On The Complementarities Of The Principles Of Most-Favored-Nation Treatment And Reciprocity

The principles of most-favored-nation (MFN) treatment and reciprocity have been the core principles of the multilateral trade system. In light of this, the purpose of this paper is to probe into the rationality of their existence and the complementarities between them under the framework of the economic analysis.Firstly, this paper demonstrates their complementarities logically from the view of their basic connotations: bilateral trade negations are the basis of multilateral trade system, while the principle of reciprocity is the footstone of bilateral negotiations; the principle of MFN treatment is the thruster and fundamental guarantee to multilateralize bilateral trade liberalization fruit, and the amendment to some possible damages caused by the principle of reciprocity.Then the author shows their complementarities theoretically. By using traditional economics—cost-benefit analysis, the author makes a review of MFN's potential costs and benefits, figuring out its three forms: forward manipulation, backward stealing and asymmetry, while reciprocity assures of minimizing MFN's potential costs, which can be solved by combining the two principles through the principle of Principal Supplier subtly. Meanwhile, it is indicated that MFN's potential benefits are to provide two assurance mechanisms against bilateral opportunism but without ample proof under the framework of traditional economics. Therefore a new theoretical method—new Political Economy is introduced into this paper.Finally, a relatively integrated proof of their complementarities is presented in terms of political economy of trade policy. By using a two-country model this paper illustrates the principle of reciprocity can eliminate the terms of trade externality of two negotiation parties so that they can escape from"Prisoners'Dilemma"when tariffs are set unilaterally. Then through a three-country, it is pointed out that the nondiscrimination of MFN can ensure the singularity of bilateral terms of trade under multilateral conditions. Besides in company with the principle of reciprocity, it can also ensure the existence and uniqueness, optimum of the political optimal tariffs; in the end, the stability of the political optimal tariffs is demonstrated through the existence and settlement of the bilateral opportunism problem. In this way the complementarities of the principles of the MFN treatment and reciprocity are eloquently testified.