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

We study how the most-favored-nation (MFN) clause affects the tariffs of an importer, the technology choices of exporters, and global welfare. Our key contribution is to consider that the MFN clause does not only impose nondiscriminatory tariffs but also makes tariffs observable to third parties. We show that the latter effect potentially overturns important results from the literature. Namely, if the exporters' technology choices are long-term decisions, the MFN clause may reduce welfare if technology adoption costs are high and/or the exported products are close substitutes. If the exporters' technology choices are short-term decisions, the welfare effects 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