Non-discrimination is the fundamental principle of the multilateral trading system put in place by the World Trade Organisation (WTO) and its predecessor the General Agreement on Tariffs and Trade (GATT). Non-discrimination takes two forms: non-discriminating among trading partners; and non-discriminating between domestic and foreign producers or suppliers. The former is called the most favoured nation (MFN) treatment principle, while the latter is called the national treatment principle. We begin with the MFN treatment.

The legal basis of the MFN treatment principle is Article I of GATT, Article II of GATS (General Agreement on Trade in Services), and Article 4 of TRIPS (Trade Related Intellectual Property Rights) Agreement. This means the MFN treatment is essential to all the three pillars of international trade - goods, services, and intellectual property rights (IPRs). Article I of GATT states: "With respect to customs duties and charges of any kind imposed on or in connection with importation or exportation or imposed on the international transfer of payments for imports or exports, and with respect to the method of levying such duties and charges, and with respect to all rules and formalities in connection with importation and exportation - any advantage, favour, privilege, or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all contracting parties."

Thus, as the above definition shows, MFN treatment means treating all trading partners equally. The MFN treatment applies to both customs duties and internal taxes, such as sales tax or value added tax, to both imports and exports, to both duties or taxes and the method of levying duties or taxes, and with respect to all rules and formalities. Moreover, MFN treatment must be extended unconditionally and immediately. The meaning of "unconditionally" was explained by a WTO panel in what is commonly known as the Canada-Autos case. According to the panel, unconditionally does not mean that an advantage should be granted without any conditions. What unconditionally means is that once an advantage has been granted to a WTO member, the extension of that advantage to other members may not be made subject to conditions with respect to the situation or conduct of those countries.

The MFN principle, however, applies only to "like" products. What are like products? Are wine and whisky like products? Are tea and coffee like products? Are beef and mutton like products? One does not find any definition of like products in the WTO agreements except in the Anti-dumping Agreement, where like products are defined as products, which are identical or similar in all respects. However, this is a circular definition and does not serve any purpose. The WTO case law has established the following four criteria in determining what constitutes likeness: physical characteristics, customs classification, end use, and consumer behaviour. Products to be considered like products need not be identical in all respects. They may be considered like even if they have close resemblance. Thus products lacking physical identity but similar end use may be considered like products.

Though a basic principle of the WTO, the MFN principle is not without exceptions. The two major exceptions to the MFN principle are the enabling clause and provisions for preferential trading arrangements (PTAs). The Enabling Clause was adopted in 1979 for an indefinite period and is now the part of the WTO system. The Enabling Clause provides a legal basis for non-reciprocal preferential treatment given by developed countries to imports from developing countries. Such treatment is preferential because it is better than MFN treatment. It is non-reciprocal because developing countries are not required in turn to offer such treatment to developed countries. Take an example. The USA gives duty free treatment to most of the imports originating in developing countries under its generalised system of preferences (GSP) without getting any preferential treatment from them in return. Since the USA does not offer such treatment to other developed countries like Japan and Germany, the preferences under the US GSP are a departure from the MFN principle. But this departure is permissible and does not constitute a violation of the WTO system.

Members of a preferential trading arrangement (PTA), such as a free trade area (FTA) and the customs union, can also give MFN plus treatment to each other. As opposed to preferential treatment under the Enabling Clause, PTA treatment is reciprocal; that is all members have to make concessions. The legal basis of such MFN plus treatment is Article XXIV of GATT and Article V of GATS. Last one decade has seen tremendous growth of PTAs. There is hardly a WTO member, which is not party to any PTA. The increase in the number of PTAs raises questions about the efficacy of the MFN principle.

Having outlined the salient features of the MFN treatment, let’s look at the other form of non-discrimination, viz the national treatment. Like the MFN treatment, national treatment applies to goods, services, and IPRs. In case of goods, the legal basis of the national treatment principle is Article III of GATT, according to which, imported goods once custom duties have been paid have to be given the same treatment as given to like domestic products in terms of taxes, charges or other regulations. As in case of the MFN treatment, the national treatment principle covers both taxes and their application but only with regard to like products.

In case of services, the legal basis of the national treatment obligation is Article XVII of GATS. However, unlike the MFN treatment obligation, the national treatment obligation in GATS is not unconditional. Rather it is a negotiated concession and subject to conditions and qualifications contained in a Member’s schedule. For instance, if a country has not committed itself to liberalising its financial services, it is not mandatory for it to treat domestic and foreign suppliers of financial services equally.

Like the MFN principle, the national treatment obligation has also some exceptions. The two major exceptions to the MFN principle are government procurement (Article III: 8.a of GATT) and production subsidies (Article III:8.b of GATT). Government agencies purchase goods for conduct of day-to-day operations as well as for development purposes. In the procurement of such goods, government agencies can discriminate between domestic and foreign buyers. The WTO has an Agreement on Government Procurement (AGP). But that is a plurilateral and not a multilateral agreement, which means that it is binding only upon its signatories. WTO members who are not signatories to the AGP are exempted from granting national treatment to foreign suppliers regarding government procurement. Likewise, government can grant subsidies exclusively to domestic producers derived from the proceeds of internal taxes or charges. However, such subsidies must be in conformity with the Agreement on Subsidies and Countervailing Measures (ASCM). It may be mentioned that under the WTO law in case of a conflict between any provision of the GATT and a specific WTO agreement such as ASCM, the latter shall prevail.