The Value of MFN Treatment

Abstract

We discuss most favoured nation (MFN) treatment in trade agreements, suggesting that its value to individual countries depends critically on the relevant model solution concept used to evaluate it. We analyze both rights to MFN treatment in foreign markets, and the obligation to grant MFN treatment in home markets; the heart of the post-war GATT/WTO multilateral trading system. In a traditional competitive equilibrium framework, MFN gives benefits to small countries in being able to free ride on bilateral tariff concessions exchanged between larger countries in GATT/WTO negotiating rounds. In a non-cooperative Nash equilibrium framework, MFN restrains retaliatory actions to be non-discriminatory. In a co-operative bargaining framework in which trade policies are jointly set, MFN changes the threat point and hence affects the bargaining solution. We use a calibrated numerical model of global trade in which we compute all three solution concepts and compare MFN and non MFN equilibria for each. We use the GTAP (1992) data base, concluding that quantitatively the most significant effect of MFN seems to be in its impact on bargaining rather than on competitive and Nash equilibrium solutions; being beneficial to smaller countries.