IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/5160.html
   My bibliography  Save this paper

Do Countries Free Ride on MFN?

Author

Listed:
  • Ludema, Rodney D
  • Mayda, Anna Maria

Abstract

The Most-Favored Nation (MFN) clause has long been suspected of creating a free rider problem in multilateral trade negotiations. To address this issue, we model multilateral negotiations as a mechanism design problem with voluntary participation. We show that an optimal mechanism induces only the largest exporters to participate in negotiations over any product, thus providing a rationalization for the Principal supplier rule. We also show that, through this channel, equilibrium tariffs vary according to the Herfindahl index of export shares: higher concentration in a sector reduces free riding and thus causes a lower tariff. Estimation of our model using sector-level tariff data for the US provides strong support for this relationship.

Suggested Citation

  • Ludema, Rodney D & Mayda, Anna Maria, 2005. "Do Countries Free Ride on MFN?," CEPR Discussion Papers 5160, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:5160
    as

    Download full text from publisher

    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=5160
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Kishore Gawande & Usree Bandyopadhyay, 2000. "Is Protection for Sale? Evidence on the Grossman-Helpman Theory of Endogenous Protection," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 139-152, February.
    2. Palfrey, Thomas R. & Rosenthal, Howard, 1984. "Participation and the provision of discrete public goods: a strategic analysis," Journal of Public Economics, Elsevier, vol. 24(2), pages 171-193, July.
    3. Ederington, Josh & McCalman, Phillip, 2003. "Discriminatory tariffs and international negotiations," Journal of International Economics, Elsevier, vol. 61(2), pages 397-424, December.
    4. Leamer, Edward E. & Levinsohn, James, 1995. "International trade theory: The evidence," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.),Handbook of International Economics, edition 1, volume 3, chapter 26, pages 1339-1394, Elsevier.
    5. Bombardini, Matilde, 2008. "Firm heterogeneity and lobby participation," Journal of International Economics, Elsevier, vol. 75(2), pages 329-348, July.
    6. Andrew K. Rose, 2004. "Do We Really Know That the WTO Increases Trade?," American Economic Review, American Economic Association, vol. 94(1), pages 98-114, March.
    7. Grossman, Gene M & Helpman, Elhanan, 1995. "Trade Wars and Trade Talks," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 675-708, August.
    8. Cebi, Pinar & Ludema, Rodney, 2002. "The Rise and Fall of the Most-Favored-Nation Clause," Working Papers 15853, United States International Trade Commission, Office of Economics.
    9. Koujianou Goldberg, Pinelopi & Pavcnik, Nina, 2003. "The response of the informal sector to trade liberalization," Journal of Development Economics, Elsevier, vol. 72(2), pages 463-496, December.
    10. Trefler, Daniel, 1993. "Trade Liberalization and the Theory of Endogenous Protection: An Econometric Study of U.S. Import Policy," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 138-160, February.
    11. Kamal Saggi, 2018. "Tariffs and the most favored nation clause," World Scientific Book Chapters, in: Kamal Saggi (ed.),Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 1, pages 3-32, World Scientific Publishing Co. Pte. Ltd..
    12. Nuno Limão, 2007. "Are Preferential Trade Agreements with Non-trade Objectives a Stumbling Block for Multilateral Liberalization?," Review of Economic Studies, Oxford University Press, vol. 74(3), pages 821-855.
    13. Karacaovali, Baybars & Limão, Nuno, 2008. "The clash of liberalizations: Preferential vs. multilateral trade liberalization in the European Union," Journal of International Economics, Elsevier, vol. 74(2), pages 299-327, March.
    14. Ludema, Rodney D. & Mayda, Anna Maria, 2009. "Do countries free ride on MFN?," Journal of International Economics, Elsevier, vol. 77(2), pages 137-150, April.
    15. Baldwin, Richard, 1987. "Politically realistic objective functions and trade policy PROFs and tariffs," Economics Letters, Elsevier, vol. 24(3), pages 287-290.
    16. Lim“o, Nuno, 2002. "Are Preferential trade Agreements with Non-trade Objectives a Stumbling Block for Multilateral Liberalization?," Royal Economic Society Annual Conference 2002 129, Royal Economic Society.
    17. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-850, September.
    18. Blonigen, Bruce A. & Bown, Chad P., 2003. "Antidumping and retaliation threats," Journal of International Economics, Elsevier, vol. 60(2), pages 249-273, August.
    19. Bagwell, Kyle & Staiger, Robert W., 2010. "Backward stealing and forward manipulation in the WTO," Journal of International Economics, Elsevier, vol. 82(1), pages 49-62, September.
    20. Horn, Henrik & Mavroidis, Petros C., 2001. "Economic and legal aspects of the Most-Favored-Nation clause," European Journal of Political Economy, Elsevier, vol. 17(2), pages 233-279, June.
    21. Dixit, Avinash & Olson, Mancur, 2000. "Does voluntary participation undermine the Coase Theorem?," Journal of Public Economics, Elsevier, vol. 76(3), pages 309-335, June.
    22. Eric W. Bond & Stephen Ching & Edwin L.-C. Lai, 2003. "GAME-THEORETIC ANALYSIS OF CHINA's WTO ACCESSION," Pacific Economic Review, Wiley Blackwell, vol. 8(2), pages 117-125, June.
    23. 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.
    24. Bown, Chad P., 2004. "Trade disputes and the implementation of protection under the GATT: an empirical assessment," Journal of International Economics, Elsevier, vol. 62(2), pages 263-294, March.
    25. Giovanni Maggi & Pinelopi Koujianou Goldberg, 1999. "Protection for Sale: An Empirical Investigation," American Economic Review, American Economic Association, vol. 89(5), pages 1135-1155, December.
    26. Christian Broda & Nuno Limao & David E. Weinstein, 2008. "Optimal Tariffs and Market Power: The Evidence," American Economic Review, American Economic Association, vol. 98(5), pages 2032-2065, December.
    27. John H. Jackson, 1997. "The World Trading System, 2nd Edition: Law and Policy of International Economic Relations," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262600277, September.
    28. Saijo, Tatsuyoshi & Yamato, Takehiko, 1999. "A Voluntary Participation Game with a Non-excludable Public Good," Journal of Economic Theory, Elsevier, vol. 84(2), pages 227-242, February.
    29. Kyle Bagwell & Robert W. Staiger, 2004. "The Economics of the World Trading System," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262524341, September.
    30. Kishore Gawande & Pravin Krishna & Michael J. Robbins, 2006. "Foreign Lobbies and U.S. Trade Policy," The Review of Economics and Statistics, MIT Press, vol. 88(3), pages 563-571, August.
    31. Nicita, Alessandro & Olarreaga, Marcelo, 2001. "Trade and production, 1976-99," Policy Research Working Paper Series 2701, The World Bank.
    32. Harry G. Johnson, 1965. "An Economic Theory of Protectionism, Tariff Bargaining, and the Formation of Customs Unions," Journal of Political Economy, University of Chicago Press, vol. 73, pages 256-256.
    33. Rodney D. Ludema, 1991. "International Trade Bargaining And The Most‐Favored‐Nation Clause," Economics and Politics, Wiley Blackwell, vol. 3(1), pages 1-20, March.
    34. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Florian Freund, 2017. "Reciprocal Tariff Reductions Under Asymmetric Bargaining Power," The World Economy, Wiley Blackwell, vol. 40(5), pages 978-992, May.
    2. Ludema, Rodney D. & Mayda, Anna Maria, 2009. "Do countries free ride on MFN?," Journal of International Economics, Elsevier, vol. 77(2), pages 137-150, April.
    3. Anna A. Klis, 2019. "Identity and equal treatment in negative externality agreements," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 19(6), pages 615-630, December.
    4. Foucart, Renaud & Wan, Cheng, 2018. "Strategic decentralization and the provision of global public goods," Journal of Environmental Economics and Management, Elsevier, vol. 92(C), pages 537-558.
    5. Bagwell, Kyle & Staiger, Robert W., 2010. "Backward stealing and forward manipulation in the WTO," Journal of International Economics, Elsevier, vol. 82(1), pages 49-62, September.
    6. Saggi, Kamal & Wong, Woan Foong & Yildiz, Halis Murat, 2017. "Preferential Trade Agreements and Rules of the Multilateral Trading System," MPRA Paper 76330, University Library of Munich, Germany.
    7. Ludema, Rodney D & Mayda, Anna Maria & Mishra, Prachi, 2010. "Protection for Free? The Political Economy of U.S. Tariff Suspensions," CEPR Discussion Papers 7926, C.E.P.R. Discussion Papers.
    8. Saggi, Kamal & Wong, Woan Foong & Yildiz, Halis Murat, 2019. "Should the WTO require free trade agreements to eliminate internal tariffs?," Journal of International Economics, Elsevier, vol. 118(C), pages 316-330.
    9. Rodney D. Ludema & Anna Maria Mayda, 2010. "Do Terms-of-Trade Effects Matter for Trade Agreements? Evidence from WTO Countries," Development Working Papers 293, Centro Studi Luca d'Agliano, University of Milano.
    10. Kevin x.d. Huang & Engin Volkan & M. ege Yazgan, 2013. "Nonhomothetic Preferences with Habit Formation in Nondurable and Durable Consumption: Implications for Sectoral Comovement," Vanderbilt University Department of Economics Working Papers 13-00002, Vanderbilt University Department of Economics.
    11. Kyle Bagwell & Chad P. Bown & Robert W. Staiger, 2016. "Is the WTO Passé?," Journal of Economic Literature, American Economic Association, vol. 54(4), pages 1125-1231, December.
    12. Ali Yavuz Polat, 2018. "From Bilateral Approach To Global Free Trade," Eurasian Journal of Economics and Finance, , vol. 6(3), pages 52-58.
    13. Kyle Bagwell & Robert W. Staiger, 2009. "The WTO: Theory and Practice," NBER Working Papers 15445, National Bureau of Economic Research, Inc.
    14. Limão, Nuno & Tovar, Patricia, 2011. "Policy choice: Theory and evidence from commitment via international trade agreements," Journal of International Economics, Elsevier, vol. 85(2), pages 186-205.
    15. Chad P. Bown & Kara M. Reynolds, 2017. "Trade Agreements and Enforcement: Evidence from WTO Dispute Settlement," American Economic Journal: Economic Policy, American Economic Association, vol. 9(4), pages 64-100, November.
    16. Ludema, Rodney D & Mayda, Anna Maria & McClure, Jonathan C. F., 2015. "Dragons, Giants, Elephants and Mice: Evolution of the MFN Free Rider Problem in the WTO Era," CEPR Discussion Papers 10961, C.E.P.R. Discussion Papers.
    17. Nuno Limão & Kamal Saggi, 2018. "Size inequality, coordination externalities and international trade agreements," World Scientific Book Chapters, in: Kamal Saggi (ed.),Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 16, pages 357-374, World Scientific Publishing Co. Pte. Ltd..
    18. Spearot, Alan C., 2013. "Variable demand elasticities and tariff liberalization," Journal of International Economics, Elsevier, vol. 89(1), pages 26-41.
    19. Wilfred J. Ethier & Arye L. Hillman, 2017. "The Politics of International Trade," CESifo Working Paper Series 6456, CESifo.
    20. Joanne Gowa & Raymond Hicks, 2012. "The most-favored nation rule in principle and practice: Discrimination in the GATT," The Review of International Organizations, Springer, vol. 7(3), pages 247-266, September.
    21. Maggi, Giovanni, 2014. "International Trade Agreements," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.),Handbook of International Economics, edition 1, volume 4, chapter 0, pages 317-390, Elsevier.
    22. Wisarut Suwanprasert, 2020. "The role of the most favored nation principle of the GATT/WTO in the New Trade model," Review of International Economics, Wiley Blackwell, vol. 28(3), pages 760-798, August.
    23. Manzano, George N. & Prado, Shanti Aubren, 2016. "Dominant Supplier Approach to Liberalizing Trade in APEC Environmental Goods," Philippine Journal of Development PJD 2014-2015 Vol. 41-42 , Philippine Institute for Development Studies.
    24. Nuno Limão, 2016. "Preferential Trade Agreements," NBER Working Papers 22138, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    free riding; Most-Favoured Nation (MFN) clause; principal supplier rule;

    JEL classification:

    • D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:5160. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: https://www.cepr.org .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.