Different Scope of Application

The MFN clause became a central pillar of international trade relations since 1860 and was constantly included in treaties of friendship, commerce and navigation. The main ob-jective of these treaties was to reduce the relatively high tariff rates that were applied to trade in goods.⁹¹ Since the typical duration of these treaties was only about ten years, con-stant negotiations were necessary to agree on new tariff levels. The negotiations all took place on a bilateral level, and there was therefore always the risk that an agreement would be devaluated by lower tariff levels negotiated with third countries. Therefore countries entered into an agreement only on condition of including a most-favoured-nation clause in

89 Feketekuty, Assessing and Improving the Architecture of GATS, in Sauvé/ Stern, GATS 2000, p.

88. 90 For an overview see Kurtz, The MFN Standard and Foreign Investment, pp. 866-872; Kurtz, The Delicate Extension of MFN Treatment to Foreign Investors, in: Weiler (ed.) International Investment Law and Arbitration, pp. 529-536.

91 Hudec, Tiger Tiger, pp. 306-307.

the treaty which ensured that subsequent concessions granted to third countries would equally be extended to them.⁹² The MFN clause thus had a substantial importance in tariff bargaining.

The GATT is also principally concerned with the treatment of goods at the border,⁹³ which means that the most-favoured-nation obligation in the GATT essentially concerns tariffs and quantitative restrictions, although it reaches beyond border measures to the fields of taxation and regulation through its cross-reference to Article III. As regards tar-iffs, the core meaning of the principle is that the same tariff rate must be charged for a given product regardless of the country of origin. With respect to quantitative restrictions, the most-favoured-nation clause basically requires that in case a quantitative restriction is imposed on imports of a given product, some similar quantitative restriction must also be imposed on imports of that product originating from all other countries.⁹⁴

Unlike in trade in goods, where products are produced in jurisdictions different from the Respondent state, in the case of foreign investment production facilities operate within the jurisdiction of the Respondent host country. The activities of foreign investors in their host countries encompass a wide array of operations involved in the creation and admin-istration of a business enterprise, including local production and distribution, international trade in products and components, the use of know-how and technology, raising of capi-tal, employment, the request of permits, import and export licenses and the necessary en-try and stay visas for foreign personnel. The foreign investor is thus deeply involved in the host country’s economy. His activity in the host state directly affects the environment and other social rights such as human rights, labour standards and development policies in that state. With not only the product, but also the producer crossing the border, the host country may on the one hand benefit from economic growth, employment, or transfer of technology and knowledge, but on the other may also suffer serious environmental harm or labour exploitation.⁹⁵ Due to the intrusive nature of foreign investment, which takes

92 Kurtz, The MFN Standard and Foreign Investment, p. 863.

93 Ruggiero, Foreign Direct Investment and the Multilateral Trading System, p. 2.

94 See Article XIII GATT. For details as regards discriminatory quantitative restrictions, see Hudec, Tiger tiger, pp. 292-297.

95 One example is the chemical disaster in Bhopal in 1984.

25 place within the host state, investors are subject to the full range of regulatory measures a host state may take, not only those specifically aimed at the regulation of trade or invest-ment. While the non-discrimination provisions in trade law are limited to the treatment of products or services, non-discrimination obligations in BITs apply to the entire range of laws, rules and regulations that may affect any aspect of an investor’s business. Investors are thus potentially affected by a much broader array of national regulation than goods, such as for example building laws, urban planning law, environmental law, commercial and corporation law, capital market law and intellectual property rights.⁹⁶ Since foreign investment is subject to more regulation, differential treatment can take place in very dif-ferent fields. The most-favoured-nation clause thus has a potentially greater impact in in-vestment law than in trade law to infringe on the regulatory autonomy of host states.

The difficulties concerning the impact of the obligation to accord most-favoured-nation treatment on a broad range of regulatory measures can be seen from the experience with the GATS. While the GATT has meanwhile also become relevant for some sensitive do-mestic policy issues such as subsidies or technical standards, the GATS must necessarily be applied to internal policy issues that are inherent in the commercial presence of foreign service providers. Since a large share of trade in services takes place inside national econ-omies, services are much more regulation-intensive than goods.⁹⁷ The requirements of GATS will thus from the beginning necessarily influence national domestic laws and reg-ulations.⁹⁸ Due to the potentially broad reach of the most-favoured-nation standard, the WTO Members were not inclined to accord unconditional most-favoured-nation treatment in the services sector.⁹⁹ Instead they included Article II:2 in the GATS, providing that members may maintain measures inconsistent with the most-favoured-nation principle as

96 Krajewski/ Ceyssens, Internationaler Investitionsschutz und innerstaatliche Regulierung, p. 187.

Judge Oda stated in his separate opinion in the ELSI case: “It is a great privilege to be able to engage in business in a country other than one’s own. By being permitted to undertake commercial or manufacturing activities or transactions through businesses incorporated in another country, nationals of a foreign country will obtain further benefits. Yet these local companies, as legal entities of that country, are subject to local laws and regulations; so that foreigners may have to accept a number of restrictions in return for the ad-vantages of doing business through such local companies.” (ELSI case, Judgment of 20 July 1989, ICJ re-ports 1989, p. 79)

97 Hoekman/ Messerlin, Liberalizing Trade in Services, in: Sauvé/ Stern, GATS 2000, p. 493.

98 WTO, Guide to the Uruguay Round Agreements, p. 161.

99 Kurtz, The MFN Standard and Foreign Investment, p. 872.

long as these measures are listed in the Annex on Article II exemptions. Moreover, the preamble of the GATS explicitly recognizes the need of WTO members, and particularly of developing countries, to regulate the supply of services to meet national policy objec-tives.¹⁰⁰