Optimal Tariffs and Technology Adoption : Most Favored Nation vs. Secret Trade Agreements

We study how the most-favored-nation (MFN) clause affects the tariffs of an importer, technology adoption by exporters, and global welfare. Our main contribution is to consider the disclosure effect of the MFN clause, that is, the fact that it makes tariffs not only uniform but also observable by third parties. We show that the disclosure effect potentially offsets the price uniformity effect studied in the literature. As a result, if technology adoption is a long-term decision and entails high costs for the exporters, the MFN clause may reduce global welfare. In case of short-term technology adoption, we show that the welfare implications of the MFN clause depend on key primitives of the competition model such as strategic complementary or substitutability, the derivative of the cost pass-through rate, and the derivative of the exporters' conduct parameter