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The Role of Non-Discrimination in a World of Discriminatory Preferential Trade Agreements

Author

Listed:
  • 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 Favored Nation Clause (MFN) when countries are free to form discriminatory preferential trade agreements (PTAs). While PTA members discriminate against non-member countries, MFN requires non-members to treat PTA members in a non-discriminatory fashion. We show that MFN reduces the potency of a country’s optimal tariffs and therefore its incentive for unilaterally opting out of trade liberalization. Thus, MFN can be 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 since one country finds itself deliberately excluded by member countries as opposed to staying out voluntarily.

Suggested Citation

  • Kamal Saggi & Woan Foong Wong & Halis Murat Yildiz, 2020. "The Role of Non-Discrimination in a World of Discriminatory Preferential Trade Agreements," CESifo Working Paper Series 8139, CESifo.
  • Handle: RePEc:ces:ceswps:_8139
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    References listed on IDEAS

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    More about this item

    Keywords

    trade agreements; tariffs; customs unions; World Trade Organization; coalition proof Nash equilibrium; welfare;
    All these keywords.

    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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