Most-Favored-Nation Principle - Mfn treatment in practice, 1974–2000: unconditional mfn under siege but preserved



The GATT relied on discrimination and retaliation to enforce an open, multilateral trade regime. The coexistence of unconditional MFN treatment and reciprocity in the GATT gave rise to tensions among members, because disparities in liberalization among participants widened over time. Under unconditional MFN treatment, countries that lagged in opening their markets enjoyed the benefits of a free ride on the system. When the United States experienced economic downturn during the 1970s and 1980s, domestic interest groups called for redress from participants who seemed to be unfairly "gaming" the GATT. The United States seemed to be suffering within a system in which its trade negotiators ceded more to their counterparts from increasingly competitive trading partners—Japan in particular—than they received. In response, Congress resumed the activist trade-policy role from which it had retreated in 1934. Members of Congress introduced a plethora of retaliatory bills that had the potential of compromising America's commitment to unconditional MFN treatment within the GATT framework. In most instances, the actions threatened by these socalled fair, or strategic, trade measures constituted interest group efforts to push policy in a nationalistic direction. But the administrations of Presidents Gerald Ford, Jimmy Carter, Ronald Reagan, George H. W. Bush, and Bill Clinton handled them in (often illiberal) ways that kept the United States committed to the GATT.

Transparency in trade relations constituted a key principle of the GATT. Trade barriers were to be converted into tariffs, which then were to be lowered through negotiation. This approach reached its point of diminishing returns with the Kennedy Round. Nontariff barriers, which included such things as countervailing duties, technical barriers, import licensing, voluntary export restraints, and local content rules, were becoming significant obstacles to trade. The United States still adhered to the principle of nondiscrimination, but the GATT commitment to transparency was being lost.

Congress insisted that President Richard Nixon's administration use reciprocity to defend U.S. producers when it authorized the so-called fast track negotiating process for the Tokyo Round (1973–1979). (Under fast track, Congress had to approve or reject a trade treaty. Its members could not amend it.) Most significantly, the Tokyo Round extended the GATT to cover non-tariff barriers (NTBs). While tariff negotiations continued on the basis of unconditional MFN treatment, however, NTB bargaining proceeded on a conditional MFN basis. The Tokyo Round in practice did little to reduce these barriers or to equalize access among the American, European, and Japanese markets. U.S. consumers were soon benefiting from a flood of well-made Japanese autos and electronic consumer goods. Besieged U.S. industries, however, petitioned Congress for assistance.

The 1974 Trade Act provided the basis for relief. Section 201 of the act authorized tariffs, quotas, and other remedies to facilitate orderly adjustment to increased competition from abroad. If the U.S. International Trade Commission (ITC) determined that imports were causing "serious injury, or threat thereof " to a petitioning industry, it could order up to five years of relief. As U.S. automakers and the United Auto Workers union discovered in 1980, however, ITC approval of import relief could not be counted upon. In such cases, interested parties appealed again to Congress for help. Congress proved willing to consider measures that violated the GATT to redress sectorial trade imbalances and compensate injured firms and dislocated workers. U.S. administrations used reciprocity to derail such efforts. In the case of the U.S.–Japan auto dispute, for example, the Reagan administration negotiated and secured a voluntary export restraint agreement in May 1981. This strategy kept U.S. trade policy within the GATT framework and thereby preserved the U.S. commitment overall to unconditional MFN treatment.

During the 1980s and 1990s, regional trade agreements posed another threat to the principle of nondiscrimination in U.S. trade policy. After the protracted Tokyo Round, the Reagan administration pursued regional free trade agreements even as it pushed for a new GATT round. The Bush and Clinton administrations did so as well, even after the Uruguay Round commenced in 1986. Advocates insisted that free trade agreements not only were compatible with multilateral trade liberalization, they actually promoted it, since the agreements addressed issues not handled successfully with the GATT framework (such as agriculture, services, investment, intellectual property rights, and various nontariff barriers). Nonetheless, free trade agreements with Israel in 1985 and Canada in 1987, as well as the North American Free Trade Agreement (NAFTA) with Canada and Mexico in 1992, marked a digression in U.S. trade policy from unconditional MFN treatment. At the same time, the Clinton administration remained committed to the successful conclusion of the Uruguay Round, which was completed in 1994. One hundred and eleven countries signed the pact, which established the World Trade Organization as the successor organization to the GATT.

During this period, Congress also linked MFN treatment to human rights. The Jackson-Vanik Amendment to the 1974 Trade Act, championed by Senator Henry Jackson, prohibited granting MFN treatment or Export-Import Bank credits to any "non-market economy country" that restricted emigration. Jackson was primarily concerned about the emigration of Jews from the Soviet Union. To achieve its broader aims of diplomacy, the Nixon administration wanted to extend MFN treatment and access to export credits to the Soviet Union. The Nixon administration was also interested in the emigration of Jews but preferred to accomplish it through quiet diplomacy. Administration officials believed that Jackson's amendment had some value in sending a signal to the Kremlin regarding America's concern for human rights. However, as National Security Adviser Henry Kissinger argued, the administration would likely lose any leverage it had on the emigration issue once the Jackson-Vanik Amendment became law. This proved to be the case. From 1972 to 1974, some 87,000 people emigrated from Russia. For the period 1975–1977, the figure fell to a little more than 44,000.

The Jackson-Vanik Amendment also ensured that human rights became intertwined with the MFN debate on China, particularly after the Tiananmen Square massacre of June 1989. In this case, the Bush and Clinton administrations successfully "de-linked" MFN treatment from human rights. In 1999 the Clinton administration secured congressional approval of "permanent normal trade relations" with China.

From their first commercial agreement in 1979, the United States and the People's Republic of China conducted trade relations on the basis of unconditional MFN treatment. China was not a member of the GATT. MFN treatment for China was subject to annual renewal by the president, per the Jackson-Vanik Amendment, and had to conform to various requirements stipulated by the 1974 Trade Act. Until the Chinese government cracked down on the student demonstrators in Tiananmen Square, the renewal of MFN treatment for China was a pro forma affair. After the massacre, in which more than a thousand protestors and bystanders were killed by soldiers, members of the House and Senate sought to condition MFN status on China's performance on human rights. In 1990, the Bush administration gathered enough Republican support in the Senate to renew unconditional MFN treatment for China. But soon thereafter, members of Congress complicated the issue by demonstrating their willingness to condition MFN status for China not only on human rights but also on a range of strategic, political, and economic issues. To meet the concerns of Congress (and businesses interested in such matters as intellectual property rights and Chinese textile imports), both the Bush and Clinton administrations adopted a policy of "constructive engagement." They used diplomacy to address human rights and other issues. At the same time, they continued to renew MFN status for the purpose of expanding trade and developing investment opportunities for U.S. corporations.

The Clinton administration initially favored linking unconditional MFN treatment to China's human rights record, but President Clinton ultimately proved unwilling to sacrifice the China market. After a protracted battle with human rights groups and members of Congress, the administration succeeding in "de-coupling" human rights from its trade policy on China in 1994. Over the next five years, Clinton administration officials worked to bring China into the newly created World Trade Organization and to put unconditional MFN treatment for China on a permanent basis. This culminated in an agreement of 15 November 1999 to make China a full member of the WTO.

The United States remained committed to unconditional MFN treatment within the WTO framework. However, by the end of the 1990s, further liberalization of trade within the WTO had stalled. Congress revoked fast track bargaining authority from the executive branch after the Uruguay Round, and the Clinton administration did not put a high priority on regaining it. The administration also declined to take a leadership position on the expansion of NAFTA to Latin America, as the Chilean and other governments hoped. With the remarkable expansion of the U.S. economy during the late 1990s, demands by Congress and interest groups for retaliation became less strident. To be sure, trade disputes continued. However, outside of MFN status for China, trade retreated in importance relative to finance as the "high-visibility" foreign economic policy issue.



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