The role of non‐discrimination in a world of discriminatory preferential trade agreements

Abstract

In a three‐country model of endogenous trade agreements, we study the implications of the most‐favoured‐nation (MFN) clause when countries are free to form discriminatory preferential trade agreements (PTAs). Under current rules of the World Trade Organization (WTO), although non‐member countries face discrimination at the hands of PTA members, they themselves are obligated to abide by MFN and treat PTA members in a non‐discriminatory fashion. The non‐discrimination constraint of MFN reduces the potency of a country's optimal tariffs and therefore its incentive for unilaterally opting out of trade liberalization. Thus, MFN can act as a catalyst for trade liberalization. However, when PTAs take the form of customs unions, the efficiency case for MFN as well as its pro‐liberalization effect is weaker because one country finds itself deliberately excluded by the other two as opposed to staying out voluntarily.

Trade Policy Along the Global Value Chain a Rationale for the Existence of Deep Trade Agreements

“…In the second one, the South would prefer keeping the low institutional quality, if the trade agreement were not enforcing the institutional improvement (black region). This challenges the view held by many that even in the absence of binding contracts trade will provide sufficient incentives for developing countries to improve institutional quality in their self-interest (see Rodrik, 2002;IMF, 2005, for a discussion).…”

Sanctions in directed trade networks

“…We consider a model with three countries, , where the third country $$$ R $$$ captures rest‐of‐the‐world. We adapt a “pure endowments” trade model developed by Saggi et al (2022). There are three goods, corresponding to the three countries, represented in lowercase letters as $$$ \left\{s,t,r\right\} $$$.…”

Sequential tariffs with increasing marginal costs

“…Recently, Saggi et al. (2022) explored the implications of MFN clauses when countries were free to form discriminatory preferential trade agreements. Although these studies offer interesting results in terms of importing trade policies, their purposes and models differ substantially from ours.…”

“…They indicated that a move from bilateral or regional trade agreements to the MFN treatment may benefit developing countries but the effect may be small when tariffs are set non-cooperatively. Recently, Saggi et al (2022) explored the implications of MFN clauses when countries were free to form discriminatory preferential trade agreements. Although these studies offer interesting results in terms of importing trade policies, their purposes and models differ substantially from ours.…”