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

Kamal Saggi (), Woan Foong Wong and Halis Yildiz

No 8139, CESifo Working Paper Series from CESifo

Abstract: In a three-country model of endogenous trade agreements, we study the implications of the Most Favored Nation Clause (MFN) when countries are free to form discriminatory preferential trade agreements (PTAs). While PTA members discriminate against non-member countries, MFN requires non-members to treat PTA members in a non-discriminatory fashion. We show that MFN reduces the potency of a country’s optimal tariffs and therefore its incentive for unilaterally opting out of trade liberalization. Thus, MFN can be 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 since one country finds itself deliberately excluded by member countries as opposed to staying out voluntarily.

Keywords: trade agreements; tariffs; customs unions; World Trade Organization; coalition proof Nash equilibrium; welfare (search for similar items in EconPapers)
JEL-codes: F11 F12 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-gth and nep-int
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Related works:
Journal Article: The role of non‐discrimination in a world of discriminatory preferential trade agreements (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_8139

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