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The role of non‐discrimination in a world of discriminatory preferential trade agreements

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  • Kamal Saggi
  • Woan Foong Wong
  • Halis Murat Yildiz

Abstract

In a three‐country model of endogenous trade agreements, we study the implications of the most‐favoured‐nation (MFN) clause when countries are free to form discriminatory preferential trade agreements (PTAs). Under current rules of the World Trade Organization (WTO), although non‐member countries face discrimination at the hands of PTA members, they themselves are obligated to abide by MFN and treat PTA members in a non‐discriminatory fashion. The non‐discrimination constraint of MFN reduces the potency of a country's optimal tariffs and therefore its incentive for unilaterally opting out of trade liberalization. Thus, MFN can act as a catalyst for trade liberalization. However, when PTAs take the form of customs unions, the efficiency case for MFN as well as its pro‐liberalization effect is weaker because one country finds itself deliberately excluded by the other two as opposed to staying out voluntarily. Le rôle de la non‐discrimination dans un monde d'accords commerciaux préférentiels discriminatoires. Nous étudions, dans un modèle à trois états d'accords commerciaux endogènes, les conséquences d'une clause de la nation la plus favorisée (NPF) dans un scénario où les pays sont libres de conclure des accords commerciaux préférentiels (ACP) discriminatoires. En vertu des règles en vigueur de l'Organisation mondiale du commerce (OMC), même si les états non membres subissent de la discrimination de la part des membres d'ACP, ils doivent tout de même se conformer à la clause de la NPF et traiter les membres d'ACP sans discrimination. Les obligations de non‐discrimination de la NPF réduisent le poids des tarifs optimal d'un état et, du coup, sa motivation à se désister unilatéralement de la libéralisation du commerce. Ainsi, la clause de NPF peut avoir un effet catalyseur sur la libéralisation du commerce. Or, lorsque les ACP se présentent sous la forme d'unions douanières, le poids de l'efficacité d'une clause de NPF et ses effets favorisant la libéralisation sont affaiblis du fait qu'un état est délibérément exclu par les deux autres, plutôt que de pouvoir se désister volontairement.

Suggested Citation

  • Kamal Saggi & Woan Foong Wong & Halis Murat Yildiz, 2022. "The role of non‐discrimination in a world of discriminatory preferential trade agreements," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 55(1), pages 174-212, February.
  • Handle: RePEc:wly:canjec:v:55:y:2022:i:1:p:174-212
    DOI: 10.1111/caje.12586
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    References listed on IDEAS

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    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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