Optimal tariffs and the choice of technology Discriminatory tariffs vs. the ‘Most Favored Nation’ clause

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, the importing country's long-run welfare increases with the adoption of MFN while in most cases the exporting countries' welfare decreases. However, ex post 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.