OPTIMAL TARIFFS AND THE CHOICE OF TECHNOLOGY - DISCRIMINATORY TARIFFSVS 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 Favore d Nation' (MFN) clause. It is shown that a lower marginal cost (MC) te chnology will be chosen in equilibrium under the MFN clause. As a resu lt, the importing country's long-run welfare increases with the adopti on of MFN while in most cases the exporting countries' welfare decreas es. 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.