The Value of MFN Treatment to Developing Countries

Working Paper No. 9907

Posted: 5 May 2000

See all articles by Malay Ghosh

Malay Ghosh

University of Florida

Carlo Perroni

University of Warwick - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: 1999

Abstract

We discuss most favoured nation (MFN) treatment in trade agreements, and its significance for developing countries, 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 significantly beneficial in this regard to smaller developing countries.

Keywords: International Trade, Developing Countries, Economic Models

JEL Classification: F10, F13

Suggested Citation

Ghosh, Malay and Perroni, Carlo, The Value of MFN Treatment to Developing Countries (1999). Working Paper No. 9907. Available at SSRN: https://ssrn.com/abstract=217084

Malay Ghosh (Contact Author)

University of Florida ( email )

Department of Statistics P.O. Box 118545
Gainesville, FL 32610-0496
United States
(352) 392-1941 ext 232 (Phone)
(352) 392-5175 (Fax)

Carlo Perroni

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom
44 24 7652 8416 (Phone)
44 24 7652 3032 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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