MFN status and the choice of tariff regime

The gradualist approach to trade liberalization views the uniform tariffs implied by MFN status as an important step on the path to free trade. We investigate whether a regime of uniform tariffs will be preferable to discriminatory tariffs when countries engage in non-cooperative interaction in multilateral trade. The analysis includes product differentiation and asymmetric costs. We show that with the cost asymmetry the countries will disagree on the choice of tariff regime. When the choice of import tariffs and export subsidies is made sequentially the uniform tariff regime may not be sustainable, because of an incentive to deviate to a discriminatory regime. Hence, an international body is needed to ensure compliance with tariff agreement.