In general terms, members of GATT agree that reduction in tariffs and elimination of discrimination in international commerce should be on a reciprocal and mutually advantageous basis.
To ensure against discrimination, members agree to grant to each other unconditional most favoured nation status in all import and export duties, with certain exceptions.
Article of the Agreement deals with the ‘most favoured nation clause’ meaning that any advantage, favour, privilege or immunity granted by a contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to a like product originating in or destined for the territories of all other contracting parties.
Thus, the principle of most favoured nation implies that each nation should be treated as the most favoured nation. As such, the contracting parties are forbidden from granting any new preference. And the negotiations and concessions materialised under bilateral agreements should be extended to all member countries on an equal basis so that, the concessions are multilateralised. It also signified that the permitted quantitative restrictions should be administered without favouring any party.
GATT permits such restrictions only for:
(i) Safeguarding exchange reserves when a country has balance of payments difficulties.
(ii) Restricting imports that would harm domestic price supports and production control programmes of a country.
GATT also lays down that state trading should be non-discriminatory. However, the formation of customs unions or free trade areas are allowed by the General Agreement, provided their purpose is to facilitate trade between the constituent territories and not to raise barriers to the trade of other member nations.
(iii) Underdeveloped countries to further their economic development under procedures approved by GATT.