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The Value of MFN Treatment

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  • Madanmohan Ghosh
  • Carlo Perroni
  • John Whalley

Abstract

We discuss most favoured nation (MFN) treatment in trade agreements, suggesting that its value to individual countries depends critically on the relevant model solution concept used to evaluate it. We analyze both rights to MFN treatment in foreign markets, and the obligation to grant MFN treatment in home markets; the heart of the post-war GATT/WTO multilateral trading system. In a traditional competitive equilibrium framework, MFN gives benefits to small countries in being able to free ride on bilateral tariff concessions exchanged between larger countries in GATT/WTO negotiating rounds. In a non-cooperative Nash equilibrium framework, MFN restrains retaliatory actions to be non-discriminatory. In a co-operative bargaining framework in which trade policies are jointly set, MFN changes the threat point and hence affects the bargaining solution. We use a calibrated numerical model of global trade in which we compute all three solution concepts and compare MFN and non MFN equilibria for each. We use the GTAP (1992) data base, concluding that quantitatively the most significant effect of MFN seems to be in its impact on bargaining rather than on competitive and Nash equilibrium solutions; being beneficial to smaller countries.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6461.

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Date of creation: Mar 1998
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Handle: RePEc:nbr:nberwo:6461

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References

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  1. Shoven,John B. & Whalley,John, 1992. "Applying General Equilibrium," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521266550.
  2. John Whalley, 1984. "Trade Liberalization among Major World Trading Areas," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262231204, December.
  3. Sang-Seung, Yi, 1996. "Endogenous formation of customs unions under imperfect competition: open regionalism is good," Journal of International Economics, Elsevier, Elsevier, vol. 41(1-2), pages 153-177, August.
  4. Bond, Eric W. & Syropoulos, Constantinos, 1996. "The size of trading blocs Market power and world welfare effects," Journal of International Economics, Elsevier, Elsevier, vol. 40(3-4), pages 411-437, May.
  5. Perroni, Carlo & Whalley, John, 1996. "How Severe Is Global Retaliation Risk under Increasing Regionalism?," American Economic Review, American Economic Association, American Economic Association, vol. 86(2), pages 57-61, May.
  6. Rodney D. Ludema, 1998. "On the Value of Preferential Trade Agreements in Multilateral Negotiations," International Trade, EconWPA 9802003, EconWPA.
  7. Carlo Perroni & John Whalley, 2000. "The new regionalism: trade liberalization or insurance?," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 33(1), pages 1-24, February.
  8. Jon D. Haveman, 1996. "Some Welfare Effects of Sequential Customs Union Formation," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 29(4), pages 941-58, November.
  9. Kuga, Kiyoshi, 1973. "Tariff retaliation and policy equilibrium," Journal of International Economics, Elsevier, Elsevier, vol. 3(4), pages 351-366, November.
  10. Dawkins, Christina & Srinivasan, T.N. & Whalley, John, 2001. "Calibration," Handbook of Econometrics, Elsevier, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 5, chapter 58, pages 3653-3703 Elsevier.
  11. Hamilton, Bob & Whalley, John, 1983. "Optimal tariff calculations in alternative trade models and some possible implications for current world trading arrangements," Journal of International Economics, Elsevier, Elsevier, vol. 15(3-4), pages 323-348, November.
  12. Kalai, Ehud & Smorodinsky, Meir, 1975. "Other Solutions to Nash's Bargaining Problem," Econometrica, Econometric Society, Econometric Society, vol. 43(3), pages 513-18, May.
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Cited by:
  1. Ghosh, Madanmohan, 2002. "The revival of regional trade arrangements: a GE evaluation of the impact on small countries," Journal of Policy Modeling, Elsevier, Elsevier, vol. 24(2), pages 83-101, May.
  2. Horn, Henrik & Mavroidis, Petros C., 2001. "Economic and legal aspects of the Most-Favored-Nation clause," European Journal of Political Economy, Elsevier, Elsevier, vol. 17(2), pages 233-279, June.
  3. Lim“o, Nuno, 2002. "Are Preferential trade Agreements with Non-trade Objectives a Stumbling Block for Multilateral Liberalization?," Royal Economic Society Annual Conference 2002, Royal Economic Society 129, Royal Economic Society.
  4. Bhattarai K., 2001. "Welfare Gains to UK from a Global Free Trade," European Research Studies Journal, European Research Studies Journal, European Research Studies Journal, vol. 0(3-4), pages 55-72, July - De.

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