WORLD TRADE
ORGANIZATIONWT/WGTI/W/118
4 June 2002
. (02-3057)
Working Group on the Relationship
between Trade and Investment
NON-DISCRIMINATION
MOST-FAVOURED-NATION TREATMENT AND NATIONAL TREATMENT
Note by the Secretariat
EXECUTIVE SUMMARY
Non-discrimination is a core policy-making principle of international trade and investment
agreements.  It is the principle that underwrites most directly the process of international economic
integration, since it binds a treaty's participants together by guaranteeing that none of them will be
picked out and treated unfavourably on the grounds of their nationality.  It also brings a number of
important commercial, legal and administrative benefits to a treaty's participants.
The two most widely used standards of non- discrimination are most-favoured-nation (MFN)
treatment and national treatment.  These developed or iginally in the context of trade agreements, but
they are now routinely incorporated also in inte rnational investment agreements.  Many investment
agreements contain other standards, such as "fair and equitable treatment", that are not familiar in
trade agreements but that can have a bearing on the application of the principle of non-discrimination.
The GATT and the GATS apply the principle of non-discrimination both at the border and
inside the border, covering market access as well as conditions of competition in the domestic market.
Some international investment agreements follow the same pattern, and apply the rule of non-
discrimination at both the pre-establishment (market access) stage and the post-establishment stage of
investment.  However, the majority of them, particul arly bilateral investment treaties, apply the rule of
non-discrimination only inside a host country's border, after an investment has already been admittedand established.  In these agreements, MFN and national treatment do not apply to the
pre-establishment stage of an investment, and they do not limit a government's ability to restrict or
regulate the entry of foreign investment.
In international trade and investment agreements, governments aim to strike a balance
between the benefits of applying the principle of non-discrimination on the one hand, and their need
for flexibility to use discriminatory measures at times for specific purposes on the other.  Most
agreements therefore contain exceptions to the rule of non-discrimination, usually subject to carefully
defined conditions.  These allow governments to give preferential treatment to domestic products,
producers and investors, or to certain of their commercial partners but not others, or to pursuedomestic policy objectives that cannot be realized without practising some degree of discriminatory
treatment.
Exceptions can be grouped into four categories:  systemic exceptions – which carve out
particular activities, sectors, or measures altogether from application of the rule of non-discrimination;
general exceptions – which allow the use of discriminatory measures in certain circumstances, for
example when regulating in the public interest or  when participating in a regional integrationWT/WGTI/W/118
Page 2
agreement;  country-specific exceptions – which allow individual participants to choose to exempt
themselves from (or, depending on the legal form ula used, to commit themselves to) the rule of
non-discrimination for particular activities, sectors or measures, sometimes with the expectation that
these exemptions will be reduced (or commitments increased) over time;  or ad hoc  exceptions –
which can be used to respond to unforeseen circumstances.
Securing protection against foreign competition for domestic producers can be an overriding
policy objective, in certain sectors at least, for developed and developing countries.  Generally
speaking, this can be done in conjunction with a high, unconditional standard of MFN treatment, since
MFN treatment does not interfere directly with a host country's ability to offer preferential treatment
to domestic producers.
In the case of trade in goods, it can generally also be done in conjunction with a high,
unconditional standard of national treatment – protection against imports can usually be achieved
effectively through border measures such as import tariffs, making it unnecessary to differentiate the
treatment of imported goods from locally produced goods once they have crossed into the domestic
market.
However, in the case of trade in services and of foreign investment, border measures often
cannot play the same role of protecting domestic producers and investors.  Once a foreign service
supplier or a foreign investor is established in a host country, no further cross-border transactions are
necessarily involved, and competition takes place directly on the domestic market.  The principalmeans for a government to offer protection to domestic producers and investors against foreign
competition, then, is through the differential application of domestic laws and regulations inside the
border.  As a result, investment agreements deal with the national treatment standard in a variety of
ways, from not including it at all to applying full or qualified national treatment at the
pre-establishment and/or post-establishment stage of an investment.  In the case of the GATS, forexample, and many investment agreements too, th e national treatment obligation is hedged with
conditions and subject to country-specific exceptions, which can be extensive.
Scheduling country-specific exceptions takes on considerable importance for parties to an
international investment agreement in arriving at a balanced outcome, between application of the
principle of non-discrimination on the one hand, and flexibility for governments to pursue their
economic development and public interest objectives on the other.  In this context, three questionsrelating to the use of country-specific exceptions to the rule of non-discrimination in investment
agreements can arise:  do exceptions deter foreign investment?;  should exceptions be scheduled
"top-down", as in most investment agreements, or "bottom-up", as in the GATS?;  and should
exceptions be phased-out (or commitments phased-in) so that they operate only for a transitional
period?
1
As is the case of other individual topics listed in Paragraph 22 of the Doha Ministerial
Declaration, non-discrimination needs to be view ed in conjunction with other elements of an
international treaty:  the treaty's scope and definition, its other substantive provisions, and, above all
in the case of the GATS and international investment agreements, the specific commitments madeunder the treaty's provisions by individual member governments.  Specific commitments can be
crucial in qualifying the meaning and scope of application of the principle of non-discrimination.
_______________
                                                     
1 For a discussion of these three questions in the context of the application of national treatment, see
UNCTAD, National Treatment, Series on Issues in International Investment Agreements, 1999, pp. 63-69.WT/WGTI/W/118
Page 3
I. INTRODUCTION
1. This Note focuses on the ways in which the two main standards of non-discriminatory
treatment – most-favoured-nation treatment and national treatment – have been applied in the GATT
and the GATS and in international investment agreements, and reviews the discussions that havetaken place in the Working Group on this issue.
2
II. THE PRINCIPLE OF NON-DISCRIMINATION
2. The principle of non-discrimination aims to ensure that when governments apply policies to
manage their international commercial transactions, the policies will be applied without regard to the
origin, and in some instances the destination, of any particular transaction.  Typically, this means
without regard to the nationality of the goods, of the services and the service suppliers, or of the
investors involved.  It is synonymous with the idea  of "equal treatment for all" under a common set of
treaty rules.  Equal treatment, in the sense of "ide ntical" treatment, may not be practicable or lead to
the desired result in all cases, so non-discrimination is often translated operationally in commercial
treaties to mean effective equality of opportunity to compete on equivalent terms and conditions.
3. A number of advantages are associated with including a general principle of
non-discrimination in commercial treaties:
• In a market economy, leaving commercial transactions to be concluded on the basis of price
competition, without reference to their origin or destination, is generally believed to lead to a
better allocation of resources for all parties concerned.  It allows a country to benefit from the
comparative advantage of each of its trading partners, and it allows them to benefit from the
comparative advantage that they each enjoy.  There is no systematic gain to be had in
economic terms from favouring transactions with one particular trading partner over anothersimply on the grounds of nationality.
• As commercial restrictions are liberalized, the benefits are extended automatically to every
participant in the treaty.  In this sense, the principle of non-discrimination acts like amultiplier, opening up new market access opportunities to all of a country's commercial
partners and spreading the benefits of liberalization.
• Legal security and confidence in sharing in the benefits of a unified, rules-based commercial
treaty are increased, particularly for participants with less individual commercial or political
influence than others.
• Transaction and administration costs are reduced (at customs, for example), and there is an
economy of rule-making, when the same policy measures are applicable to all commercial
transactions instead of being differentiated by origin or destination.
                                                     
2 References to the discussions in the Working Group on this topic are to be found in the following
Reports:  WT/WGTI/M/4, paras. 44-49 and 57-74;  M/5 paras. 27-33, 36-41and 63-64;  M/6 paras. 41-51, 59-63
and 79;  M/7 paras. 40-46;  M/8 paras. 47-49 and 84-88;  M/9 paras. 36-37 and 44:  M/10 para. 9;  M/11paras. 39 and 45-48;  M/12 paras. 15-22, 54 and 63;  M/14  paras. 5, 26-35, 64, and 76;  and M/15 paras. 44, 49
and 52.  References to this topic in Members' communications can be found in:  WT/WGTI/W/19, W/22, W/28,W/29, W/30, W/33, W/34, W/36, W/37, W/42, W/51, W/54, W/68, W/71, W/75, W/79, W/84, W/89, and
W/104.WT/WGTI/W/118
Page 4
• For the private sector, the guarantee of non-discrimination translates into greater
transparency, stability and predictability of government policies, and therefore into lower riskfor their commercial activities.
• Applying the rule of non-discrimination through international treaty law is often perceived by
foreigners as offering a better guarantee than applying it solely through national legislation,
which can be changed unilaterally.
4. Notwithstanding the advantages that are associated with the full application of the principle of
non-discrimination, all commercial treaties allow for exceptions, qualifications, or limitations to their
rules of non-discrimination.  These provide governments with flexibility to accommodate various
domestic policy needs – particularly to offer protection to domestic producers and investors, and to
pursue other public interest objectives that cannot be realized without practising some degree of
discriminatory treatment.
5. Many treaties provide systemic exceptions to the rule of non-discrimination, which carve out
particular activities, sectors, or measures entirely from the scope of its application.  The GATS, for
example, exempts government procurement services from the scope of its MFN and national
treatment obligations, and the GATT excludes the payment of subsidies exclusively to domestic
producers from its National Treatment obligation.  International investment agreements can containsimilar exemptions – for matters such as taxation and government procurement, for specific sectors or
industries, and for certain measures such as subsidies.
6. Most treaties contain general exceptions to the rule of non-discrimination that are
permanently available for any eligible treaty particip ant to use, subject to specific conditions.  Two
standard categories of general exceptions apply in the GATT, the GATS, and international investmentagreements.  One covers exceptions for governments to  regulate in the public interest, in areas such as
the protection of national security and of public health, order and morals.  The other covers exceptions
for regional trade and economic integration agreements that allow parties to treat trade with each other
better than they treat trade with the rest of the world.
7. Some treaties (the GATS and most international investment agreements, but not the GATT)
allow each participant to choose and register individually country-specific exceptions to the rule of
non-discrimination with regard to particular indust ries and/or measures.  Country-specific exceptions
to the national treatment obligation can be of particular importance in providing countries with
flexibility to pursue their economic development policies and objectives.  They are also used to
provide flexibility in other areas of economic policy-making – examples given in the Working Groupinclude education, training, employment and environmental protection.
8. Country-specific exceptions can be applied in two different ways:  as exceptions to a general
rule, or as commitments to a conditional rule.
• The first approach starts from the presumption that the principle of non-discrimination
applies across-the-board, as a general rule.  It then allows each participant to compile its
own "negative" list of exemptions in the form of industries and/or measures where it will
not apply the principle of non-discrimination (the so-called "top-down" approach).  This
approach is used widely in bilateral investment treaties.
• The second approach starts without any presum ption about the application of the principle
of non-discrimination, and then allows each participant to compile and register its own"positive" list of commitments in the form of industries and/or measures where it will
apply the principle of non-discrimination (the so-called "bottom-up" approach).  This
approach is used in the GATS for scheduling market-access commitments and nationalWT/WGTI/W/118
Page 5
treatment obligations, with related conditions and qualifications on the scope of their
application.
In theory, these two approaches will converge at the same point.  However, the "bottom-up" approach
is viewed by many developing countries as the mo re flexible of the two, which best provides them
with a means of protecting fragile sectors of their economies against open competition from foreignproducts and producers.  It allows them to lock in some of their commercial policies on a
non-discriminatory basis, and to remove remaining discriminatory measures progressively over time,
as circumstances permit.
9. Most treaties allow also for ad hoc  exceptions to the principle of non-discrimination, to
address any special needs of participants that arise on a case-by-case basis.  Typically this is achieved
through the granting of waivers from the rule of non-discrimination on a time-limited basis, subject to
the approval of the other parties concerned.
III. STANDARDS OF MOST-FAVOURED-NATION TREATMENT AND NATIONAL
TREATMENT IN THE GATT AND THE GATS
10. The two standards used in the GATT and the GATS for applying the principle of
non-discrimination are most-favoured-nation (MFN) treatment and national treatment.  They are both
standards of relative treatment that a country should meet when applying its commercial policymeasures.  This means that they do not set a specific standard of non-discriminatory treatment, but
instead establish the standard by reference to exis ting practice.  MFN treatment aims to ensure that
foreign products and producers receive equal treatment relative to that given to other foreign products
and producers.  National treatment aims to ensure that foreign products and producers do not receive
less favourable treatment than that given to domestic products and producers.
11. One reason for using two different standards of non-discriminatory treatment, and for
separating them operationally in this way, is to provide flexibility for countries to protect their
domestic producers against foreign competition.  Applying the MFN standard does not interfere with
a country's ability to impose measures that give a competitive advantage to domestic producers over
their foreign competitors.  However, the national tr eatment standard, in its strictest sense, aims to
ensure that inside the border the protection of domestic products and producers ceases, so that foreign
products and producers are given an equal opportunity to compete for a share of the domestic market.
12. This is reflected most clearly in the GATT.  Border measures, such as import tariffs, can be
applied under the GATT to protect domestic producers against foreign competition.  The MFN rule
requires that the measures are applied equally to all imports, regardless of their origin.  Once goods
have crossed the border, however, the GATT's national treatment rule states that internal laws and
regulations " … should not be applied to imported or domestic products so as to afford protection todomestic production".  This differentiation of the roles of MFN and national treatment in the GATT is
facilitated by the ease with which imports of goods can be checked by customs authorities at a
country's border, and appropriate border measures can be imposed to protect domestic producers.
13. Trade in services does not lend itself so easily to a line being drawn between treatment at the
border and treatment inside the border.  In part, this is because some imports of services cannot bechecked physically and taxed or regulated as they cross the border.  More importantly in practice, and
for the purpose of this Note, foreign services are often delivered directly into the domestic market
through the establishment by a foreign service provider of a "commercial presence" in the territory of
the country concerned.  As a result, the services produced never actually cross the border;
competition between foreign and domestic suppliers takes place directly in the local market place.WT/WGTI/W/118
Page 6
14. In the case of the GATS, therefore, in seeking to establish a workable rule of
non-discrimination on the one hand, in combination with allowing a country flexibility to support its
domestic producers on the other, account is taken of the fact that part of the job of protecting them is
shifted inside the border onto the differential application of domestic laws and regulations in favour of
domestic service suppliers.  As a result, the GATS national treatment obligation is not cast in the sameway – as an unconditional obligation – as it is in the GATT.  The GATS allows Members to select the
services sectors in which national treatment will apply, and to attach conditions and qualifications to
their national treatment obligations in respect of the m easures they use, so as to be able to continue to
offer preferential treatment to domestic service suppliers.  At the same time, the importance of
continuing to apply the MFN standard inside the border tends to take on more practical significance in
the GATS than in the GATT – hence the reason why the GATS MFN standard is a general and
unconditional obligation.  Foreign service suppliers need to be able to count on the fact that they willnot face differential treatment vis-à-vis  each other in the host country market, even though they may
not be treated as favourably under internal laws and regulations as their domestic competitors.
A. L
EGAL FORMULATIONS OF MFN T REATMENT
15. The MFN rule obliges a government, when applying its commercial policies, to treat all WTO
Members "equally" in the conduct of its commerce with them.  If it negotiates improvements in thetreatment it offers to one of its trading partners – so that this country becomes the most-favoured-
nation – the MFN rule obliges it to extend the same improvements to all other WTO Members on a
non-discriminatory basis.
16. Article I of the GATT, and Article II of the GATS, contain the MFN obligations for trade in
goods and trade in services, respectively, and in most respects they are very similar.
17. The most-favoured-nation can be any country with which a WTO Member trades ;  it does not
have to be another WTO Member.  WTO Members therefore benefit from any trade advantages
enjoyed by a third country that is not itself a WTO Member.
3
18. The notion of equal treatment  is addressed in the GATT as follows:  " … any advantage,
favour, privilege or immunity …" is to be " … accorded immediately and unconditionally to … allother contracting parties …".  In most cases, providing the "same" treatment to goods from different
sources is a practical proposition, since import duties and other trade taxes are the most usual border
measures applied to trade in goods and these can be expressed in comparable, quantitative terms.  In
the case of trade in services, it is typically regula tions, rather than taxes, which are the most important
policy measures involved.  The GATS MFN obligation requires that "treatment no less favourable" be
accorded to services and service suppliers from different sources.  This term underscores the
qualitative notion of "equal treatment" used in the GATS, covering both de jure  and de facto
discrimination.
19. The MFN obligation applies under the GATT to like goods, and under the GATS to like
services and like service suppliers.  If products from different foreign suppliers are considered to be
"like", they must be treated in the same way (or at least no less favourably) at a Member's border.  If
they are not "like", they can be treated differently.  This allows a government to differentiate the tradepolicies it applies to different industries and sectors of its economy, protecting some against foreign
competition more than others.  In its most straig htforward sense in the GATT, two products are "like"
when they are classified under the same heading in a country's tariff schedule.  The concept has
                                                     
3 At the time the GATT was drafted, some GATT cont racting parties were offering to third countries
special trade preferences that they wished to preserve and not extend to other GATT members.  It was
necessary, therefore, to specifically exclude these preferences from the coverage of GATT Article I:1;  the
exclusions are listed in paragraphs 2 to 4 of that Article.WT/WGTI/W/118
Page 7
acquired a broader meaning in practice, however, to include in certain circumstances the regulatory
purpose of a measure (it must not have a protectionist intent) as well as the end-uses of products,
which may be considered "like" if they are close substitutes and therefore directly competitive with
each other.  The concept of "like" in the context of the GATS MFN obligation has not been clarified
beyond its literal meaning;  it is not defined in the Agreement.
20. The MFN obligation is unconditional  in both the GATT and the GATS.  This means that
when a WTO Member changes its trade policy (lowers a trade barrier, for example), it must apply the
change automatically to all other WTO Members without requiring anything from them in return.
Prior to taking a decision to change its trade policy, a Member may in fact try to negotiate reciprocal
concessions from one or more of its trading partners.  Once it has decided to make the change,
however, the change must be applied to all WTO Members regardless of whether they were involved
in the reciprocal bargaining process.4
B. L EGAL FORMULATIONS OF NATIONAL TREATMENT
21. The national treatment rule obliges a government, when applying its commercial policies, to
treat foreign products and producers "equally" to the way it treats its own domestic products and
producers.  If the government changes the laws or regulations that affect the way that commercial
transactions take place in its internal market, the changes must apply to all transactions, regardless of
whether they involve foreign or domestic products or producers.
22. Article III of the GATT and Article XVII of the GATS contain the core national treatment
obligations for trade in goods and trade in services, respectively.  While there are similarities between
the two, there are also differences.  The most important is that national treatment is a rule of general
application under the GATT, but in the case of the GATS it is a specific commitment related to themarket access that a Member is prepared to grant.  This is discussed further below.
23. The formulation used to define the notion of equal treatment in both the GATT and the GATS
is "treatment no less favourable" than that accorded to domestic goods, services, and service suppliers.
As noted above in the context of MFN treatment under the GATS, this allows a qualitative notion of
"equal treatment" to be applied to the use of domestic regulations, where de jure  equal treatment may
still lead to de facto  unequal treatment.  In the GATS, the meaning of the term "less favourable" in the
context of national treatment is defined further, as treatment "which modifies the conditions of
competition in favour of [domestic] services or service suppliers".  A similar interpretation has been
given by some dispute settlement panels to the m eaning of the phrase in the GATT national treatment
rule.
24. The national treatment standard applies under the GATT to like goods, and under the GATS
to like services and like service suppliers.  By and large, the term "like" carries the same meaning as in
the case of the MFN standard, but in the case of National Treatment it focuses, above all, on the
competitive relationship in the marketplace that exists between different products, whether they are
physically similar or not.  With regard specifically to taxation, the interpretative note to GATT
Article III:2 introduces the concept of "a directly competitive or substitutable product" for use in the
context of deciding whether a tax might breach the condition that it not be applied so as to affordprotection to domestic production.
                                                     
4 It is worth recalling that, from 1979 to 1994, the Tokyo Round "Code" Agreements were applied, by
and large, on a conditional  MFN basis;  the MFN rule applied among signatories of the Codes, but signatories
were not obliged to apply MFN treatment in areas of trade policy-making covered by the Codes to other GATTcontracting parties.  Conditional MFN treatment cont inues to apply in the plurilateral agreements on
Government Procurement and Trade in Civil Aircraft.WT/WGTI/W/118
Page 8
C. E XCEPTIONS TO THE RULE OF NON-DISCRIMINATION
25. Both the GATT and the GATS allow systemic, general, and ad hoc  exceptions to the rule of
non-discrimination.  The GATS allows, in addition, country-specific exceptions to its national
treatment obligation, and one-time exceptions to its MFN obligation.
26. With regard to systemic exceptions, government procurement activities are exempted from
having to meet both the MFN and the national trea tment obligation in the GATS (Article XIII), and
from having to meet the national treatment obligation in the GATT (Article III:8(a)).5  Also, under the
GATT (Article III:8(b)) the national treatment oblig ation does not prevent the payment of subsidies
exclusively to domestic producers.6
27. With regard to general exceptions, subject to specified conditions, both the GATT and the
GATS exempt from the application of MFN and national treatment a range of public policy
objectives.7  These include the protection of national security and of public health, order and morals.
In the case of MFN treatment, both the GATT and the GATS exempt preferential treatment granted to
some foreign products and producers but not to others under regional trade agreements.8  The GATT
also contains a general exception to MFN treatment to allow developed countries to implement the
Generalized System of Preferences, and apply lower tariffs on imports from developing and
least-developed countries than the tariffs they apply on imports from other developed countries.9  By
facilitating and promoting the trade of developing and least-developed countries in this way, the
expectation is that the progressive development of these countries' economies will benefit not just
themselves but also their developed country trading partners, as their domestic markets expand and
their demand for imports increases.
28. Ad hoc  exceptions to the rules of MFN and national treatment in the GATT and the GATS
can be granted through the WTO waiver provisions.10
29. Country-specific exceptions constitute the most extensive group of exceptions to the rule of
non-discrimination under the GATS.  They are not avai lable under the GATT.  In the GATS, they are
used in particular to address the fact that protection of domestic service suppliers from foreign
competition cannot necessarily be achieved at the border.  Flexibility is therefore needed under thenational treatment rule so as to be able to apply inside-the-border measures for this purpose
30. The MFN rule is a general obligation in the GATS, that applies unconditionally to all services
and service suppliers, not just those that are included in a Member's Schedule of Concessions.
                                                     
5 In the GATT, there is no explicit exemption from the MFN obligation for government procurement
activities, but an exemption can be implied by the provisions of GATT Article I:1 and Article XVII:2.
6 The GATS does not contain any similar exemption for subsidies.  However, in practice a Member
applying national treatment in a particular sector and wishing to offer subsidies exclusively to domestic servicesuppliers could include a condition to that effect in its Schedule of Concessions and achieve a similar end result
through a country-specific exception, although not necessar ily one that is as it is permanent as under the GATT.
7 The conditions include the requirement that any discrimination involved should not be "arbitrary or
unjustifiable".  GATT Article XX and GATS Articles XIV and XIV bis list eligible regulatory purposes that the
measures can serve.
8 GATT Article XXIV and GATS Article V.  In the case of the GATT (but not the GATS), general
exceptions to the rule of non-discrimination are also pe rmitted under specific circumstances in the application of
restrictions to safeguard the balance-of-payments (Article XIV).  This provision was needed during the period ofcurrency inconvertibility, but it has not been invoked since 1961.
9 The exception is contained in the 1979 CONTRACTING PARTIES Decision on Differential and
More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries, known usually asthe "Enabling Clause" (L/4903).
10 Article IX:3 of the Marrakesh Agreement Establishing the World Trade Organization.WT/WGTI/W/118
Page 9
However, country-specific exceptions were provided for in the GATS (Article II:2) at the time of its
entry into force, so as to allow Members to offe r better market access to some foreign services and
foreign service suppliers than to others.  Members were able to register their own exemptions from
MFN treatment, and maintain them for a time that  should not, in principle, exceed ten years.
31. The GATS national treatment rule is classified not as a general obligation but as a specific
commitment that is related to the market access co mmitments that a Member grants.  It need apply
only in the services sectors inscribed as market access commitments in a Member's Schedule, and it is
subject to any conditions and qualifications set out in that Schedule.  Where a Member does not make
a market access commitment in a particular services sector, it does not have to undertake a National
Treatment obligation in that sector either.11  At the same time, the GATS sets the expectation that the
general level of specific commitments undertaken by Members will increase over time, through
progressive liberalization under successive rounds of negotiations.
32. With regard to methods of scheduling country-specific exceptions and commitments to the
rule of non-discrimination (described above in paragraph 8), the GATS allows each Member to select
its commitments to national treatment by scheduling (bottom-up) a "positive" list of service sectors to
which it will apply national treatment, coupled as necessary with conditions and qualifications on the
application of national treatment to measures used in these sectors.  At the time of entry into force ofthe GATS, temporary exemptions from the general MFN obligation could be taken top-down, by
compiling a "negative" list of measures to which a Member would not apply MFN treatment.
IV. THE NON-DISCRIMINATION PRINCIPLE IN INTERNATIONAL INVESTMENT
AGREEMENTS
33. The aims and advantages of applying the principle of non-discrimination in international
investment agreements (IIAs) – bilateral, regional or multilateral – are much the same as those
associated with applying it in trade agreements:  it helps to produce a better international allocation of
resources, in this case not only capital but also technology and other assets associated with foreign
investment;  it acts as a catalyst to spread the benefits of liberalization;  it provides predictability of
treatment for all participants under a unified, rules-based system;  it reduces transaction andadministration costs;  it offers foreign investors a more transparent, stable and predictable policy
environment;  and it reinforces confidence in a host country's national legislation.
34. The challenge facing negotiators of IIAs is similar to that facing trade negotiators:  to find a
workable balance between the benefits of applying the principle of non-discrimination on the one
hand, while retaining flexibility to support domestic investors and producers and to attain certain other
domestic policy objectives on the other.
A. S
TANDARDS OF TREATMENT
35. As in the case of trade agreements, MFN treatment and national treatment are the two
standards most commonly used in IIAs for applying  the principle of non-discrimination.  IIAs that
contain MFN and national treatment obligations also allow for exceptions to them – from a menu that
can include country-specific exceptions, as well as systemic and general exceptions – so as to provide
host countries with policy flexibility for development purposes, for regional integration agreements,to regulate in the public interest, and so on.  They are described below, along with other detailed
aspects of the application of MFN and national treatment in the context of IIAs.
                                                     
11 More precisely, a GATS schedule shows under each mode of supply whether a Member intends to
grant full market access and/or national treatment, no market access and/or national treatment, or conditioned
market access and/or national treatment.WT/WGTI/W/118
Page 10
36. Some IIAs contain other standards of treatment, based on customary international law, that
have a bearing on the application of the principle of non-discrimination.  These are generally less
familiar from the point of view of trade agreements.
37. The most important of them is the standard of fair and equitable treatment, which is often
coupled with a standard of full protection and security.  It is often used in combination with MFN and
national treatment, or in combination with MFN treatment alone.12  A typical formulation is:
Each Party shall at all times accord to cover ed investments and investors fair and equitable
treatment and full protection and security in its territory.
38. UNCTAD notes that the use of the standard of "fair and equitable treatment" in bilateral
investment treaties dates from 1967, and it has assumed prominence in IIAs in recent years.13  I t
serves two main purposes:  to act as a yardstick by which relations between foreign investors and hostcountry governments can be assessed, and as a signal from host countries of their willingness to
accommodate foreign investment on terms that take into account the interests of the foreign investor.
14
39. Fair and equitable treatment has its roots in customary international law.  It is generally
considered to cover the principle of non-discriminati on, along with other legal principles related to the
treatment of foreign investors, but in a more abst ract sense than the standards of MFN and national
treatment.  In particular, it is an absolute stan dard, which may be measured in terms of the plain
meaning of the term, but more usually has come to be regarded as a minimum international standard
of treatment.15  It therefore has to be interpreted on a case-by-case basis in the light of the particular
circumstances in which it is used.  UNCTAD suggests that a challenge in this area of international law
is to identify what common elements the standard might contain.16  In contrast, MFN and national
treatment are measured relative to the yardstick of  the actual treatment provided to other foreign or
domestic investors or investments, which gives these standards a more precise and predictable quality.
40. Fair and equitable treatment is not necessarily a lower standard of treatment than MFN or
national treatment.  In some circumstances, it may be preferred to national treatment by a foreign
investor where the standard of treatment of national investors in a host country falls below minimuminternational norms.  Also, other legal principles contained within it, such as prompt and effective
compensation in case of expropriation or harm to investment, have a particular value of their own.  In
the context of applying the principle of non-discrimi nation, however, in most instances the role of the
fair and equitable treatment standard in an IIA would appear to be one of backing up the more specific
standards of MFN and national treatment, or in some cases of substituting for them, particularly in the
context of applying the principle to the pre-establishment stage of an investment.
                                                     
12 The "fair and equitable treatment" standard is used, generally in conjunction with MFN and national
treatment, for example in the Model bilateral investment agreements of Chile, China, France, Germany,Switzerland, the United Kingdom and the United States, and in regional agreements such as the NAFTA and
COMESA.  (UNCTAD, International Investment Instruments:  A Compendium, Volume III, pp. 75, 107,
143-195), as well as in the bilateral investment agreements of Canada (WT/WGTI/W/19), the EC member States
(WT/WGTI/W/30), Korea (WT/WGTI/W/42), and Turkey (WT(WGTI/W/51).  UNCTAD cites a number ofIIAs (which it characterizes as "unusual") in which the standard of fair and equitable treatment substitutes fornational treatment.  One example is the ASEAN Agreement for the Protection and Promotion of Investments.
(UNCTAD, National Treatment, Series on Issues in International Investment Agreements, 1999, pp. 15-16).
13 UNCTAD, Bilateral Investment Treaties in the mid-1990s, 1998, pp. 53-55.
14 For a full discussion, see UNCTAD, Fair and Equitable Treatment, Series on Issues in International
Investment Agreements, 1999.
15 See OECD, "Council Resolution of 12 October 1967 on the Draft Convention on the Protection of
Foreign Property", International Legal Materials , (1968) Vol. 7, p. 117.
16 UNCTAD, Ibid, p. 5.WT/WGTI/W/118
Page 11
41. Some IIAs combine the standard of fair and equitable treatment with a specific
non-discrimination standard, couched in terms of the avoidance of arbitrary, unreasonable and
discriminatory measures.17  A typical formulation is:
Neither Party shall impair by arbitrary, unreasonable or discriminatory measures the
management, maintenance, use, enjoyment or dis posal of covered investments in its territory.
UNCTAD suggests that this represents a minimum international standard of treatment, but that
discrimination based purely on the nationality of an investor does not violate it as such – there may be
valid reasons why a country may wish to give preferential treatment to investors of a particular
nationality.  Consequently, the addition of MFN treatment in an IIA can substantially improve the
situation for foreign investors that would othe rwise prevail under customary international law.18
42. Finally, many bilateral investment treaties contain a specific investment protection provision
guaranteeing foreign investors non-discriminatory treatment with respect to indemnification or
compensation for non-commercial losses, as a result, for example, of armed conflict or civil strife or
similar circumstances, and in some instances of natural disasters too.19
B. MFN T REATMENT AND NATIONAL TREATMENT
43. Including the MFN treatment and national treatment standards in IIAs tends to raise more
complex issues than including them in trade agreements.  One reason is that the entry of foreign
investment into a host country – its admission and establishment, which corresponds to market access
in trade agreements  – is in most cases a more delicate issue, particularly politically, than is the entry
of goods and services for circulation on the domestic market.  Consequently, the application of the
rule of non-discrimination to the pre-establishment stage of foreign investment is sensitive.20  Even
when non-discrimination is restricted to the post-establishment stage of an investment, the application
of the full national treatment obligation limits a host country's ability to protect its domestic investors
against foreign competition through the differential application of laws and regulations.  Also, the
activities of foreign investors in a host country can be diverse – typically covering at the
post-establishment stage alone the operation, maintenance, use, sale or liquidation of an investment –so that the potential range of policies and measures that is subject to the principle of non-
discrimination, and the national treatment oblig ation in particular, is correspondingly broad.
44. Of the two standards, MFN treatment is generally the less controversial, since it does not
impinge as directly as does national treatment on a host country's ability to provide support and
protection to domestic investment and business interests.
21  What counts most for a host country
government is likely to be flexibility to diff erentiate between national investments and foreign
investments, rather than among foreign investme nts.  Nonetheless, a host country may wish to
exercise selective controls over which foreign investments to admit, and on what terms they are to be
admitted, particularly in light of its policies to promote national investments.  It may, for example, use
screening policies on a case-by-case basis to select which foreign investments it considers to be
compatible with its domestic industrial policy.  It may also wish to continue to offer certain foreign
                                                     
17 UNCTAD, Bilateral Investment Treaties in the Mid-1990s (1998), p. 55.
18 UNCTAD, Most-Favoured-Nation Treatment, Series on Issues in International Investment
Agreements, 1999, p. 35.
19 WT/WGTI/W/19, Communication from Canada.  This is a common element of Japan's bilateral
investment agreements (WT/WGTI/W/34).
20 For a discussion of this, see UNCTAD, Admiss ion and Establishment, Series on Issues in
International Investment Agreements, 1999.
21 UNCTAD concludes that "the MFN principle is itself flexible in the sense that it allows in-built
exceptions that could accommodate development concer ns of host countries". UNCTAD, Most-Favoured-
Nation Treatment, Series on Issues in International Investment Agreements, 1999, p. 3.WT/WGTI/W/118
Page 12
investors, but not others, investment incentives and other benefits after they have established locally
and begun production.  In such instances, the host country would not be willing to offer full MFN
treatment at the pre-establishment or post-establishment stage of investment.22
45. Whether or not to apply national treatment to the entry of foreign investment is a particularly
sensitive issue for many host countries.  According to UNCTAD, until relatively recently nationaltreatment in IIAs was seen to be relevant almost exclusively to the post-establishment treatment of
investment;  extending it to the pre-establishment st age of investment in some recent IIAs, notably the
bilateral investment treaties of Canada and the United States, as well as regional agreements such as
the NAFTA, is a "revolution" for many countries.
23  When applied in full, it places foreign investors
on an equal footing with national investors, and re moves to a very large extent the means that a
host-country government has of supporting and protecting its own national investors.24  A t  t h e
pre-establishment stage of investment, for exam ple, full national treatment would prevent a
host-country government from reserving certain sectors or industries exclusively for national
investors, or attaching special conditions to foreign investment (even on an MFN-basis) that are not
applicable to national investment.  At the post-establishment stage, it would prevent a host country
government from subsidizing or providing other benefits exclusively to national investments, or from
exercising stricter regulatory control over foreign investments than over national investments, in areassuch as environmental or employment policy.  As a result, the type and extent of exceptions and
conditions attached to the rule of national treatment, that may be required in order to retain an
appropriate degree of host country discretion in investment matters, become all important.
46. The practical implication of these considerations is that the application of the rule of
non-discrimination in IIAs ranges from a strict and comprehensive formulation in some, to a muchlooser and narrower formulation in others.  Under a comprehensive formulation, an IIA requires a
host country to accord to a foreign investor no less favourable treatment, under all applicable laws and
regulations, than it accords to other foreign investors (MFN treatment) and to national investors
(national treatment), in like circumstances, wi th respect to the establishment and acquisition
(pre-establishment treatment), and the operation, maintenance, use, sale or liquidation(post-establishment treatment) of covered investments.
25  For the time being, very few IIAs approach
this level of ambition.  Most deal with post-establishment treatment only, focusing on investment
protection rather than on market access, and most contain exceptions that limit the scope of
application of the rule of non-discrimination, particularly the national treatment obligation, in some
cases considerably.
1. "Pre-establishment" and "post-establishment" treatment
47. A crucial distinction exists in most IIAs in the application of MFN and national treatment
between the "pre-establishment" and the "post-establishment" stages of investment.
48. Two main approaches are used in IIAs with regard to the pre-establishment (admission and
establishment) treatment of foreign investment.
                                                     
22 UNCTAD notes that in the case of investment incentive schemes, the MFN obligation would only
apply to general incentive programmes designed for an industry or sector as a whole.  It would not oblige a hostcountry to extend the benefits of so-called "one-off deals", in which a special benefit is provided to a particular
foreign investor, to all other foreign investors.  UNCTA D, Most-Favoured-Nation Treatment, Series on Issues in
International Investment Agreements, 1999, p. 30.
23 UNCTAD, National Treatment, Series on Issues in International Investment Agreements, 1999, p. 4.
24 UNCTAD notes:  " ... no country has so far seen  itself in a position to grant national treatment
without qualifications, especially when it comes to the establishment of an investment." Ibid, p. 1.
25 An example is the Model bilateral investment treaty of the United States, whose language on
non-discrimination is reproduced in paragraph 52 of this Note.WT/WGTI/W/118
Page 13
49. One approach is for foreign investments to be admitted in accordance with the domestic laws
and regulations of the host country, coupled in many instances with a requirement that each party
shall create favourable conditions for investors of other parties to make investments in its territory.
This is the formula used in the majority of bilateral investment treaties.  An example is:
Each Contracting Party shall promote investme nts by investors of the other Contracting
Party and admit such investments in accordance with its laws and regulations.  It shall
accord such investments fair and equitable treatment, and shall not impair by unreasonable
or discriminatory measures the management, maintenance, use, enjoyment, extension, sale or
liquidation of such investments.26
These treaties do not limit a party's ability to regulate or restrict the entry of foreign investment, andMFN and national treatment do not apply to the pre-establishment stage of an investment. Generally,
however, these treaties do apply MFN and national treatment at the "post-establishment" stage of aninvestment, after its admission to the host country.
27
50. Limiting the application of MFN and national treatment to the post-establishment stage of an
investment can be achieved in several ways.  The most usual is for an IIA to make it clear that these
obligations apply only to investments that have already been admitted and established in the territory
of the host country.  A typical example is:
A Contracting Party shall accord investments of the investors of one Contracting Party in its
territory a treatment which is no less favourable  than that accorded to investments made by
its own investors or by investors of any third country, whichever is the most favourable .28
51. The second approach to the admission and establishment of foreign investment is to apply
MFN treatment alone, or MFN and national treatment,  to the pre-establishment as well as to the
post-establishment stage of investment.  MFN and national treatment are applied at the
pre-establishment stage of an investment in most bilateral investment treaties of the United States and
the recent ones of Canada, as well as in some regional integration agreements that contain investment
provisions, such as NAFTA and MERCOSUR.  Naturally, in all cases the benefits of MFN and
national treatment apply only to investors and/or investments of parties to these agreements, not tothird countries.  Although this approach is far less common in IIAs for the time being, UNCTAD
notes a movement recently towards the wider application of MFN treatment at the pre-establishment
stage of an investment, and suggests that non-disc rimination at this market access stage is becoming
an increasingly important issue for host countries that want to attract more foreign direct investment
(FDI).
29
52. Application of MFN and national treatment in an IIA to the pre-establishment as well as to
the post-establishment stage of an investment is typically achieved by listing admission and
                                                     
26 This, or similar language, is contained in the Model bilateral investment treaties of Chile, China,
France, Germany, Switzerland, and the United Kingdom.  (UNCTAD, International Investment Instruments:  A
Compendium, (1996-2001), Volume III, pp. 143-193).  Most of the BITs concluded by the EC member States
follow this pattern (WT/WGTI/W30).  In some instances, MFN treatment, but not national treatment, is required
at the pre-establishment stage of investment.  This is a common element of Japan's bilateral investmentagreements (WT/WGTI/W/34).
27 This is a standard feature, for example, of th e Model bilateral investment treaties of Chile, France,
Germany, Switzerland, and the United Kingdom (UNCTAD, Ibid), as well as all of the BITs concluded by the
EC member States (WT/WGTI/W30) and India's Bilateral Agreements for the Promotion and Protection ofInvestments (WT/WGTI/W/71).
28 WT/WGTI/W/75, Communication from Japan.
29UNCTAD, Most-Favoured-Nation Treatment, UNCTAD Series on Issues in International Investment
Agreements, 1999, p. 15.WT/WGTI/W/118
Page 14
establishment as falling within the scope of activities to which the obligations apply.  For example,
the United States model bilateral investment treaty states:
With respect to the establishment, acquisition, expansion, management, conduct, operation
and sale or other disposition of covered inves tments, each Party shall accord treatment no
less favourable than that it accords, in like situations, to investment in its territory of its ownnationals or companies (hereinafter "national treatment") or to investments in its territory of
nationals or companies of a third country (hereinafter "most-favoured-nation treatment"),
whichever is most favourable (hereinafter "national and most-favoured-nation treatment") .
30
2. Exceptions
53. All IIAs provide for exceptions to the principle of non-discrimination.  These are important in
determining the scope of application of MFN and national treatment.  Exceptions to the national
treatment obligation are generally more numerous in IIAs than are exceptions to MFN treatment.
54. Many IIAs contain systemic exceptions that exclude particular activities, sectors or measures
from application of the rule of non-discrimination, and the range of potential exclusions is much
greater than in the case of trade agreements.  In some cases, these are based on reciprocity
considerations.  For example, all IIAs dealing with taxation matters exempt them from the MFN
obligation, to avoid undermining the purpose of separate, reciprocal, bilateral treaties on theavoidance of double taxation.
31  Other examples where separate reciprocal arrangements can take
precedence over IIAs are agriculture, fisheries, and maritime, air and road transportation.32  Some
IIAs exclude matters falling under the GATT/WTO.33  Some exclude the protection of intellectual
property rights, in recognition of separate obligations a treaty's parties may have under other
international intellectual property rights agreements.34  Some IIAs exclude government procurement
activities from the rule of non-discrimination, some exclude sectors controlled by state-owned
enterprises, some exclude cultural industries, and some exclude subsidies.35
55. Most IIAs provide general exceptions to the rule of non-discrimination that are permanently
available for any eligible treaty participant to in voke.  Typically, these cover much the same policy
areas as trade agreements – measures a host country applies in pursuit of the public interest in areas
                                                     
30 WT/WGTI/W/29, Communication from the United States.  The NAFTA uses a similar formulation.
31 UNCTAD, Most-Favoured-Nation Treatment, UNCTAD Series on Issues in International
Investment Agreements, 1999, p. 18.  Examples have been given of the bilateral investment treaties of the EC
member States (WT/WGTI/W/30), India (WT/WGTI/W/71), and Korea (WT/WGTI/W/42).
32 UNCTAD, Most-Favoured-Nation Treatment, UNCTAD Series on Issues in International
Investment Agreements, 1999, pp. 7-8.
33 For example, the bilateral investment treaty between Canada and Trinidad and Tobago (1995) exempts
from MFN treatment advantages accorded to third countrie s under any bilateral agreement "negotiated within the
framework of the GATT or its successor organization and liber alizing trade in services".  The bilateral investment
treaty between the United States and Jamaica (1994)  exempts from MFN treatment advantages accorded to
nationals or companies of any third country by virtue of "that Party's binding obligations under any multilateral
international agreement under the framework of the General Agreement on Tariffs and Trade".
34 In most US bilateral investment treaties, for example, MFN and national treatment obligations do not
apply to procedures provided for in multilateral agreements  concluded under the auspices of WIPO relating to the
acquisition or maintenance of intellectual property rights.  The bilateral investment treaty between Hong Kong,
China and Japan (1997) states that, notwithstanding the inclusion of intellectual property in the definition of
investment, nothing in the agreement shall be construed so as to derogate from the rights and obligations of theparties under international agreements relating to intellectual property rights.
35 E.g., NAFTA excludes government procurement, cultural industries, and subsidies.  On the other
hand, some recent bilateral investment treaties include sp ecific obligations on parties to apply MFN treatment in
respect of investment incentives, or include provisi ons aimed at avoiding practices that subject foreign
investment to certain restrictive and possibly distortive conditions. (WT/WGTI/W/77).WT/WGTI/W/118
Page 15
such as public health, order and morals, although the protection of national security is not generally
covered in bilateral investment treaties.  They cover also measures applied pursuant to regional trade
and economic integration agreements.36
56. Many IIAs allow for country-specific exceptions.  In contrast to the bottom-up, "positive" list
approach used in the GATS, most IIAs provide for exceptions and reservations to their MFN and
national treatment obligations through a top-down, "negative" list approach.  Where an IIA covers
pre-establishment as well as post-establishment treatment of an investment, the "negative" list of
exceptions is generally longer than when post-establishment treatment only is involved.37  It should be
recalled in this regard that most IIAs apply only to  the post-establishment stage of an investment.  In
IIAs where national treatment is provided at both the pre-establishment and the post-establishment
stages of an investment, a schedule of specific reservations is generally annexed to the agreement.
This schedule usually takes a "negative" list approach, under which the State undertakes to grantnational treatment in all investment stages and with respect to all laws, regulations and sectors, with
the exception of the reservations expressly included in the schedule.
38  For example, the US Model
bilateral investment treaty provides the right for each party to adopt or maintain exceptions falling
within one of the sectors or matters listed in the annex to the agreement.39  MERCOSUR follows a
similar pattern with respect to investments by its member States, subject to the right of each of themto maintain exceptional limitations for a transitional period, which must be detailed in an annex to the
Protocol.
40
3. MFN treatment, national treatment, or the better of the two
57. MFN treatment and national treatment are separate but closely related standards of treatment.
Situations can arise in which the two standards conf lict, particularly when they are used together in
different IIAs whose detailed terms and conditions vary.41
58. The following is an example.  Host country A concludes a bilateral investment treaty with
country B, under which investors from country B are entitled to a special investment incentive that is
not available to national investors in country A.  Country A has an existing bilateral investment treaty
with country C that entitles its investors to post -establishment MFN and national treatment but not to
any special investment incentive.  It follows, then, that investors from country C can claim entitlement
to the investment incentive under the MFN standard, but not under the national treatment standard.  In
interpreting the bilateral investment treaty between country A and country C, which standard should
prevail?
59. Some IIAs do not specify which standard should prevail in the event of a conflict between the
two.  Examples are the Model bilateral investment treaties of Germany, Portugal, and the
                                                     
36 The example of the Mexico/Costa Rica Free Trade Agreement is cited in WT/WGTI/W/68.
37 UNCTAD notes, for example, that in the case of the bilateral investment treaty between the
United States and Jamaica, the United States lists 17 ex ceptions to MFN treatment and 13 exceptions to national
treatment, while Jamaica lists four exceptions and one exception, respectively.  UNCTAD, National Treatment,
UNCTAD Series on Issues in International Investment Agreements, 1999, p. 53, fn. 18.
38 WT/WGTI/W/68, Communication from Costa Rica.
39 US Model investment treaty, Article II(2).
40 See UNCTAD, International Investment Instruments: A Compendium, (1996-2000) Volume II,
p. 520 for listed exceptions.
41 This would not seem to be as relevant to a multilateral investment agreement, since the MFN and
national treatment standards would both be measured from the same point of departure for all participants alike.However, it could be relevant if a multilateral investment agreement needed to operate in parallel with
obligations of some of the parties concerned under existing bilateral investment agreements.WT/WGTI/W/118
Page 16
United Kingdom.42  Others specify that the standard that is the more, or the most, favourable to the
foreign investor and/or investment applies.  Examples are the model bilateral investment treaties of
Canada, Chile, many of the EC member States, Ko rea, Switzerland, Turkey, and the United States, as
well as in the NAFTA.43  In the example given above, this would mean that the MFN standard would
prevail, since it would offer foreign investors from country C "better" treatment than nationaltreatment.  All foreign investors would be entitled to the same preferential treatment given to foreign
investors from country B.  The formula can be applied to the pre-establishment and the
post-establishment stage of investment.  An example from the United States Model bilateral
investment treaty was cited in paragraph 52.
60. Evidently, using the formulation in an IIA that  the better of MFN and national treatment will
apply can lead to all foreign investors being treated better than national investors.  More probably,
however, an IIA will contain exceptions or limitat ions to national treatment, with the result that
foreign investors will be treated better than their domestic counterparts in certain respects, but not as
well in others.
4. "Investment" or "investor"
61. As in the case of trade agreements, the principle of non-discrimination needs an objective
basis upon which it can be applied in an IIA, that makes it clear precisely what is to receive MFN andnational treatment.  In the case of the GATT, that basis is products, and in the case of the GATS it is
services and service providers.  Some IIAs take the "investment" as the objective basis, some take the
"investor", and some apply to both.
62. In most cases, the explanation for the difference in wording between IIAs on this issue relates
to the definitions used in a particular IIA.  As noted in WT/WGTI/W/108, some IIAs use and defineonly the term "investment", some use and define both "investment" and "investor";  the same
approach is carried over to specify the scope of an IIA's non-discrimination provisions.  For example,
the bilateral investment treaties of the United States grant MFN and national treatment only to
"investment", but at the same time they do not contain reference to, nor define, the term "investor".  In
contrast, the NAFTA and the Model investment treaty of Switzerland use and define also the term"investor", and they entitle both foreign investors and their investments to MFN and national
treatment.
44
63. It has been stated in the Working Group that th e choice between "investment", "investor" and
"investment and investor" can have substantive implications that go beyond the simple definitional
issue, in certain contexts at least.  At the pre-establishment stage of investment, it has been suggested
that it may be necessary to clarify whether the host country undertakes to grant MFN and national
treatment to potential investors who have not yet established an investment but intend to do so.45  As
regards the post-establishment stage of investment, one Member has noted that its practice is to apply
national treatment to foreign investments, but not to foreign investors.46
                                                     
42 UNCTAD, International Investment Instruments:  A Compendium, (1996-2000) Volume III, pp. 169
and 187, and UNCTAD, Bilateral Investment Treaties in the Mid-1990s, (1998) p. 268.
43UNCTAD, Ibid, (1996-2000), pp. 145, 161, 179, and 197, and WT/WGTI/W/19, W/28, W/29, W/30,
W/42 and W/51.
44 UNCTAD, International Investment Instruments: A Compendium, (1996-2000) Vol III, pp. 73 and
177.
45WT/WGTI/W/68, Communication from Costa Rica.
46 WT/WGTI/W/71, Communication from India.WT/WGTI/W/118
Page 17
5. "Equal" treatment
64. Most IIAs use the term "treatment no less favourable" to establish the basis of comparison
between foreign investments for applying the MFN standard, and between foreign and national
investments for applying the national treatment standard.47  The rationale for this was explained
earlier in this Note in relation to the GATT and the GATS (see paragraphs 18 and 23).  A standard of"identical" treatment can be applied when there are clear and objective (usually quantitative) grounds
for measuring it, as is the case, for example, of ad valorem  tariffs under the GATT MFN obligation.
However, this standard is more difficult to apply to laws, regulations and other measures that involve
a qualitative comparison of the treatment proffered and, often, also administrative discretion in their
application.  In the main, it is these measures, rather than quantitative measures, that affect the
treatment of investment in a host country.
65. The standard of "treatment no less favourable" is therefore typically used in IIAs, with the
aim of creating effective opportunities for foreign investment to compete with domestic investment on
equivalent terms and conditions.  This means that justifiable differences can exist in the treatment
accorded, as long as the overall competitive opport unities of foreign investments in the host country
market are maintained.
66. The formulation of "treatment no less favourable" implies that foreign investors may be
treated more favourably than national investors in the context of the application of national treatment.
For some host countries, that may indeed be the intention – to offer positive discrimination in favour
of foreign investors in order to attract foreign invest ment.  To the extent that this is not the intended
consequence, however, some IIAs specifically exclude that possibility.  For example, according to a
1992 World Bank survey of 51 investment codes adopted by developing countries, many havefavoured a definition of national treatment that excludes the possibility of granting more favourable
treatment to foreign investors, through a test of treatment similar or equal to that given to local
investors.
48
6. "Like" circumstances
67. Since MFN and national treatment are relative standards of treatment, that are to be measured
against the treatment given to existing producers and investors, some IIAs follow the practice of the
GATT and the GATS in specifying that they apply only between investments that are in "like" or
"similar" circumstances.49  This indicates that investors do not have to be treated equally irrespective
of their activities in a host country.  Different treatment is justified if investors are in different
objective circumstances, such as operating in different sectors of activity.  For example, it would not
necessarily breach MFN or national treatment in an II A if a host country limited subsidies to investors
in high technology industries, but not others, or if it set a threshold relating to the size of theworkforce employed as a condition for both national and foreign investors to receive a subsidy.  Only
if investors of a particular nationality, or foreign investors as a group, found themselves
systematically excluded, or if the purpose of a measure were found to be deliberately protectionist,
would there be grounds for considering de facto  discrimination.
68. Including the term "in like circumstances" in an IIA raises the question of what relevant
criteria should be used to determine which circumstances are "like", and which are different.  One
                                                     
47 This is the formulation used in the Model investment agreements of Chile, France, Germany, the
Netherlands, Portugal, Switzerland, the United Kingdom and the United States, as well as in the NAFTA.UNCTAD, International Investment Instruments:  A Compendium, (1996-2000) Vol III, pp. 73 and 143-193.
48 World Bank, Legal Framework for the Treatment of Foreign Investment, Volume 1:  Survey of
Existing Instruments, (Washington, 1992).
49 The term is used in bilateral investment treaties of the United States, in the Canada-Chile Free Trade
Agreement, and in the NAFTA.WT/WGTI/W/118
Page 18
view is that this can encourage creative thinking on the part of host countries to define "different"
circumstances, and that it is preferable not to use the term at all.  This leaves open the scope for
comparison of the treatment offered to investors, vis-à-vis  other foreign investors and national
investors.
V. DISCUSSIONS IN THE WORKING GROUP
69. It has been noted in the Working Group that MFN and national treatment are core provisions
of most IIAs, and that their application can vary according to a number of factors.  These are, in
particular:  whether an IIA applies to the post-establishment treatment of investment only, or to
pre-establishment treatment and admission of investment too;  appropriate means of striking a proper
balance between applying the rule of non-discrimination on the one hand, and maintaining policy
flexibility to address vital economic, development, and public interest objectives on the other;  and
appropriate forms of exceptions and limitations attached to non-discrimination provisions, particularlyto national treatment.  In addition, a number of comments have been made on more detailed aspects of
the formulation of the rule of non-discrimination.
70. Although the principle of non-discrimination and the standards of MFN and national
treatment have become common features of IIAs, some have suggested that the different ways in
which they are applied operationally in separate IIAs decreases their value considerably.  That isparticularly the case for the numerous bilateral investment treaties that exist today.  Notwithstanding
the MFN commitments incorporated into most of  them, they have created a fragmented web of
different legal standards of treatment for investors from different countries.  This is detrimental both
to the ease and efficiency with which governments can administer the agreements, and to the
transparency, stability and predictability of investment conditions that private investors are seeking.This makes it desirable to take a multilateral approach and to establish a common standard of
non-discrimination applicable to all.
71. Some others have doubted that the diversity of bilateral investment treaties undermines the
value of their respective non-discrimination provisions in any significant way, and suggested, in any
event, that from a developing country's point of view the flexibility of these agreements outweigh anydisadvantages they may have in this respect.
A.P RE- AND POST-ESTABLISHMENT TREATMENT
72. A prominent theme of discussion, particularly with regard to national treatment, has been
whether the principle of non-discrimination should  apply only to the post-establishment stage of
investment, which is common practice in most IIAs, part icularly bilateral investment treaties, or at the
pre-establishment stage too, which for the time being is not.
73. It has been noted that under customary internatio nal law there is no "right to invest" or "right
of admission" for foreign investors, and there are very few protections for foreign investment once
established.  Any legal rights and obligations in this field are the result of international legal
instruments that States choose to accept.  The rela ted concept of the "right of establishment" has been
created in foreign investment law, but this typically occurs only in the context of deep economic
integration agreements, such as an economic union;  it is not a standard feature of IIAs.
74. In this regard, it has been suggested that MFN and national treatment are the most common
and practical forms of pre-establishment obligations undertaken in IIAs.  They do not involve a right
of establishment, but rather a requirement to elim inate measures that discriminate against foreign
investors.  They can be made subject to exceptions, relating to matters such as screening procedures,
national security, public order, privatization, balance-of-payments considerations, and performancerequirements.  They can also be tied to specific ("negative" or "positive" list) commitments on marketWT/WGTI/W/118
Page 19
access.  In this way it has been suggested that a modulated legal framework for regulating the
admission and establishment of foreign investment can be created, combining the discipline of
non-discrimination with flexibility for host countries to apply domestic policies according to their
needs.
75. One view has been that developing countries need to be able to apply national treatment in
particular, and MFN treatment too, flexibly at both the post-establishment and the pre-establishment
stages of investment.  Incorporating a development dimension into an international investment
agreement implied that there should be no automatic right to invest or establish a foreign investment.
This would ensure that host countries retained the ability to screen foreign investments, and allow in
only those that would best suit their industrial policies and developmental needs and not stifle
domestic investment and development. Most bilateral investment treaties provide for that, by
excluding pre-establishment treatment from application of MFN and national treatment, and byattaching whatever limitations or qualifications developing countries deem necessary to their MFN
and national treatment obligations at the post-establishment stage of investment.  At the
pre-establishment stage, they provided an assura nce of investment protection in accordance with the
domestic laws of host countries by applying international standards such as "fair and equitable
treatment".  Bilateral investment treaties therefore offered a framework within which countries couldact autonomously to create an enabling environment for foreign investment.  While creating legal
security for foreign investors, they did not affect the ability of a host country to regulate FDI and to
use other policies to pursue national development objectives.
76. Another view has been that in order to prot ect an investment adequately, an investment
agreement must address the three stages of an investment – its entry, its operation after establishment,and its liquidation – and MFN and national treatment should apply to investors and/or their
investments at all three stages.  Applying the principle of non-discrimination to the post-establishment
stage only is not sufficient.  Entry is the stage at which governments can deny market access
altogether, demand government or local participation in the ownership or control of the investment, or
set conditions such as performance requirements.  Conditions attached to entry into a host countryoften remain in force throughout the life of an investment, either because the applicable policies
remain in force or because once such conditions have been set, it is often impractical or too costly for
a foreign investor subsequently to restructure the investment.  This means that discrimination applied
at the pre-establishment stage can prevent a foreign investor from competing on equal terms with
domestic investors throughout the life of an investment, and this prospect can preclude an investment
from taking place altogether.  In this regard, the application of the principle of non-discrimination at
the pre-establishment stage of an investment is a critical market access issue, and market access is akey ingredient of an investment treaty.  A commitment not to discriminate at the post-establishment
stage is meaningless if the investment is prevented altogether from happening or so handicapped by
restrictions and conditions applied during establishment that it is at a competitive disadvantage
vis-à-vis  competing domestic investors.
B. B
ALANCING DISCIPLINE WITH FLEXIBILITY
77. A second prominent theme of discussion has been the need for IIAs to strike an appropriate
balance between discipline and flexibility in the application of the principle of non-discrimination:
discipline to provide legal security for foreign investors on the one hand, and flexibility for host
countries to regulate the activities of foreign investors and to be able to pursue their development and
other domestic policy objectives on the other.
78. One view has been that flexibility to accommodate development and other domestic policy
objectives in an investment agreement is not synonymous with discrimination.  Appropriate standards
of non-discrimination, coupled as appropriate with exceptions and limitations, can be found that allow
for the necessary degree of policy flexibility for host countries.WT/WGTI/W/118
Page 20
79. In this respect, some have felt that a differentiation may need to be made between MFN and
national treatment.  They have suggested that there is no evident reason to discriminate among
investments or investors on the grounds of their nationality, so that MFN treatment should be a core
principle of general application in IIAs.  Host countries have better policy instruments at their
disposal to attract the kind of high quality foreign in vestment that they want other than differentiating
between investors on the grounds of their nationality.  With regard to national treatment, on the other
hand, there can be scope to vary its application so as to allow host countries to use their development
policies flexibly, as well as policies in other areas such as education, training, employment and
environmental protection.  However, this should be done on the basis of objective and transparent
criteria that reflect differences in circumstances between foreign investors and domestic investors,
particularly those in developing countries.
80. In this context, some have pointed to the national treatment exceptions and limitations that are
allowed under the GATS as examples of how a suitable balance between discipline and flexibility can
be struck.  One comment in this regard has been that modalities for scheduling market access in an
investment agreement would have important bearings on the application of the principle of
non-discrimination, particularly the application of the rule of national treatment.
81. Another view has been to question whethe r a proper balance between discipline and
flexibility can ever be found in a multilateral framework on investment, and whether the national
treatment principle, in particular, is readily transfer able from trade to the case of foreign investment.
Granting MFN and national treatment to foreign investors prevents developing countries from
pursuing policies that they deem appropriate in areas such as industrialization and the transfer of
technology.
82. Doubts have been expressed about the GATS offering the necessary degree of flexibility to
serve as a model for a possible investment agreem ent.  Even with the use of MFN exemptions and
national treatment exceptions and limitations, it was felt that developing countries would not be able
to secure the level of protection for their domestic investors that they needed.  One concern expressed
in this regard has been whether developing countries would have the scope to adjust nationaltreatment commitments they make in particular sect ors if they find subsequently that these are not
compatible with their development needs.  It ha s been suggested that in the case of a possible
multilateral investment agreement it would be necessary to consider creating permanent carve-outs
from national treatment for specific sectors and policies.
83. One view has been that the contours of any set of rights and obligations on investment should
depend on whether the objective was the promotion, treatment and protection of investment, its
liberalization, or both.  Broadly speaking, a host country needed to ensure the effective promotion,
fair treatment and full protection of FDI, while a home country would need to respect the policies and
rules of the host country and actively assist in the realization of its objectives or, at the very least, not
undermine such objectives.  The crux of the matter was how multilateral rules could take into account
the development dimension in a more meaningful manner than through preambular references and
transition periods.  The development dimension should be manifest in each of the elements thatcomprised any set of multilateral rules on investment.
C. E
XCEPTIONS
84. It has been noted that the principle of non-discrimination, whether applied at the
post-establishment stage of investment only, or at the pre-establishment stage too, is always subject in
IIAs to horizontal or sectoral exceptions that allow participants to pursue essential domestic policies,such as development policies, and to safeguard im portant interests, such as national security and
public order.WT/WGTI/W/118
Page 21
85. In that context, there has been reference in particular to the qualification of national treatment
in the GATS on a country-by-country basis through the "positive" list approach to scheduling service
industries to which the National Treatment standard applies.  One view is that this weakens the
standard significantly.  Another is that it is needed  to provide flexibility to host countries, particularly
developing countries.
86. A key consideration for some is that whether a "positive" or a "negative" list approach is
used, there should be transparency and predictability of any limitations to national treatment.
D. DEFINITIONAL ISSUES
87. It has been noted that the scope of application of MFN and national Treatment in an IIA
depends crucially on the definitions used.
88. One view has been that when applying MFN and national treatment, foreign and domestic
investors need to be in "like" circumstances.  For example, two firms with the same manufacturingfacilities and the same product, but located in different regions, might be held to different air pollution
control standards because of differences in levels of air pollution between these regions.  These two
investors would not be in like circumstances for the purpose of air pollution controls.  Some have felt
that the concept of like circumstances could be useful to ensure a degree of flexibility in the
application of national treatment in particular, but that it would need to be defined precisely if it wereto be incorporated in a multilateral investment agreement.
E. O
THER AREAS FOR FURTHER ANALYSIS
89. A number of other areas for further analysis have been proposed in the Working Group:
•  interaction between the non-discrimination provis ions of existing IIAs, particularly their
MFN provisions;
• application of the principle of non-discrimination in the case of investment laws and
regulations at sub-federal levels of government;
• whether the existence of a common competition policy should be a prerequisite for the
existence of a right of establishment in an IIA;
• whether MFN and national treatment should be applied as conditional or unconditional
principles of non-discrimination;
• criteria to define potential investors if national treatment were to be accorded to foreign
investors at the pre-establishment stage of an investment;
• the compatibility of the MFN principle with screening procedures used by some host
countries to evaluate the costs and benefits of particular foreign investments;
• handling investment incentives under the rules of MFN and national treatment.WT/WGTI/W/118
Page 22
VI. EXAMPLES OF THE APPLICATION OF THE PRINCIPLE OF NON-
DISCRIMINATION IN REGIONAL AND MULTILATERAL INVESTMENT
AGREEMENTS AND ARRANGEMENTS
90. The 1987 Agreement Among the Governments of Brunei Darussalam, the Republic of
Indonesia, Malaysia, the Republic of the Philippines, the Republic of Singapore and the Kingdom ofThailand for the Promotion and Protection of Investments  requires each contracting party to
encourage and create favourable conditions in its territory for investments from the other contracting
parties, in a manner consistent with its national objectives.  General treatment standards require
contracting parties to accord fair and equitable treatment and full protection and security to
investments from other contracting parties, to observe any obligation arising from particular
commitments entered into with regard to specific investments of nationals or companies of the other
contracting parties, and to refrain from impairing by unjustified or discriminatory measures themanagement, maintenance, use, enjoyment, extension, disposition or liquidation of investments from
other contracting parties.  The Agreement requires that MFN treatment be accorded to investments
made by investors of other contracting parties, but national treatment is a subject for bilateral
negotiations between contracting parties.
91. Under the 1992 North American Free Trade Agreement  (NAFTA) each Party is required to
accord the better of MFN and national treatment to investors of another Party, and to investments of
investors of another Party, with respect to the establishment, acquisition, expansion, management,
conduct, operation, and sale or other disposition of investments.  This obligation is qualified by the
Parties' ability to lodge (top-down) country-specific reservations listed in annexes to the Agreement
and is subject to certain exceptions with respect to government procurement, subsidies and intellectualproperty.
50  Minimum standards of treatment require each Party to accord to investments of investors
of another Party treatment in accordance with international law, including fair and equitable treatment
and full protection and security, and non-discriminatory treatment with respect to measures a Party
adopts or maintains relating to losses suffered by investments in its territory owing to armed conflict
or civil strife.
92. The 1994 Colonia Protocol on Reciprocal Promotion and Protection of Investments within
MERCOSUR  covers investments of investors of one MERCOSUR Member State in the territory of
another.  It provides that each contracting party shall accord MFN and national treatment in respect of
the admission of investments of investors of another contracting party.  An Annex to the Protocol
identifies for each contracting party specific se ctors in which it may maintain limited, temporary
exceptions to this obligation, requires contracting parties to make all efforts to eliminate these
exceptions as soon as possible, and provides for periodic consultations to monitor the process of theirelimination.  With respect to the treatment of investment once admitted, the Protocol requires the
contracting parties to accord fair and equitable treatment and full legal protection, to refrain from
impairing the management, maintenance, use, enjoyment or disposal of investments through
unjustified or discriminatory measures, and to accord MFN and national treatment.
51  It prohibits
nationalization or expropriation of covered investments, except for public purposes and then only on a
                                                     
50 Article 1108 allows for such country-specific reservations with regard to:  (1) existing non-conforming
measures maintained by a Party at the federal, state or local level, as set out in that Party's Schedule to theAgreement;  (2) any measure that a Party maintains or adopts with respect to specified sectors, subsectors oractivities, as set out in its Schedule to Annex II;  an d (3) treatment accorded by a Party pursuant to specified
agreements or with respect to sectors, as set out in its Schedule.  With respect to intellectual property, the MFN and
National Treatment obligations do not apply to any measure that is an exception to, or derogation from, the
obligations under the National Treatment article of the NAFTA Chapter on intellectual property, as specificallyprovided for in that article.
51 With regard to the MFN and National Treatment obligations, the Annex contains a reservation by
Brazil relating to government procurement.WT/WGTI/W/118
Page 23
non-discriminatory basis.  It also requires that national treatment and MFN treatment be accorded to
covered investments in relation to measures taken with respect to indemnification or compensation for
losses suffered owing to war, other armed conflict or internal disorder.
93. In 1994, MERCOSUR Member States adopted a Protocol on Promotion and Protection of
Investments from States not Parties to MERCOSUR .  The Parties to this Protocol undertake not to
accord to investments of investors of third countries more favourable treatment than that provided for
in the Protocol.  Each Party is required to promote investments from third countries and to admit them
in conformity with its domestic laws and regulations.  In respect of the treatment of established
investments, the Protocol lays down general standards of treatment which are similar to those
contained in the Colonia Protocol, except that the Parties can decide whether or not to accord national
treatment and MFN treatment to established investments of investors of third countries.  Parties to the
Protocol may not extend to investors of third countries treatment, preferences or privileges accordedunder regional trade and integration agreements or agreements in the field of taxation.
94. The 1995  Treaty on Free Trade between Colombia, Mexico and Venezuela  requires Parties to
accord MFN and national treatment to investors of another Party and their investments, subject to an
exception for treatment accorded pursuant to bilateral agreements for the avoidance of double
taxation, and to the right of each Party to impose special formalities in connection with theestablishment of an investment.  The Treaty envisages the conclusion of an additional Protocol
containing lists of sectors and subsectors in which each Party may maintain or adopt measures not
conforming to these national treatment and MFN treatment obligations.
95. The 1994  Energy Charter Treaty  requires each contracting party to encourage and create
stable, equitable, favourable and transparent conditions for investors of other contracting parties tomake investments in its area;  to accord fair and equitable treatment and the most constant protection
and security to investments of investors of other contracting parties;  to refrain from impairing by
unreasonable or discriminatory measures the management, maintenance, use, enjoyment or disposal
of such investments;  to accord treatment which shall be no less favourable than that required by
international law, including treaty obligations;  and to observe any obligation it has entered into withan investor or an investment of an investor of any other contracting party.  With regard to MFN and
national treatment, the Treaty distinguishes between the treatment of established investments and the
admission of investments.  Regarding the treatment of established investments, it requires contracting
parties to accord the better of MFN and national treatment to investments of investors of other
contracting parties and their related activities, including management, maintenance, use, enjoyment or
disposal.  This obligation does not apply to intellectual property, nor to grants and other forms of
financial assistance and contracts for energy technology.  Regarding the admission of investments ofinvestors of other contracting parties, it provides that contracting parties "shall endeavour" to accord
the better of MFN and national treatment to investors of other contracting parties.  Negotiations were
concluded in 1997 on a Supplementary Treaty co ntaining a legally binding non-discrimination
obligation covering the pre-establishment stage, defined as establishing new investments, acquiring all
or part of existing investments, or moving into different fields of investment activity.  It provides fortwo types of exceptions from the non-discrimination principle:  it grandfathers existing restrictions
which are registered by individual Member countries, and it provides for a listed country to reserve
for its own nationals all or some of the state' s share of assets which are being privatized.
96. The 1994 APEC Non-Binding Investment Principles  contain principles of a general nature
that Member economies will extend MFN treatmen t to investors from any economy with respect to
the establishment, expansion and operation of their investments, and accord national treatment to
foreign investors in relation to the establishmen t, expansion, operation and protection of foreign
investment, with exceptions as provided for in domestic laws, regulations and policies.  Member
economies will not expropriate foreign investments or take measures that have a similar effect exceptWT/WGTI/W/118
Page 24
for public purposes, and then only on a non-discriminatory basis in accordance with the laws of each
Member and principles of international law.
97. The 1976 OECD National Treatment Instrument  is one of four components of the OECD
Declaration on International Investment and Multinational Enterprises .52  The Declaration is not
legally binding, and it does not deal with the right of Member countries to regulate the entry offoreign investments or the conditions of establishment  of foreign enterprises, so that it covers the
treatment of investment only after its admission.  The National Treatment Instrument provides that
Member countries, consistent with their needs to maintain public order, to protect their essential
security interests and to fulfil commitments relating  to international peace and security, should accord
to enterprises operating in their territories, and owne d or controlled directly or indirectly by nationals
of another member country, treatment consistent with international law and no less favourable than
that accorded in like situations to domestic ente rprises.  Exceptions to this national treatment
commitment are notified to the OECD for transparency purposes.
__________
                                                     
52 WT/WGTI/W/40, Communication from the OECD.