The Case for MFN under Asymmetries of Cost and Market Structure

Kamal Saggi () and Halis Yildiz

MPRA Paper from University Library of Munich, Germany

Abstract: This paper constructs a three-country partial equilibrium model to examine the effects of the most favored nation (MFN) clause on equilibrium tariffs and welfare when exporting countries are asymmetric with respect to market structure as well as production costs. In the model, firms sell differentiated goods and compete in prices. We contrast two policy scenarios: one where the importing country is free to tariff discriminate among exporters and another where it must treat them the same (MFN). Relative to tariff discrimination, MFN benefits low cost (more concentrated) exporters and hurts high cost (less concentrated) ones. While MFN is generally preferable to discrimination from a global welfare perspective, such need not be the case when high cost exporters enjoy greater market power (because they are merged into a single unit) than low cost ones. Under such a situation, if cost differences between exporters are not too large then tariff discrimination favors low cost producers and is welfare preferred to MFN.

Keywords: Most Favoured Nation Clause; Price Competition; import tariffs; WTO (search for similar items in EconPapers)
JEL-codes: F1 F12 F13 (search for similar items in EconPapers)
Date: 2005-02-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Canadian Journal of Economics 38.1(2005): pp. 242-254

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