The role of the most favored nation principle of the GATT/WTO in the New Trade model

Abstract

I study the impact of the most favored nation (MFN) principle of the GATT/WTO on bilateral trade agreements in the New Trade model. The paper offers four main predictions. First, a bilateral trade agreement without external tariff adjustments hurts the outside country, while a bilateral trade agreement under MFN benefits the outside country. Second, the MFN principle may cause a free‐rider problem. Third, a Pareto‐improving bilateral trade agreement under MFN does not exist if initial tariffs and the elasticity of substitution are sufficiently low. This suggests that the MFN principle may prevent bilateral trade agreements in the future when tariffs are already low and that the definition of “like products” in the MFN rule is welfare improving only if it covers only goods that are closely substituted. Fourth, in the future when tariffs are low, multilateral negotiations and preferential trade areas will become more desirable. Using a calibrated 10‐region 33‐industry model, I show that around 30% of bilateral trade agreements that would be agreed upon in the absence of the MFN rule could not be agreed upon if the MFN rule is imposed.

The Role of Non-Discrimination in a World of Discriminatory Preferential Trade Agreements

“…For tariff complementarity discussions, see Staiger (1997, 1999), Bond (2004),Saggi and Yildiz (2009) and Estevedeordal (2008). While only terms-of-trade considerations influence trade policy considerations here, this result is robust to including other trade policy motives like the presence of a production relocation externality(Suwanprasert (2018) andOssa (2011))…”

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

“…Calculations supporting this restriction and all of the results reported in the paper are contained in the online appendix.6 For tariff complementarity discussions, seeBagwell and Staiger (1998, 1999a, 1999b,Bond et al (2004),Saggi and Yildiz (2009) andEstevadeordal et al (2008). While only terms-of-trade considerations influence trade policy considerations here, this result is robust to including other trade policy motives like the presence of a production relocation externality(Suwanprasert 2020 andOssa 2011). …”