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Do Countries Free Ride on MFN?

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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 U.S. provides strong support for this relationship.

Suggested Citation

  • Rodney Ludema (Georgetown University) and Anna Maria Mayda (Georgetown University and CEPR), 2005. "Do Countries Free Ride on MFN?," Working Papers gueconwpa~05-05-13, Georgetown University, Department of Economics.
  • Handle: RePEc:geo:guwopa:gueconwpa~05-05-13
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    1. repec:bla:worlde:v:40:y:2017:i:5:p:978-992 is not listed on IDEAS
    2. 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.
    3. Kyle Bagwell & Robert W. Staiger, 2009. "The WTO: Theory and Practice," NBER Working Papers 15445, National Bureau of Economic Research, Inc.
    4. Wilfred J. Ethier & Arye L. Hillman, 2017. "The Politics of International Trade," CESifo Working Paper Series 6456, CESifo Group Munich.
    5. 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.
    6. Bown,Chad P. & Reynolds,Kara Marie & Bown,Chad P. & Reynolds,Kara Marie, 2015. "Trade agreements and enforcement : evidence from WTO dispute settlement," Policy Research Working Paper Series 7242, The World Bank.
    7. Limão, Nuno & Saggi, Kamal, 2013. "Size inequality, coordination externalities and international trade agreements," European Economic Review, Elsevier, vol. 63(C), pages 10-27.
    8. 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.
    9. 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.
    10. Foucart, Renaud & Wan, Cheng, 2018. "Strategic Decentralization and the Provision of Global Public Goods," Rationality and Competition Discussion Paper Series 65, CRC TRR 190 Rationality and Competition.
    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. Prachi Mishra & Rodney D. Ludema & Anna Maria Mayda, 2010. "Protection for Free? the Political Economy of U.S. Tariff suspensions," IMF Working Papers 10/211, International Monetary Fund.
    13. Kamal Saggi & Woan Foong Wong & Halis Murat Yildiz, 2017. "Preferential Trade Agreements and Rules of the Multilateral Trading System," Working Papers 067, Ryerson University, Department of Economics.
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    15. 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.
    16. 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.
    17. Maggi, Giovanni, 2014. "International Trade Agreements," Handbook of International Economics, Elsevier.
    18. Nuno Limão, 2016. "Preferential Trade Agreements," NBER Working Papers 22138, National Bureau of Economic Research, Inc.
    19. Spearot, Alan C., 2013. "Variable demand elasticities and tariff liberalization," Journal of International Economics, Elsevier, vol. 89(1), pages 26-41.
    20. 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.

    More about this item

    Keywords

    Most-Favored Nation (MFN) clause; free riding; Principal supplier rule;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • D7 - Microeconomics - - Analysis of Collective Decision-Making

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