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The MFN clause, welfare, and multilateral cooperation between countries of unequal size

In: Economic Analysis of the Rules and Regulations of the World Trade Organization

Author

Listed:
  • Kamal Saggi
Abstract
This paper analyzes MFN in a “competing exporters” model of trade between three countries with unequal endowments and shows that MFN yields higher aggregate welfare than tariff discrimination even as it makes low income countries worse off. Furthermore, in a repeated game of tariff cooperation, multilateral free trade is easier to sustain under MFN punishments relative to discriminatory ones. This conclusion holds even when tariff discrimination takes the form of bilateral trade agreements. Overall, the analysis shows that from the viewpoint of low income countries, MFN and multilateral tariff cooperation are complementary in nature.

Suggested Citation

  • Kamal Saggi, 2018. "The MFN clause, welfare, and multilateral cooperation between countries of unequal size," World Scientific Book Chapters, in: Kamal Saggi (ed.), Economic Analysis of the Rules and Regulations of the World Trade Organization, chapter 14, pages 312-323, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789813233058_0014
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    1. Bagwell, Kyle & Staiger, Robert W, 1997. "Multilateral Tariff Cooperation during the Formation of Free Trade Areas," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 291-319, May.
    2. Robert W. Staiger & Kyle Bagwell, 1999. "An Economic Theory of GATT," American Economic Review, American Economic Association, vol. 89(1), pages 215-248, March.
    3. Bond, Eric W. & Syropoulos, Constantinos & Winters, L. Alan, 2001. "Deepening of regional integration and multilateral trade agreements," Journal of International Economics, Elsevier, vol. 53(2), pages 335-361, April.
    4. Ederington, Josh & McCalman, Phillip, 2003. "Discriminatory tariffs and international negotiations," Journal of International Economics, Elsevier, vol. 61(2), pages 397-424, December.
    5. Staiger, Robert W., 1995. "International rules and institutions for trade policy," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 29, pages 1495-1551, Elsevier.
    6. Chad P. Bown, 2004. "Trade policy under the GATT/WTO: empirical evidence of the equal treatment rule," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 37(3), pages 678-720, August.
    7. 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..
    8. 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.
    9. Bagwell, Kyle & Staiger, Robert W., 2004. "Multilateral trade negotiations, bilateral opportunism and the rules of GATT/WTO," Journal of International Economics, Elsevier, vol. 63(1), pages 1-29, May.
    10. Raymond Riezman, 2013. "Dynamic tariffs with asymmetric information," World Scientific Book Chapters, in: Raymond Riezman (ed.), International Trade Agreements and Political Economy, chapter 6, pages 67-83, World Scientific Publishing Co. Pte. Ltd..
    11. 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.
    12. 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.
    13. 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.
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    Cited by:

    1. Yanase, Akihiko & Tsubuku, Masafumi, 2022. "Trade costs and free trade agreements: Implications for tariff complementarity and welfare," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 23-37.
    2. Kym Anderson, 2016. "Contributions Of The Gatt/Wto To Global Economic Welfare: Empirical Evidence," Journal of Economic Surveys, Wiley Blackwell, vol. 30(1), pages 56-92, February.
    3. Kangsik Choi & Seonyoung Lim, 2023. "Sequential tariffs with increasing marginal costs," Manchester School, University of Manchester, vol. 91(4), pages 336-360, July.
    4. Edwin L.-C. Lai, 2008. "The most-favored nation rule in club enlargement negotiation," Working Papers 0815, Federal Reserve Bank of Dallas.
    5. Ki‐Dong Lee & Kangsik Choi, 2024. "Uniform versus discriminatory tariffs when competition mode is endogenous," Bulletin of Economic Research, Wiley Blackwell, vol. 76(1), pages 95-120, January.
    6. 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.
    7. 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.
    8. Paul Missios & Halis Murat Yildiz, 2017. "Do SouthSouth preferential trade agreements undermine the prospects for multilateral free trade?," Canadian Journal of Economics, Canadian Economics Association, vol. 50(1), pages 111-161, February.
    9. Blanchard,Emily J. & Bown,Chad P. & Johnson,Robert Christopher & Blanchard,Emily J. & Bown,Chad P. & Johnson,Robert Christopher, 2016. "Global supply chains and trade policy," Policy Research Working Paper Series 7536, The World Bank.
    10. Euan MacMillan, 2014. "Explaining rising regionalism and failing multilateralism: consensus decision-making and expanding WTO membership," International Economics and Economic Policy, Springer, vol. 11(4), pages 599-617, December.
    11. Lee, Ki-Dong & Choi, Kangsik, 2023. "Optimal tariffs with endogenous vertical structure: Uniform versus discriminatory tariffs," Mathematical Social Sciences, Elsevier, vol. 124(C), pages 35-50.
    12. Hong-Ren Din & Kuang-Cheng Andy Wang & Wen-Jung Liang, 2016. "MFN vs Tariff Discrimination in the Presence of Cross Ownership," Review of International Economics, Wiley Blackwell, vol. 24(5), pages 1149-1166, November.

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    More about this item

    Keywords

    Multilateral Trading System; Trade Agreements; Trade Liberalization; International Tariff Cooperation; WTO Disputes; Case Studies;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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