Economic Analysis of the Rules and Regulations of the World Trade Organization

Kamal Saggi

• Publisher: WSPC
• Year: 2018
• eBook ISBN: 9789813233065
• Topic: Economics
• Subtopic: International Business
• Index: Economics

This volume collects 21 papers on the following topics: non-discrimination in the multilateral trading system; preferential trade agreements and multilateral trade liberalization; sustaining international tariff cooperation; and case-studies of WTO disputes.

Contents:

• Non-Discrimination in the Multilateral Trading System:
  • Tariffs and the Most Favored Nation Clause (Kamal Saggi)
  • An Analysis of the MFN Clause under Asymmetries of Cost and Market Structure (Kamal Saggi and Halis Murat Yildiz)
  • National Treatment at the WTO: The Roles of Product and Country Heterogeneity (Kamal Saggi and Nese Sara)
  • On the Emergence of an MFN Club: Equal Treatment in an Unequal World (Kamal Saggi and Faruk Sengul)
  • Is There a Case for Non-Discrimination in the International Protection of Intellectual Property? (Difei Geng and Kamal Saggi)
• Preferential Trade Agreements and Multilateral Trade Liberalization:
  • Preferential Trade Agreements and Multilateral Tariff Cooperation (Kamal Saggi)
  • Bilateralism, Multilateralism, and the Quest for Global Free Trade (Kamal Saggi and Halis Murat Yildiz)
  • Bilateral Trade Agreements and the Feasibility of Multilateral Free Trade (Kamal Saggi and Halis Murat Yildiz)
  • On the Relationship between Preferential and Multilateral Trade Liberalization: The Case of Customs Unions (Kamal Saggi, Alan Woodland, and Halis Murat Yildiz)
  • External Trade Diversion, Exclusive Incentives, and the Nature of Preferential Trade Agreements (Paul Missios, Kamal Saggi, and Halis Murat Yildiz)
  • Do Free Trade Agreements Affect Tariffs of Nonmember Countries? A Theoretical and Empirical Investigation (Kamal Saggi, Andrey Stoyanov, and Halis Murat Yildiz)
• Sustaining International Tariff Cooperation:
  • Tariff Bindings and Bilateral Cooperation on Export Cartels (Bernard Hoekman and Kamal Saggi)
  • Tariff Retaliation versus Financial Compensation in the Enforcement of International Trade Agreements (Nuno Limão and Kamal Saggi)
  • The MFN Clause, Welfare, and Multilateral Cooperation between Countries of Unequal Size (Kamal Saggi)
  • India at the WTO: From Uruguay Round to Doha and Beyond (Kamal Saggi)
  • Size Inequality, Coordination Externalities and International Trade Agreements (Nuno Limão and Kamal Saggi)
• Case-studies of WTO Disputes:
  • Incomplete Harmonization Contracts in International Economic Law: Report of the Panel, China — Measures Affecting the Protection and Enforcement of Intellectual Property Rights, WT/DS362/R, adopted 20 March 2009 (Kamal Saggi and Joel P Trachtman)
  • Yet Another Nail in the Coffin of Zeroing: United States — Anti-Dumping Administrative Reviews and Other Measures Related to Imports of Certain Orange Juice from Brazil (Kamal Saggi and Mark Wu)
  • What is Not so Cool about US–COOL Regulations? A Critical Analysis of the Appellate Body's Ruling on US–COOL (Petros C Mavroidis and Kamal Saggi)
  • Understanding Agricultural Price Range Systems as Trade Restraints: Peru–Agricultural Products (Kamal Saggi and Mark Wu)
  • Trade and Agricultural Disease: Import Restrictions in the Wake of the India–Agricultural Products Dispute (Kamal Saggi and Mark Wu)

Readership: Advanced undergraduate and postgraduates taking advance classes in international trade and economic development.

PART I

NON-DISCRIMINATION IN THE MULTILATERAL TRADING SYSTEM

Chapter 1

Tariffs and the most favored nation clause

Kamal Saggi^∗

Department of Economics, Southern Methodist University, Dallas, TX 75275-0496, USA

Received 13 August 2001; received in revised form 25 February 2003; accepted 10 March 2003

Abstract

In an n country oligopoly model of intraindustry trade (n ≥ 3), this paper explores the economics of the most-favored-nation (MFN) principle. Under the non-cooperative tariff equilibrium, each country imposes higher tariffs on low cost producers relative to high cost ones thereby causing socially harmful trade diversion. MFN adoption by each country improves world welfare by eliminating this trade diversion. Under linear demand, MFN adoption by the country with the average production cost is most desirable. High cost countries refuse reciprocal MFN adoption with other countries and also lose even if others engage in reciprocal MFN adoption amongst themselves.

Keywords: Tariffs; Most favored nation clause; Trade policy; Oligopoly; Intraindustry trade

JEL classification: F13; F12

1.Introduction

The most favored nation (MFN) clause is an integral part of all multilateral trade agreements. For example, this clause constitutes the very first article of the General Agreement on Tariffs and Trade (GATT). Similarly, all the other major multilateral agreements of the World Trade Organization (WTO) (such as the General Agreement on Trade in Services or the Agreement on Trade Related Aspects of Intellectual Property Rights) also contain an MFN clause. In fact, Horn and Mavroidis (2000) and Hoekman and Kostecki (2001) note that MFN constitutes one of the pillars of the WTO system. At the core of MFN is the idea of non-discrimination. Yet, as noted by several recent surveys (see Staiger, 1995; Horn and Mavroidis, 2000), there is no strong general case for non-discrimination in trade policy and the pervasiveness of MFN requires explanation. This paper develops a simple model to highlight the implications of MFN for equilibrium tariffs.¹ The model isolates the impact of MFN for tariff policies of individual countries when they cannot negotiate tariff levels directly.² The key motivating question is: Can countries achieve a mutually beneficial outcome by agreeing to constrain their choices via MFN given that they do not negotiate directly over tariff levels?

The model is partial equilibrium in nature and allows market size and production technology to differ across countries.³ Imperfect competition is central to the model and the trade that occurs is intraindustry. Furthermore, unlike Bagwell and Staiger (1999) and other related works where countries impose tariffs to improve their terms of trade, here tariffs are used to extract rents from foreign firms some of which go to the government as revenue and the rest to the local firm as profits (as in Brander and Spencer, 1984). It is worth emphasizing why a model of intraindustry trade with imperfect competition is a useful one for exploring MFN. First, as is well known, the bulk of trade between industrialized countries is intraindustry in nature and analyses of MFN that do not capture such trade might omit some important considerations. Second, and perhaps more importantly, as Brander and Spencer (1984) note, tariffs can improve global welfare in models of imperfect competition if they result in production being allocated in favor of efficient producers. Thus, it is natural to ask whether a regime of MFN tariffs is better or worse than one of tariff discrimination. From the viewpoint of global welfare maximization, tariff discrimination dominates MFN since a social planner can always choose not to discriminate. But are non-cooperatively chosen MFN tariffs preferable to similarly chosen discriminatory tariffs? The simple model developed here shows that this indeed can be the case.

The model is a three-stage game involving n(n ≥ 3) countries. Production in each country is carried out by a single firm and markets are assumed to be segmented (so that equilibrium prices generally differ across countries).⁴ In the first stage, all countries simultaneously decide whether or not to commit to MFN (i.e., to non-discrimination). Next, given their MFN commitments, countries choose their trade policies (a vector of specific import tariffs) to maximize their own welfare defined as the sum of local firm’s profits, consumer surplus, and tariff revenue. Finally, firms choose their output levels and consumption takes place. An important result of the model is that under tariff discrimination each country levies higher tariffs on low cost exporters relative to high cost ones (see also Gatsios, 1990; Hwang and Mai, 1991; Choi, 1995). By definition, when a country grants MFN to all exporters to its market, it imposes the same tariff on all of them. It turns out that country i’s MFN tariff is lower than its discriminatory tariff on country j if and only if country j’s cost of production is lower than the average production cost of all exporters to country i.

The results show that welfare gains from MFN adoption can arise even when countries cannot (or do not) negotiate over tariff levels because the constraints implied by MFN lower the inefficiency associated with the equilibrium use of beggar-thy-neighbor discriminatory tariffs. It is worth noting that while GATT rules require member countries to adopt MFN, they do not require that countries adopt free trade. In fact, tariff liberalization under the GATT has been achieved over many years via a series of tariff negotiations. Such negotiations have frequently proved to be time-consuming and MFN tariffs of many GATT-member countries have typically stayed positive and unrestricted from their unilaterally chosen levels for subst...

Table of contents

• Cover
• Halftitle
• Series Editors
• Title
• Copyright
• Acknowledgments
• About the Author
• Contents
• Part I Non-Discrimination in the Multilateral Trading System
• Part II Preferential Trade Agreements and Multilateral Trade Liberalization
• Part III Sustaining International Tariff Cooperation
• Part IV Case-studies of WTO Disputes