economic measure internally or externally is worth more than the guarantee against discrimination? The quest for special economic advantage through preferences and bilateral reciprocity inevitably subjects the clause to fatal limitations for the simple reason that its normal operation thwarts these objectives. Those nations which still adhere to the most-favored-natlon clause do so within a framework of strict reciprocity because the risk of conceding tariff reductions to all nations is too great when weighed against the advantages of sharing the reductions made by other countries. The general effectiveness of most-favored-nation treatment Is basically determined by the extent to which each nation experiences the need for equality of treatment. The clause has no more force than the commercial policies pursued in conjunction with it afford. To characterize the metapiorphosis of the clause since the advent of the depression as a breakdown of the principle it represents is misleading. The clause Itself cannot have any inherent defects (lest it be in vagueness of wording) but the system of which It is only an integral part can and has broken down. Mostfavored-natlon policies have been made the scapegoat for what is really criticism of, and dissatisfaction with, the workings or failures of an economic system. The clause has been the target for a concerted attack because it entails obligations which nations cannot or will not assume. There is, however, no fundamental objection to the clause. Denunciations which have appeared superficially to be directed against the principle are found upon closer examination to be directed against certain operations of the clause which result in injustices in some cases. In large part these "Injustices" are apparent rather than real, at least in the long run. Where injustices have been real, such as the operation of the clause between different tariff systems, defects in underlying conditions have been mistaken for defects In the clause. As an instrument for the organization of international trade, the most-favored-nation clause can be no more effective than nations choose to make it, and much

SUMMARY A N D CONCLUSIONS

247

of the failure along this line has occurred because of the lack of unified opinion upon all aspects of the problem. The W o r l d Economic Conference In 1927 was the first International attempt to consider the clause In relation to world commercial policies. Unfortunately, as w e have 3een, the results were soon disappointing; the recommendations were broad and undefined in addition to hiding what later turned out to be inconsistencies. Ever since this time the Economic Committee of the League has b e e n thoroughly studying the technical aspects of the clause. Furthermore, the International Chamber of Commerce and other similar groups have given considerable attention to gathering suggestions for modification and codification of the principle of equality of treatment. These efforts have failed to yield any constructive progress; however, they have served to clarify the ills, or the conditions behind the ills, of the most-favored-natlon clause. Today, of course, political and economic tensions preclude any reform, and It Is widely suggested that the clause has slipped permanently into the realm of theoretical and academic discussion. What is needed, however, is a more sincere and universal application of the clause w i t h an earnest desire to achieve what the clause is designed to achieve. Because a rule or principle of recognized value is evaded is an argument, not for its abandonment, but for Its more rigid enforcement. One other conclusion remains to be treated briefly. For reasons peculiar to Its very nature, it is extremely difficult to separate the clause from the sum total of International economic relations. This fact makes it almost Impossible to evaluate the clause. In the last chapter the relation of the clause to recent trends- in commercial policy, such as regional preferences, quotas, exchange controls, and clearing agreements was discussed. It was stated that these practices constituted discrimination against foreign nations, that they nullified the effect of most-favored-nation treaties. No definite charges of violation of the clause could be made without a detailed examination of every commercial treaty and without carefully tracing the specific effects of these measures on treaty obligations. The most that can be done, therefore, is to set the broad results of these new policies over against the broad results of a general commercial treaty regime embodying most-favorednation treatment. Certain deductions can be drawn--wlth

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THE MOST-FAVORED-NATION

CLAUSE

caution. Since equality of treatment is not a principle of International law to w h i c h a l l nations subscribe In the same fashion, the issue is less likely to be one of the wholesale flouting of legal obligations, more likely to be one of desirable versus undesirable conditions. Throughout this study there has bean a tacit assumption that International trade is necessary for the economic welfare of the world, a n d that this trade is most beneficial w h e n moving between a l l nations on a triangular basis. Such trade cannot be based on the creation of special economic advantage between two individual nations. If these premises are not accepted, a n y further discussion of the most-favored-natlon clause is irrelevant. Equality of the conditions of trade is necessary for sound international trade, and because recent trade practices make this Impossible, they are Incompatible w i t h the mostfavored-natlon clause. Again, the problem is not «in absolute one; It is simply a matter of one set of conditions balanced against another, neither one of which exists in a pure state. Thus, the most-favored-natlon clause is outworn as an Instrument of trade policy only If it I3 judged essential that Its application be unlimited. But such a view is unrealistic: it fails to take account of the transformations that the most-favored-natlon principle has undergone in the course of the change in international economic relations. U n l i m i t e d employment of the principle or its absolute renunclatlon--the one is as uncalled for as the other. The International market system is only compatible w i t h economic nationalism in so far as each accommodates Itself to the nature of the other. The most-favored-natlon clause Is the method by w h i c h that accommodation is achieved. W h e n the pull is positive In one direction the clause grows in Importance; w h e n the pull is the other way, the clause is restricted accordingly. It is not right versus wrong, but the choice between two alternatives, and w h i c h prevails Is, after all, dictated by the w i l l of nations whatever may be the factors shaping that will. The clause 13 n o t an end in itself: it Is a means to a n end, and must be judged on the basis of its success in performing this function. Finally, a more definite statement as to the status of the clause at the present time and a n Indication as to possible future developments Is in order. In the first place, It must be repeated that the difference between the status of the clause at the present time a n d

SUMMARY A N D CONCLUSIONS

2^9

its status, say, fifty years ago, Is n o t that between complete Inequality and complete equality in economic relations. Equality of treatment is a matter of degree a t best. E v e n were the clause carried out to its logical conclusion, some discrimination w o u l d undoubtedly exist. B u t It is only w h e n tariffs are the sole, or by all odds the most Important, trade barrier that a relatively high degree of equality is possible. That degree is low today because the area w i t h i n w h i c h the clause operates is nowhere near proprotionate to the trading area of the w o r l d in virtue of the new methods of trade control. Notwithstanding this fact, the most-favored-nation clause Is still very much a reality. Tariffs have not been completely replaced by neo-mercantlllst devices, only supplemented by them. In many respects, equality of treatment is more important than ever before because tariffs are higher, free lists are more limited, a n d higher duties generally involve a greater spread between maximum and minimum rates or between general and conventional rates. A major part of the world's trade is carried o n at the lowest tariff rates. In some cases equality of treatment is applied to total imports, in many cases it is applied to a part of the total. Most countries w i t h double tariffs have obligated themselves to give their lowest rates on all commodites to countries supplying the larger part of their Imports. Thus in 1933, ^2 countries dealing w i t h 72$ of the total imports of the world applied slch r a t e s . 1 0 Mo3t-favored-nation treaties Hence, still cover a great section of the w o r l d economy. subject to the qualifications described in Chapter V, the most-favored-nation clause continues to regulate much of the trade between nations. As regards the future of most-favored-natlon treatment, three alternative developments seem possible. First, it may n o t survive the recent onslaught of economic and political changes, in which case it w i l l be almost completely discarded in favor of the principle of bilateral bargaining. W i t h the war now over, commercial treaties containing the clause w i l l be revived slowly, and the rehabilitation period w i l l doubtlessly see much trade regulated in a manner antithetical to equality of treatment. Second, If quotas, exchange controls, and the like have become permanent features of commercial policy, an attempt may be made to apply the clause to them in an 10. Extent of Equal Tariff Treatment In Foreign Countries, p. 12. This figure has obviously shrunk somewhat since 1933.

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THE MOST-FAVORED-NATION CLAUSE

effort to achieve as much equality as possible under their operation. The United States is now pursuing this course, the success of which remains as yet unknown.11 Two fundamentally different economic philosophies cutting across each other In International trade make the chances of reconciling most-favored-natlon treatment with mercantilist policies exceedingly slim. Swedeh, for instance, finds it very difficult to reconcile her most-favorednation relations with the United States and her special trade arrangements with Great Britain. Finally, there Is a remote possibility that the world economy will return to normal, that Is, to pre-war trade practices, that trade will be unhampered by quantitative restrictions, and that political conditions will be stabilized enough so that some measure of good will among nations returns. In this event, the clause will be restored to its former position as the basis of commercial policy. Even so, it will be a greatly modified clause if opposition to its present nature Is any criterion. It may well be that state Intervention in economic life will continue to Increase and that the interests of private traders will never be paramount again. If so, the Influence upon the future of the clause will be great, for the interests of the state do not necessarily correspond to those of private groups. The issue seems simply drawn: has the organization of world commerce been so drastically altered that equality of treatment is no longer a primary requisite for sound International economic intercourse? Much of the secret to the future of the most-favored-nation clause lies in the answer to this question.

1 1 . See T a e c a , R e c i p r o c a l Trade P o l i c y of t h e U n i t e d S t a t e s .

Selected Bibliography Alllx, Edgard, Le3 Droits de douane, (Parla, 1932) "La Clause de la nation la plus favorisée," Revue d'Economie Politique et Parlementaire, March, April, 1933. A m e r i c a n Tariff League, "Tariff Bargaining and MostFavored-Nation Treatment," Monthly Bulletin, May, 1934. Amery, L.C.M., "La Clause de la nation la plus favorisée," Revue Economique Internationale, November, 1935. "The Most-Favored-Nation Clause," Address delivered at the 20th Plenary Meeting of the Inter-Parliamentary Commercial Committee, h e l d in London, October 1-5, 1935. Ashley, Percy, Modern Tariff History, (3rd Edition, London, 1920). Ashley, Sir William, The Tariff Problem. (London, I9II). Aubry, D., "Le Traitement de la nation la plus favorisée," La Réforme Economique, V o l . 2, February 9, 1902. Auld, George P., Rebuilding Trade by Tariff Bargaining, National Foreign Trade Council, Inc. and the National Foreign Trade Association, New York, 1936. Bailey, S. H . , "Reciprocity a n d the Most-Favored-Nation Clause," Economics, Vol. 42, November, 1933. Barclay, Sir Thomas, "The Effect of the Most-FnvoredNatlon Clause in Treaties,"*Yale Lav Journal, Vol. 17, November, I907. Bäsch, Antonín, The Danube Basin and the German Economic Sphere, (New York, 19^3). Basdevant, J., Traités et conventions en vlgeur entre la France et les puissances e'trangéres, (Ministère des Affaires Etrangères, Paris, 1918). Basdevant, Suzanne, la Clause de la nation la plus favorisée, (Paris, 1929). Bauer, G. F., "Which is the Better Policy? Most Favored Nations I n Reciprocal Trade or Exact Balanced Trade Between Two Countries," A m e r i c a n Import and Export Bulletin, May 1935Benês, Dr. Eduard, The Austro-German Customs Union Project, Czechoslovak Sources and Documents, No. 6, Orbis, Prague, 1931. Benham, Frederic, Great B r i t a i n Under Protection (New York, 1941).

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T H E MOST-FAVORED-NATION CLAUSE

Berglund, Abraham, "The R e c i p r o c a l Trade Agreements A c t of 1934," A m e r i c a n Economic Review, V o l . 25, September, 1935. Beverldge, Sir William, Tariffs: The Case Examined, London, 1932. Bldvell, Percy, "The Yankee Trader in 1936," Yale Review, Vol. 23, June, 1936. A Commercial Policy for the United Nations (Carnegie Endowment for Int. Peace 19^5) Tariff Policy of the United States, (New York, 1933). The Invisible Tariff, (New York, 1939). "Tariff Reform: The Case for Bargaining," American Economic Review, Supplement, March, 1933. Bonn, Morltz, "The A u s t r o - G e r m a n Customs Union," International Affairs, July, 1931. Borchard, Edwin, "Neutral Embargoes and Commercial Treaties," A m e r i c a n Journal of International Law, July, 1936. Bres3ler, H. J., "Trade Barriers and the League of Nations," Foreign Policy Reports, Vol. 7, August 5> 1939. British Association of Chambers of Commerce, Report of Committee on the Most-Favored-Nation Clause in Treaties and Trade Agreements. (London, 193*0. Buday, K a i m a n de, "Stresa and After," Nineteenth Century and After, November, 1932. Buell, Raymond L., A New Commercial Policy for the United States, Foreign Policy Association, Pamphlet No. 84, Series 1932-33, December, 1932. Bansen, G. V . , Free Trade a n d the European Treaties of Commerce, Cobden Club Publications, 1875. Calvo, Droit International Théorlque et Practique (4th ed.) V o l . III (Paris, 1896). Catudal, Honore', "The Most-Favored-Nation Clause and the Courts," A m e r i c a n J o u r n a l of International Law, Vol. 35, 19^1, pp. 41-45. Chalmers, H e n r y , "How the Most-Favored-Nation Clause has Helped Our Exports," Exporters Digest, November 20, 1936. "Current Trends In F o r e i g n Commercial Policy," Annals of the A m e r i c a n Academy of Political a n d Social Science, July, 1930. "Depression and Foreign Trade Barriers," Annals of the A m e r i c a n Academy of Political and Social Science. July, 1934. "Foreign .Tariffs and Trade Control Movements, 19301931," Commerce Reports, A p r i l 20, 1931.

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