The Most Favored Nation Principle: Passive Constraint or Active Commitment?

15 Pages Posted: 16 Feb 2015 Last revised: 29 Oct 2015

See all articles by Jeongmeen Suh

Jeongmeen Suh

Soongsil University

Sihoon Nahm

Myongji University

Seung-Gyu Sim

Aoyama Gakuin University

Date Written: October 28, 2015

Abstract

This paper examines how the welfare implication of the "most-favored-nation" (MFN) principle has changed as the trade agreement mode has shifted from the "one-shot-multilateral-trade-agreement" to "sequential-bilateral-trade-agreements.'' In particular, it emphasizes that the MFN principle works as 'passive constraints' in the former but 'active commitments' in the latter. It demonstrates that under the latter, (i) the importing country strategically takes a cost-efficient country as the first (second) trading partner when the MFN principle is (is not) embedded, and (ii) embedding the MFN clause improves both trade surplus of the importing country and world economy. That the MFN principle is utilized as a commitment device to encourage production by the cost-efficient country causes a reversal of the welfare implication in the previous literature.

Keywords: Most-Favored-Nation Principle, Sequential Trade Agreements, Commitment

JEL Classification: F12, F13

Suggested Citation

Suh, Jeongmeen and Nahm, Sihoon and Sim, Seung-Gyu, The Most Favored Nation Principle: Passive Constraint or Active Commitment? (October 28, 2015). Available at SSRN: https://ssrn.com/abstract=2565589 or http://dx.doi.org/10.2139/ssrn.2565589

Jeongmeen Suh

Soongsil University ( email )

369 Sangdo-Ro, Dongjak-gu
Seoul
Korea, Republic of (South Korea)

Sihoon Nahm

Myongji University ( email )

50-3 Namgajwadong
Seodaemungu
Seoul, 120-728
Korea

Seung-Gyu Sim (Contact Author)

Aoyama Gakuin University ( email )

4-4-25 Shibuya, Shibuya-ku
Tokyo, 150-8366
Japan

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
247
Abstract Views
1,143
rank
150,877
PlumX Metrics