The essence of GATT is non-discrimination and reciprocity. The members of GATT undertake to engage in mutual tariff reductions on the principle of non-discrimination. The principle of non- discrimination requires that no member country shall discriminate between the members of GATT in the conduct of trade.
To ensure against discrimination, members agree to grant to each other the most favoured nation (MFN) status in all import and export duties. This means that ‘each nation shall be treated as well as the most favoured nation.’
The principle of most favoured nation implies that the members of GATT undertake to extend to all the contracting parties any reductions made in favour of a participating country.
If, for example, the U.K. agrees with the U.S. to reduce the import duty on cars, this reduction will also be extended in full to all other contracting parties. Thus, in accordance with the philosophy of non-discrimination under the most favoured nation clause, the GATT is opposed to preferential trading arrangements.
In fact, the contracting parties are forbidden from granting any new preference or widening of existing margins.
The principle of most favoured nation also implies that the permitted quantitative restrictions on trade should be applied indiscriminately and permitted only for the following purposes:
(a) Safeguarding exchange reserves when a country faces balance of payments difficulties:
(b) Restricting imports that would harm domestic price supports and production control programmes of the country;
(c) Promoting economic development in underdeveloped countries under the procedures approved by GATT.
Although GATT is opposed to preferences, it allows certain exceptions to the principle of most favoured nation:
(i) It permits the formulation of customs union or free trade areas to promote economic integration provided that
(a) Such arrangements cover the bulk of trade between the participating countries,
(b) A definite time table is set for the eventual removal of tariff,
c) The contracting parties are satisfied that the final common tariff is no more restrictive than the average of member countries’ pre-union tariffs.
The most important customs union in the modern world is the European Economic Community (EEC), which unites 12 European nations in a zone without any tariffs and quotas.
(ii) The GATT also permits members to adopt measures against counter-dumping and export subsidies, provided these measures are limited to the offending countries.