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An analysis of the MFN clause under asymmetries of cost and market structure

In: Economic Analysis of the Rules and Regulations of the World Trade Organization

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  • Kamal Saggi
  • Halis Murat Yildiz

Abstract

We conduct a welfare comparison of MFN and tariff discrimination in an oligopoly model of trade between two exporting countries and one importing country. While MFN dominates tariff discrimination from a world welfare perspective when exporting countries are asymmetric with respect to either cost or market structure, such need not be the case when both types of asymmetries co-exist. In particular, when highcost exporters are merged and the cost disadvantage of the merged unit relative to competing firms is of intermediate magnitude, tariff discrimination can be welfare preferred to MFN (even when the average tariff is actually lower under MFN).

Suggested Citation

  • Kamal Saggi & Halis Murat Yildiz, 2018. "An analysis of the MFN clause under asymmetries of cost and market structure," World Scientific Book Chapters, in: Kamal Saggi (ed.), Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 2, pages 33-45, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789813233058_0002
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    1. Kamal Saggi, 2018. "Tariffs and the most favored nation clause," World Scientific Book Chapters, in: Kamal Saggi (ed.), Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 1, pages 3-32, World Scientific Publishing Co. Pte. Ltd..
    2. Bagwell,K. & Staiger,R.W., 1999. "Multilateral trade negotiations, bilateral opportunism and the rules of GATT," Working papers 6, Wisconsin Madison - Social Systems.
    3. Choi, Jay Pil, 1995. "Optimal tariffs and the choice of technology Discriminatory tariffs vs. the 'Most Favored Nation' clause," Journal of International Economics, Elsevier, vol. 38(1-2), pages 143-160, February.
    4. Rodney D. Ludema, 1991. "International Trade Bargaining And The Most‐Favored‐Nation Clause," Economics and Politics, Wiley Blackwell, vol. 3(1), pages 1-20, March.
    5. Hong Hwang & Chao-Cheng Mai, 1991. "Optimum Discriminatory Tariffs under Oligopolistic Competition," Canadian Journal of Economics, Canadian Economics Association, vol. 24(3), pages 693-702, August.
    6. Robert W. Staiger & Kyle Bagwell, 1999. "An Economic Theory of GATT," American Economic Review, American Economic Association, vol. 89(1), pages 215-248, March.
    7. Brander, James A. & Spencer, Barbara J., 1985. "Export subsidies and international market share rivalry," Journal of International Economics, Elsevier, vol. 18(1-2), pages 83-100, February.
    8. Saggi, Kamal & Yildiz, Halis Murat, 2005. "The Case for MFN under Asymmetries of Cost and Market Structure," MPRA Paper 76331, University Library of Munich, Germany.
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    Citations

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    Cited by:

    1. Ferrara, Ida & Missios, Paul & Murat Yildiz, Halis, 2009. "Trading rules and the environment: Does equal treatment lead to a cleaner world?," Journal of Environmental Economics and Management, Elsevier, vol. 58(2), pages 206-225, September.
    2. Ki‐Dong Lee & Kangsik Choi, 2024. "Uniform versus discriminatory tariffs when competition mode is endogenous," Bulletin of Economic Research, Wiley Blackwell, vol. 76(1), pages 95-120, January.
    3. Kamal Saggi & Faruk Sengul, 2018. "On the emergence of an MFN club: equal treatment in an unequal world," World Scientific Book Chapters, in: Kamal Saggi (ed.), Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 4, pages 76-108, World Scientific Publishing Co. Pte. Ltd..
    4. Lee, Ki-Dong & Choi, Kangsik, 2023. "Optimal tariffs with endogenous vertical structure: Uniform versus discriminatory tariffs," Mathematical Social Sciences, Elsevier, vol. 124(C), pages 35-50.
    5. Sajal Lahiri & Peri Silva, 2016. "Potential Pareto-Improving Move Toward Most Favored Nation Tariffs," Economic Inquiry, Western Economic Association International, vol. 54(2), pages 1086-1104, April.
    6. Pei-Cheng Liao, 2008. "International R&D Rivalry with Spillovers and Tariff Policies," Open Economies Review, Springer, vol. 19(1), pages 55-70, February.
    7. Nigar Hashimzade & Hassan Khodavaisi & Gareth Myles, 2011. "MFN Status and the Choice of Tariff Regime," Open Economies Review, Springer, vol. 22(5), pages 847-874, November.
    8. Kangsik Choi & Seonyoung Lim, 2023. "Sequential tariffs with increasing marginal costs," Manchester School, University of Manchester, vol. 91(4), pages 336-360, July.
    9. Missios, Paul & Yildiz, Halis Murat, 2006. "The role of MFN under asymmetries in environmental standards," Economics Letters, Elsevier, vol. 93(2), pages 297-304, November.
    10. Hong-Ren Din & Kuang-Cheng Andy Wang & Wen-Jung Liang, 2016. "MFN vs Tariff Discrimination in the Presence of Cross Ownership," Review of International Economics, Wiley Blackwell, vol. 24(5), pages 1149-1166, November.

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    More about this item

    Keywords

    Multilateral Trading System; Trade Agreements; Trade Liberalization; International Tariff Cooperation; WTO Disputes; Case Studies;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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