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Most-Favored Nation Treatment in Trade Under Central Planning

Published online by Cambridge University Press:  27 January 2017

Edward A. Hewett
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All economic systems have ways in which they determine how much their total trade with the world will be, what commodities will make up that total, and the destinations and sources of those commodities (the geographic composition of exports and imports). In Western economies, which rely heavily on markets, the values of these variables summarize the outcome of a myriad of private decisions, with some influence of governments primarily through tariffs and quotas. In Eastern economies, which rely heavily on central planning, the government itself through its planners directly determines the value of those same variables.

The concept of Most-Favored Nation (MFN) treatment evolved as a mechanism by which governments in market economies could agree mutually to limit interference in private decisions on trade, with the expected consequence being an increase in trade and welfare. When two market economy governments agree to accord MFN treatment to each other's commodities, it means (in its simplest form) that tariffs applied in each country to commodities imported from the other country shall be no higher than the lowest tariffs charged on imports of those commodities from any destination.

Type
Articles
Information
Slavic Review , Volume 37 , Issue 1 , March 1978 , pp. 25 - 39
Copyright
Copyright © Association for Slavic, East European, and Eurasian Studies. 1978

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References

1. Throughout the paper, the term “Eastern economies” is used to denote East European countries and the Soviet Union, developed countries which rely heavily on central planning to allocate resources. The term “Western economies” refers to developed Western economies which rely heavily on markets in some form to allocate resources.

2. I am concerned in this paper with MFN status in trade matters, which for a market economy means nondiscriminatory tariffs and quotas. MFN status also encompasses other issues—treatment of ships in ports, treatment of nationals, rights to firms to locate offices in the countries, and so on—but I shall not consider them here.

3. Obviously this oversimplifies matters. For example, despite the fact that the United States accords MFN status to Japanese commodities, still we seek through other devices, such as bilateral negotiations, to control imports from Japan. At present, however, this type of behavior is an exception to the rule and MFN treatment means just that for the majority of commodities moving in international trade. There are also exceptions to MFN treatment. Countries which belong to economic unions (such as the European Economic Community) may apply tariff rates below MFN rates in their mutual trade, and developed countries have agreed among themselves to apply what are called “Generalized Preferences” to imports from developing countries in the form of tariff rates somewhat below MFN rates.

4. I shall not discuss a third solution which seems uniquely American—that of asking concessions in the political system in return for the removal of economic discrimination—because I wish to focus only on reciprocity in the economic sphere. Moreover, I think this solution is doomed to failure.

5. Martin Domke and John Hazard, “State Trading and the Most-Favored-Nation Clause,” American Journal of International Law, January 1958, p. 56.

6. Ibid., pp. 56-57.

7. Alexander Gerschenkron proposed this solution in his Economic Relations with the USSR (New York, 1945)Google Scholar and it was built into the ill-fated draft of an agreement for the International Trade Organization (Domke and Hazard, “State Trading and the Most- Favored-Nation Clause,” p. 60).

8. For details on this agreement see Andrew Ian Douglass, “East-West Trade: The Accession of Poland to the GATT,” Stanford Law Review, 24 (April 1972): 748-64.

9. There were also provisions concerning dumping which I am ignoring here.

10. It may also be a tribute to their negotiators, but I will not go into an analysis of Hungary's membership in this paper.

11. The first type was common in the 1960s, but now is less so since the EEC has centralized all negotiations on trade matters. Negotiations between a group of market economies and individual centrally planned economies occurred in the Polish, Rumanian, and Hungarian accessions to GATT, and will most likely continue as other CMEA countries seek to enter GATT (or if Czechoslovakia chooses to reactivate its dormant membership). The groupto- group negotiations may occur as an outcome of the preliminary discussions going on between the CMEA and the EEC concerning their formal relations, or possibly as an outcome of one of the follow-up meetings to the Helsinki CSCE talks. The fourth logical possibility here, that of individual Western countries negotiating with groups of Eastern countries, does not seem to be very important in relation to the MFN issue. Such cases that do exist—for example, the agreements between the CMEA and Finland, Mexico, and Iraq—are cooperation agreements which do not bear directly on traderelated issues. Trade, in particular trade barriers, is left to bilateral agreements with several East European countries. These agreements set goals for reduction of trade barriers and include clauses on market disruption similar to association agreements EFTA countries have signed with the EEC. The Finnish-East European bilateral agreements call for tariffs going to zero on all save the most sensitive products. No mention is made, other than for Hungary, of how East European countries will reciprocate the tariff reductions; but most likely the Finns will use direct negotiations on the level of trade as they have in the past. For more details, see “Finnorszâ0E1;g Kereskedelme a szocialista orszâ0E1;gokkal” [Finland's Trade with the Socialist Countries], Figyelő, August 4, 1976, p. 7.

12. This model is meant to capture the essentials, but not the detail, of Soviet foreign trade decision making. It is based primarily on the overlapping, but also complementary materials in three sources: Harold J. Berman and George L. Bustin, “The Soviet System of Foreign Trade,” Law and Policy of International Business, 7 (Fall 1975): 987-1056; Gruzinov, V. P., Upravlenie vneshnei torgovlei [The Management of Foreign Trade] (Moscow, 1975)Google Scholar, chapters 1-3; and John, Quigley, The Soviet Foreign Trade Monopoly: Institutions and Laivs (Columbus: Ohio State University Press, 1974 Google Scholar, chapters 3, 5, and 6.

13. This is based on Gruzinov, , Upravlenie vneshnei torgovlei, pp. 70–78Google Scholar; but a similar discussion is found in Quigley, The Soviet Foreign Trade Monopoly, pp. 84-85. I ignore the distinction between administrations and main (glavnye) administrations because it is of no importance for the subject matter of this paper.

14. The Russian word is ob “edinenie which literally translates as ” combine,” but it is traditionally translated as “organization,” despite the efforts of those such as Quigley. The use of “organization” is a harmless tradition, but the use by some authors of the term “enterprise” is not so harmless. These are not enterprises (predpriiatiia) ; indeed, there is some discussion now in the USSR concerning an administrative reform which would change the powers of FTO's and turn them into enterprises (see Gruzinov, , Upravlenie vneshnei torgovlei, p. 27 Google Scholar).

15. Berman and Bustin, “The Soviet System of Foreign Trade,” p. 1006, state that in 1974 there were sixty-one FTO's, and two Foreign Trade Offices (kontory), of which at least eighteen were under other ministries and committees. The State Committee for Foreign Economic Relations, for example, which is involved in major projects in lessdeveloped countries, has six FTO's under its jurisdiction; and the Ministry of the Maritime Fleet has several FTO's under its jurisdiction which handle such matters as servicing ships and handling port formalities ( Quigley, , The Soviet Foreign Trade Monopoly, p. 108 Google Scholar).

16. There are two plans for the export and for the import of goods by country; two for the supply of goods for export and the supply of imported goods to the domestic economy; a currency plan; a plan for the transportation of goods; and a financial plan for each FTO (see Quigley, , The Soviet Foreign Trade Monopoly, p. 128 Google Scholar).

17. Unless otherwise indicated, statements concerning the formal structure of the planning process are taken from Quigley, The Soviet Foreign Trade Monopoly, chapters 5 and 6.

18. In fact, a set of instructions to the Ministry of Foreign Trade from the Council of Ministers has been in force since the late 1920s. The instructions allow the Ministry to curtail trade with countries which do not have diplomatic relations with the USSR, or which discriminate against USSR products (see Harold J. Berman, “The Legal Framework of Trade Between Planned and Market Economies: The Soviet-American Example,” Law and Contemporary Problems, 24 [1959]: 502-3). And recently, a department head in the Treaty and Legal Administration of the Ministry of Foreign Trade made a point of confirming that those instructions are still in force (see V. G. Smirnov, “The System Regulating Exports and Imports in the USSR,” in American-Soviet Trade: A Joint Seminar on the Organizational and Legal Aspects, Moscow, December 1975 [Washington, D.C.: U.S. Department of Commerce, Bureau of East-West Trade, 1976]).

19. There is no reason for the FTO's themselves to discriminate. If they are not constrained in their choice of country or area for imports, their plan indicators can only improve by purchasing commodities from the cheapest sources. It is their plans, including import quotas for countries and products, which restrict them. And those plans come from the Ministry, in particular from the administrations.

20. Domke and Hazard, “State Trading and the Most-Favored-Nation Clause,” pp. 58-59.

21. An agreement to buy a product over a fixed period of time is also an announcement that competitive bids will not be entertained during that period. Such agreements are typical in private contracts between firms in Western economies, and I am assuming without any empirical verification whatsoever that norms have evolved in the world economy concerning the length of time, typically stipulated in the agreements for specific products, that the bidding process is suspended. This second provision seeks to ensure that Eastern economies, particularly in their mutual trade, do not enter into agreements for specific products which cover abnormally long time periods. If they were allowed to do so, the first provision on competitive bidding would lose a great deal of its force

22. For examples, see Janos, Nyerges, “Hungary's Accession to GATT,” New Hungarian Quarterly, 17 (Summer 1976): 133-42Google Scholar; and L. Sabel'nikov, “Neobkhodimoe uslovie mezhdunarodnoi torgovli” [The Necessary Conditions of International Trade], Mirovaia ekonomika i mezhdunarodnye otnosheniia, May 1976, p. 112.

23. Domke and Hazard, “State Trading and the Most-Favored-Nation Clause,” p. 65.

24. For an application of such a model to the CMEA countries see Edward A. Hewett, “A Gravity Model of CMEA Trade,” in Brada, Josef C., ed., Quantitative and Analytical Studies in East-West Economic Relations (Bloomington, 1976), pp. 1–16 Google Scholar.

25. The model automatically takes care of the first, the second is easy to incorporate.

26. J. C. Brada and Larry J. Wipf, “The Export Performance of East European Nations on Western Markets,” Weltwirtschaftlichcs Archiv, March 1975.

27. For a review of the recent literature on this, see Thomas A. Wolf, “The Impact of Formal Western Restraints on East-West Trade: An Assessment of Existing Quantitative Research,” in Hardt, John P., ed., Tariff, Legal and Credit Constraints on East-West Commercial Relations (Ottawa, 1975), pp. 27–55 Google Scholar.

28. J. C. Brada and Larry Wipf, “Romanian Export Performance in Western Markets: An International Comparison,” in Brada, Quantitative and Analytical Studies, pp. 37-50Google Scholar.

29. Andrew Ian Douglass suggests that this may be one of the reasons that the Contracting Parties in GATT have been reluctant to reduce their trade barriers. High trade barriers give them extra bargaining power for concessions (Douglass, “East-West Trade,” p. 760).

30. In “A Gravity Model of CMEA Trade,” I estimate that the level of intra-CMEA trade is three to four times higher than it would be if the CMEA protected trade as much as the EEC or EFTA typically do.

31. Franklyn Holzman, “CMEA's Hard-Currency Deficits and Ruble Convertibility,” paper presented at the International Economics Association Meetings in Dresden, July 1976.