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The role of the most favored nation principle of the GATT/WTO in the New Trade model
Author(s) -
Suwanprasert Wisarut
Publication year - 2020
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/roie.12470
Subject(s) - tariff , economics , international economics , negotiation , international trade , bilateral trade , welfare , free trade , elasticity of substitution , international free trade agreement , trade barrier , pareto principle , multilateral trade negotiations , rules of origin , microeconomics , production (economics) , law , china , market economy , operations management , political science
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.