Key Principles


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What are Some Key Principles in International Trade? 

Information Courtesy Congressional Research Service, IF11016

What is most-favored-nation (MFN) treatment?

Most-favored-nation treatment (MFN) is the fundamental principle of nondiscrimination in the multilateral trading system. MFN requires World Trade Organization (WTO) members to grant each other member country treatment at least as favorable as it grants to its most-favored trade partner—in other words, every member must treat all members equally. For example, if a country grants a trade benefit or concession to one country, such as lower tariffs, it would have to extend the same benefit to all other members. There are a number of permitted exceptions to MFN treatment, however. For example, countries can establish trade agreements with one another outside of the WTO, granting additional preferences to those in the agreement, provided certain conditions are met. In addition, more favorable treatment can be given to developing countries, often called “special and differential treatment.”

What is national treatment?

National treatment is another fundamental principle of nondiscrimination in the multilateral trading system. It obligates each trading partner not to discriminate between domestic and foreign products. In other words, once an imported product enters a country, it must be treated no less favorably than a “like” product produced domestically. The same concept is also applied to foreign and domestic services and intellectual property rights.

What is Permanent Normal Trade Relations (PNTR) status?

“Most-favored nation” (MFN) trade status, called permanent normal trade relations (PNTR) in U.S. law, denotes nondiscriminatory treatment of a trading partner. According to U.S. Customs and Border Protection, Cuba and North Korea do not have PNTR with the United States. Other countries at times have received temporary or conditional NTR status before graduating to PNTR. In practice, imports from countries with NTR status face lower duty rates than imports from countries without that status. Title IV of the Trade Act of 1974 prohibits the President from granting PNTR status to any country not receiving such treatment at the time of the law’s enactment in January 1975 (in effect, the majority of then-communist countries). The so-called, Jackson-Vanik amendment further denies PNTR status for countries that deny citizens freedom of emigration (subject to presidential waiver). As a WTO member, the United States is required to extend MFN treatment “immediately and unconditionally” to all WTO members. Thus upon accession to the WTO for countries like China (joined in 2001), Vietnam (2007), and Russia (2012) for example, PNTR had to concurrently be established under U.S. law for the United States to receive the full benefits of their membership.

What is the Harmonized Tariff Schedule of the United States?

The Harmonized Tariff Schedule of the United States (USHTS) determines the tariffs (also known as duties) that are imposed on imported goods. The HTS uses a structure of tariff classification, based on standard commodity codes and descriptions developed by the World Customs Organization (WCO), the so-called Harmonized System (HS). The HS groups 1,200 product headings into 96 chapters. Each heading is divided into product subheadings at the four- digit and six-digit levels, for a total of 5,000 separate groups of goods at the 6-digit level, with harmonized digit and category descriptions. In other words, the higher the digits the more detailed the product category. For example, the 2-digit chapter 08 stands for “edible fruits and nuts.” Within that chapter, “citrus fruits” are identified by the 4-digit HS code 0805; and within that subheading, “oranges” are identified by 6-digit HS code 0805.10. HS codes are standard worldwide up to the 6-digit level. The USHTS further subdivides each product subheading into 8- digit and 10-digit tariff lines that are unique to the United States. The U.S. International Trade Commission (ITC) publishes the HTS and keeps it up to date. U.S. Customs and Border Protection is responsible for interpreting and enforcing the tariff code.

What are rules of origin?

Rules of origin (ROO) determine the “nationality” of imported products. ROO are important for several reasons, including determining admissibility of imports, assessing duty rates, and establishing eligibility for preferential trade programs and free trade agreements (FTAs). Determining a product’s origin can be relatively straightforward if the product’s raw materials and parts are manufactured and assembled in a single country. However, in today’s global economy, determining origin can be complex because goods such as autos, computers, and clothing are assembled with parts sourced from many countries.

The United States negotiates different ROO within its FTAs to ensure that only eligible trading partners receive the agreement’s tariff benefits. But some rules may also be crafted to limit the impact of liberalized trade on import-sensitive industries. For example, the “yarn-forward” rule requires that all yarn and fabric used in most apparel must come from FTA partners themselves, in addition to the assembly process. Some in Congress with retailers in their districts argue that the yarn-forward rule is relatively strict compared to the rules negotiated by other countries; others with textile interests maintain that the rule is crucial for the survival of the U.S. industry.