The Korean Economic Review
The Most Favored Nation Principle: Passive Constraint or Active Commitment?
Jeongmeen Suh (Soongsil University), Sihoon Nahm (University of Chicago), Seung-Gyu Sim (University of Tokyo)Year 2016Vol. 32No. 1
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 MFNprinciple works as “passive constraints” in the former but “active commitments” in thelatter. Under the sequential-bilateral-trade-agreements, (i) an importing countrystrategically takes a cost-efficient country as its first (second) trading partner when the MFNprinciple is (not) embedded, and (ii) embedding the MFN clause improves the trade surplusof the importing country and the world economy. The MFN principle is utilized by the costefficientcountry as a commitment device to encourage production. This principle reversesthe welfare implication in the existing literature. Finally, the importing country prefers thesequential agreements with the MFN clause to other cases in which it can choosesimultaneous or sequential agreements with/without the MFN clause.