1992 Reports

Optimal Tariffs and the Choice of Technology: Discriminatory Tariffs vs. the "Most Favored Nation" clause

Choi, Jay Pil

We compare the effects of optimal tariffs on the technology choice of exporters under the discriminatory tariffs regime and the "Most Favored Nation (MFN)" clause. It is shown that a lower marginal cost (MC) technology will be chosen in equilibrium under the "MFN" clause. As a result, importing country's long-run welfare increases with the adoption of "MFN" while exporting countries welfare decreases in most cases. However expost technology choice, the importing country prefers discriminatory tariffs. This result, therefore, highlights the role of "MFN" as a commitment mechanism to resolve a time-inconsistency problem facing the importing country.