The Most Favored Nation Principle: Passive Constraint or Active Commitment?

Jeongmeen Suh, Sihoon Nahm and Seung-Gyu Sim
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Jeongmeen Suh: Soongsil Unive
Sihoon Nahm: University of Chicago
Seung-Gyu Sim: University of Tokyo

Korean Economic Review, 2016, vol. 32, 77-99

Abstract: This study examines how the welfare implication of the ��most-favored-nation�� (MFN) principle changed when the trade agreement mode shifted from a ��one-shot-multilateral-trade-agreement�� to ��sequential-bilateral-trade-agreements.��It emphasizes that the MFN principle works as ��passive constraints��in the former but ��active commitments��in the latter. Under the sequential-bilateral-trade-agreements , (i) an importing country strategically takes a cost-efficient country as its first (second) trading partner when the MFN principle is (not) embedded, and (ii) embedding the MFN clause improves the trade surplus of the importing country and the world economy. The MFN principle is utilized by the cost-efficient country as a commitment device to encourage production. This principle reverses the welfare implication in the existing literature. Finally, the importing country prefers the sequential agreements with the MFN clause to other cases in which it can choose simultaneous or sequential agreements with/without the MFN clause

Keywords: Most-Favored-Nation Principle; Sequential Trade Agreements; Commitment (search for similar items in EconPapers)
JEL-codes: F12 F13 (search for similar items in EconPapers)
Date: 2016
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