PREFERENTIAL TARIFFS AND THE MOST-FAVORED-NATION PRINCIPLE - A NOTE

The aim of this note is to suggest a simple explanation of the need for an international agreement like the 'Most Favoured Nation' (M.F.N.) principle, concerning the uniformity of import tariffs. It is shown that preferential import tariffs can be the optimal outcome of non-cooperative behaviour by trading countries and, therefore, it is argued that the existence of the M.F.N. principle reflects the incentive of each country to otherwise pursue discriminatory tariff policies. Although the M.F.N. principle is well justified in terms of production efficiency, its distributional effects favour the more cost-efficient countries. © 1990.