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The Most Favored Nation Principle: Passive Constraint or Active Commitment?

Author

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  • Jeongmeen Suh

    (Soongsil Unive)

  • Sihoon Nahm

    (University of Chicago)

  • Seung-Gyu Sim

    (University of Tokyo)

Abstract

This study examines how the welfare implication of the ��most-favored-nation�� (MFN) principle changed when the trade agreement mode shifted from a ��one-shot-multilateral-trade-agreement�� to ��sequential-bilateral-trade-agreements.��It emphasizes that the MFN principle works as ��passive constraints��in the former but ��active commitments��in the latter. Under the sequential-bilateral-trade-agreements , (i) an importing country strategically takes a cost-efficient country as its first (second) trading partner when the MFN principle is (not) embedded, and (ii) embedding the MFN clause improves the trade surplus of the importing country and the world economy. The MFN principle is utilized by the cost-efficient country as a commitment device to encourage production. This principle reverses the welfare implication in the existing literature. Finally, the importing country prefers the sequential agreements with the MFN clause to other cases in which it can choose simultaneous or sequential agreements with/without the MFN clause

Suggested Citation

  • Jeongmeen Suh & Sihoon Nahm & Seung-Gyu Sim, 2016. "The Most Favored Nation Principle: Passive Constraint or Active Commitment?," Korean Economic Review, Korean Economic Association, vol. 32, pages 77-99.
    • Handle: RePEc:kea:keappr:ker-20160630-32-1-04
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Most-Favored-Nation Principle; Sequential Trade Agreements; Commitment;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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