The Case for MFN under Asymmetries of Cost and Market Structure

Saggi, Kamal and Yildiz, Halis Murat (2005): The Case for MFN under Asymmetries of Cost and Market Structure. Published in: Canadian Journal of Economics , Vol. 1, No. 38 (1 February 2005): pp. 242-254.

Abstract

This paper constructs a three-country partial equilibrium model to examine the effects of the most favored nation (MFN) clause on equilibrium tariffs and welfare when exporting countries are asymmetric with respect to market structure as well as production costs. In the model, firms sell differentiated goods and compete in prices. We contrast two policy scenarios: one where the importing country is free to tariff discriminate among exporters and another where it must treat them the same (MFN). Relative to tariff discrimination, MFN benefits low cost (more concentrated) exporters and hurts high cost (less concentrated) ones. While MFN is generally preferable to discrimination from a global welfare perspective, such need not be the case when high cost exporters enjoy greater market power (because they are merged into a single unit) than low cost ones. Under such a situation, if cost differences between exporters are not too large then tariff discrimination favors low cost producers and is welfare preferred to MFN.

• Item Type: MPRA Paper
• Language: English
• Keywords: Most Favoured Nation Clause, Price Competition, import tariffs, WTO
• Subjects: F - International Economics > F1 - Trade; F - International Economics > F1 - Trade > F12 - Models of Trade with Imperfect Competition and Scale Economies ; Fragmentation; F - International Economics > F1 - Trade > F13 - Trade Policy ; International Trade Organizations

References

Bagwell, Kyle, and Robert W. Staiger, 1999. "An Economic Theory of GATT." American Economic Review 89(1), 215-248.

Bagwell, Kyle and Robert W. Staiger, 2003. "Multilateral Trade Negotiations, Bilateral Opportunism and The Rules of GATT/WTO." Journal of International Economics, forthcoming.

Brander, James A. and Barbara J. Spencer, 1985. "Export Subsidies and International Market Share Rivalry." Journal of International Economics 18, 83-100.

Caplin, Andrew and Kala Krishna, 1988. "Tariffs and the Most Favored Nation Clause: a Game Theoretic Approach." Seoul Journal of Economics 1, 267-289.

Choi, Jay Pil, 1995. "Optimal Tariffs and the Choice of Technology: Discriminatory Tariffs vs. the Most Favored Nation Clause." Journal of International Economics 38(1), 143-160.

Davidson, Carl and Raymond Deneckere, 1985. "Incentives to Form Coalitions with Bertrand Competition." Rand Journal of Economics 16, 473-486.

Ederington, Josh and Phillip McCalman, 2003. "Discriminatory Tariffs and International Negotiations." Journal of International Economics 61, 397-424.

Ethier, Wilfred J., 2002. "Unilateralism in a Multilateral World." Economic Journal 112, 266-292.

Ethier, Wilfred, J., 1999. " Reciprocity, Non-Discrimination In a Multilateral World." University of Pennsylvania PIER Working Paper No. 99-001.

Gatsios, Konstantine, 1990. "Preferential Tariffs and the `Most Favoured Nation' Principle: A Note." Journal of International Economics 28, 365-373.

Hoekman, Bernard M. and Michael M. Kostecki, 2001. The Political Economy of the World Trading System. Oxford University Press, New York, NY.

Horn, Henrik and Petros C. Mavroidis, 2001. "Economic and Legal Aspects of the Most-Favored Nation Clause." European Journal of Political Economy 17, 233-279.

Hwang H., and C.-C Mai, 1991. "Optimum Discriminatory Tariffs Under Oligopolistic Competition." Canadian Journal of Economics XXIV, 693-702.

Ludema, Rodney, 1991. "International Trade Bargaining and the Most Favored Nation Clause." Economics and Politics 3, 1-20.

McCalman, Phillip, 2002. "Multi-lateral Trade Negotiations and the Most Favored Nation Clause." Journal of International Economics 27, 151-176.

Saggi, Kamal, 2004. "Tariffs and the Most Favored Nation Clause." Journal of International Economics, forthcoming.

Saggi, Kamal, 2003. "Implications of the Most Favored Nation Clause for Welfare and Multilateral Tariff Cooperation." Mimeo, Southern Methodist University.

Salant, Stephen W., Sheldon Switzer and Robert J. Reynolds, 1983. "Losses from Horizontal Merger: the Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium." Quarterly Journal of Economics 48, 185-199.

Shubik, Martin, 1980. Market Structure and Behavior. Cambridge: Harvard University Press.

Staiger, Robert W., 1995. "International Rules and Institutions for Trade Policy." In G.M. Grossman and K. Rogoff, eds., The Handbook of International Economics vol. 3, North Holland, 1495-1551.