Leveraging US Commercial Adjustments: MFN Tariffs and Trade Diversion

Maria Cipollina and Luca De Benedictis

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Abstract: Most-favored-nation (MFN) tariff increases do more than raise trade costs. By changing the relative tariff treatment of competing exporters, they increase the value of existing trade preferences, reshaping relative market access and trade allocation. While the trade-reducing effects of higher tariffs are well established, much less is known about this mechanism. We investigate whether higher MFN tariffs amplify the competitive advantage of preferential partners, generating trade diversion. Using domestic and international trade data, we estimate a structural gravity model with CES-consistent bilateral tariff margins and examine recent changes in US trade policy as an empirical application. We find that higher MFN protection simultaneously reduces imports and redirects trade toward preferential exporters. These effects are highly heterogeneous across sectors and regions, with the largest losses concentrated in intermediate and capital goods, highlighting the role of MFN tariffs in reshaping relative market access and global trade patterns.

Date: 2026-10
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