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Do Countries Free Ride on MFN?

Author

Listed:
  • Rodney D. Ludema

    (Georgetown University)

  • Anna Maria Mayda

    (Georgetown University and Centro Studi Luca d\'Agliano)

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-Hirschman 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 U.S. provides strong support for this relationship.

Suggested Citation

  • Rodney D. Ludema & Anna Maria Mayda, 2008. "Do Countries Free Ride on MFN?," Development Working Papers 254, Centro Studi Luca d'Agliano, University of Milano.
  • Handle: RePEc:csl:devewp:254
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    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. Wilfred J. Ethier & Arye L. Hillman, 2017. "The Politics of International Trade," CESifo Working Paper Series 6456, CESifo.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. Nuno Limão & Patricia Tovar, 2018. "Policy choice: Theory and evidence from commitment via international trade agreements," World Scientific Book Chapters, in: Policy Externalities and International Trade Agreements, chapter 6, pages 179-198, World Scientific Publishing Co. Pte. Ltd..
    8. 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..
    9. 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.
    10. 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.
    11. Ludema, Rodney D & Mayda, Anna Maria, 2010. "Do terms-of-trade effects matter for trade agreements? Evidence from WTO countries," CEPR Discussion Papers 7695, C.E.P.R. Discussion Papers.
    12. 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.
    13. 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.
    14. 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.
    15. 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.
    16. 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.
    17. 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.
    18. 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.
    19. Ali Yavuz Polat, 2018. "From Bilateral Approach To Global Free Trade," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 6(3), pages 52-58.
    20. Kyle Bagwell & Robert W. Staiger, 2009. "The WTO: Theory and Practice," NBER Working Papers 15445, National Bureau of Economic Research, Inc.
    21. 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.
    22. 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.
    23. Nuno Limão, 2016. "Preferential Trade Agreements," NBER Working Papers 22138, National Bureau of Economic Research, Inc.
    24. Spearot, Alan C., 2013. "Variable demand elasticities and tariff liberalization," Journal of International Economics, Elsevier, vol. 89(1), pages 26-41.

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    More about this item

    JEL classification:

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

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