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The MFN clause, welfare, and multilateral cooperation between countries of unequal size

  • Saggi, Kamal

This paper analyzes MFN in a "competing exporters" model of trade between three countries with unequal endowments and shows that MFN yields higher aggregate welfare than tariff discrimination even as it makes low income countries worse off. Furthermore, in a repeated game of tariff cooperation, multilateral free trade is easier to sustain under MFN punishments relative to discriminatory ones. This conclusion holds even when tariff discrimination takes the form of bilateral trade agreements. Overall, the analysis shows that from the viewpoint of low income countries, MFN and multilateral tariff cooperation are complementary in nature.

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Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 88 (2009)
Issue (Month): 1 (January)
Pages: 132-143

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Handle: RePEc:eee:deveco:v:88:y:2009:i:1:p:132-143
Contact details of provider: Web page: http://www.elsevier.com/locate/devec

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  1. 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.
  2. McCalman, Phillip, 2002. "Multi-lateral trade negotiations and the Most Favored Nation clause," Journal of International Economics, Elsevier, vol. 57(1), pages 151-176, June.
  3. Bond, Eric W & Syropoulos, Costas & Winters, L. Alan, 2000. "Deepening of Regional Integration and Multilateral Trade Agreements," CEPR Discussion Papers 2480, C.E.P.R. Discussion Papers.
  4. Bagwell,K. & Staiger,R.W., 1998. "An economic theory of GATT," Working papers 15, Wisconsin Madison - Social Systems.
  5. Bagwell, Kyle & Staiger, Robert W, 1997. "Multilateral Tariff Cooperation during the Formation of Free Trade Areas," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 291-319, May.
  6. Horn, Henrik & Mavroidis, Petros C, 2001. "Economic and Legal Aspects of the Most Favoured Nation Clause," CEPR Discussion Papers 2859, C.E.P.R. Discussion Papers.
  7. Riezman, Raymond, 1991. "Dynamic tariffs with asymmetric information," Journal of International Economics, Elsevier, vol. 30(3-4), pages 267-283, May.
  8. Robert W. Staiger, 1994. "International Rules and Institutions for Trade Policy," NBER Working Papers 4962, National Bureau of Economic Research, Inc.
  9. Chad Bown, 2004. "Trade policy under the GATT-WTO: empirical evidence of the equal treatment rule," Canadian Journal of Economics, Canadian Economics Association, vol. 37(3), pages 678-720, August.
  10. Saggi, Kamal, 2004. "Tariffs and the most favored nation clause," Journal of International Economics, Elsevier, vol. 63(2), pages 341-368, July.
  11. Bagwell, Kyle & Staiger, Robert W., 2004. "Multilateral trade negotiations, bilateral opportunism and the rules of GATT/WTO," Journal of International Economics, Elsevier, vol. 63(1), pages 1-29, May.
  12. Rodney D. Ludema, 1991. "International Trade Bargaining And The Most-Favored-Nation Clause," Economics and Politics, Wiley Blackwell, vol. 3(1), pages 1-20, 03.
  13. Ederington, Josh & McCalman, Phillip, 2003. "Discriminatory tariffs and international negotiations," Journal of International Economics, Elsevier, vol. 61(2), pages 397-424, December.
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