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Title The Most Favored Nation Principle: Passive Constraint or Active Commitment?
Author Jeongmeen Suh (Soongsil University), Sihoon Nahm (University of Chicago) and Seung-Gyu Sim (University of Tokyo)
Volume 32 Number 1
Keywords Most-Favored-Nation Principle, Sequential Trade Agreements, Commitment
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-multilateraltrade-
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 costefficient
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.
File KER-20160630-31-1-04.pdf
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