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Tariffs and the most favored nation clause

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  • Saggi, Kamal

Abstract

In an n country oligopoly model of intraindustry trade (n ≥ 3), this paper explores the economics of the most-favored-nation (MFN) principle. Under the non-cooperative tariff equilibrium, each country imposes higher tariffs on low cost producers relative to high cost ones thereby causing socially harmful trade diversion. MFN adoption by each country improves world welfare by eliminating this trade diversion. Under linear demand, MFN adoption by the country with the average production cost is most desirable. High cost countries refuse reciprocal MFN adoption with other countries and also lose even if others engage in reciprocal MFN adoption amongst themselves.
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  • Saggi, Kamal, 2004. "Tariffs and the most favored nation clause," Journal of International Economics, Elsevier, vol. 63(2), pages 341-368, July.
    • Handle: RePEc:eee:inecon:v:63:y:2004:i:2:p:341-368
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    JEL classification:

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

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