Question

Country a has Most favored nation MFN trade agreements with Country c and d, and it has just lowered its tariff on imports of cars from country c. It has violated its MFN agreement with Country d unless it also:

a. allows country d to raise tariffs on country c’s cars

b. raises its tariff on other goods imported from country C

c. Reeses the tariff on other goods imported from country D

d. Reduces its tariff on country D’s cars by the same amount

Answer 1

Correct option is d. Reduces its tariff on country D’s cars by the same amount.

In order to avoid violation of Most Favored Nation agreement with country D, country A should reduce its tariff on country D’s cars by the same amount. Under Most Favored Nation trade agreements, countries are not allowed to discriminate between their trading partners. So, if country A has lowered its tariff on imports of cars from country C, therefore, it is required to reduce its tariff on country D’s cars by the same amount. Country A is required to treat all its trading partners equally. Most Favored Nation agreements helps to maximize efficiency, minimizes transaction costs, also, minimizes costs of trade negotiations.