Developing-Country Benefits from MFN Relative to Regional/Bilateral Trade Arrangements Madanmohan Ghosh, Carlo Perroni, and John Whalley* Abstract Using a general-equilibrium model of world trade, this paper evaluates the benefits of most-favored-nation (MFN) treatment to developing countries in multilateral relative to bilateral or regional trade agreements, from three sources. First, developing countries may be able to free-ride on bilateral tariff concessions exchanged between larger countries in MFN-based GATT/WTO rounds. Second, MFN benefits developing countries by restricting discriminatory retaliatory actions by other countries, evaluated here by a non- cooperative Nash tariff game. Finally, MFN changes threat points in bargaining and hence affects the bar- gaining solution of multilateral MFN-based trade negotiation compared to a bilateral/regional arrangement. The authors find that the benefits to developing countries are small in the first case as the tariff rates are already low, and the benefits are small in the second case as the optimal tariffs under unconstrained retali- ation are not very asymmetric. Benefits from the third case are large as large countries can extract large side-payments if they bargain bilaterally. 1. Introduction Despite its central role in modern trade policy, there is little literature that attempts to evaluate the benefits and costs of most-favored-nation (MFN) treatment for various types of countries, and specifically for developing countries. 1 Here we suggest that countries receive various benefits from—and incur costs because of—their MFN rights and obligations relative to regional or bilateral agreements, and we use numerical simulation techniques to investigate their implications by focusing on three different model solution concepts: comparative static competitive equilibria, tariff-game Nash equilibria, and bargaining solutions (with side-payments), each of which is affected in different ways by the MFN commitment relative to a non-MFN world.We model MFN as a constraint on the relevant model solution concept, and use a seven-region global trade model calibrated to the 1992 GTAP version 3 database (Hertel et al., 1997) to compute equilibria, and value MFN benefits by comparing across MFN and non-MFN equilibrium outcomes. In so doing, we draw on code and a model structure used earlier by Perroni and Whalley (1994). 2. The Rationale for MFN Most-favored-nation treatment implies that countries extend to other countries the same trade treatment as that granted to their most favored trading partners, effectively Review of International Economics, 11(4), 712–728, 2003 *Ghosh: University of Western Ontario and MEPA, Industry Canada, 235 Queen Street, C. D. Howe Building, 5 West, 528 G, Ottawa, Ontario K1A 0H5, Canada. Tel: 1-613-995-6939; Fax: 1-613-991-1261; E-mail: ghosh.madanmohan@ic.gc.ca. Perroni: University of Warwick, Coventry CV4 7AL, UK. E-mail: C.Perroni@warwick.ac.uk.Whalley: University of Western Ontario, London, Ontario N6A 5C2, Canada.Tel: 1-519-661-3509; Fax: 1-519-661-3064; E-mail: jwhalley@uwo.ca. The second and third authors acknowledge support from the UK ESRC under an award for “General Equilibrium Modelling of UK Policy Issues.”We are grateful to the referees for helpful comments. We also thank Hari Govindran, Anne Kreuger, and Uzi Segal for discussions of the issues addressed in the paper,and to Ayhan Kose for helpful detailed comments. The views expressed here are those of the authors and do not necessarily reflect the opinions of the insti- tutions with which the authors are affiliated. © Blackwell Publishing Ltd 2003, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA