The Free Rider Problem Of The Most-Favored-Nation Clause

As the core principles of GATT/WTO,the principle of most-favored-nation treatment has played a significantly important role on the international trade liberalization.However,the studies of the principle of most-favored-nation treatment mostly focused on the legal point of view so far,and the studies from an economic point of view are relatively small.Therefore,the main purpose of this paper is to analysis the positive and negative effect of the principle of most-favored-nation treatment,especially the free-rider problem which caused by the principle of most-favored-nation treatment.Why does the principle of most-favored-nation treatment have the possibility to produce the free-rider problem in the terms of theory, and whether the free-rider problem will be truly appearance in the real negotiation or not,the root reason that caused the free-rider problem and the impact on the negotiated counties or non-negotiated countries,as well as a country how to avoid the free-rider problem in the trade negotiation,those questions are the subjects need to be discuss in our paper.This paper analysis the contents and application scope,as well as the exceptions of the principle of most-favored-nation treatment from the legal point of view at first, and then analysis the effects of the principle of most-favored-nation treatment on the international trade liberalization.While confirmed its positive effects,we also point out its externality which will caused the free-rider problem.In the fourth part of this paper,we confirmed the existence possibility of the free-rider problem at first,and then according to those empirical analyses which analysis by the predecessors and it showed that the free-rider problem is truly appearance in the real negotiation, especially for the large countries.And the root reason which caused the free-rider problem produced is the monopoly power which played a impact on the world price. The appearances of the free-rider problem will not only made the tariff concession inefficiently,but also reduced the negotiated countries' profit margin which can be obtained from the tariff reduction,so the members of GATT/WTO was always tried to avoid the free-rider problem which caused by the principle of most-favored-nation treatment and the GATT/WTO was also provide some safeguard clauses for avoid it. From analysis,we found that there have three ways to solve the free-rider problem, the first one is preventing other countries free-rider,to achieve this goal you can adopt narrow product definition and the exception clauses under the principle of most-favored-nation treatment,as well as the principle of reciprocity which can ensure that collocated with the principle of most-favored-nation treatment can realize the tariff concession efficiency,and solve the free-rider problem completely.Secondly, if the free-rider problem cannot avoid completely in the real negotiation,the best way can be do is to minimize its costs,to achieve this goal you can adopt the principle of "Principal Supplier Rule" which was shown in the GATT/WTO.At last,if the costs is huge,the best way can be do is to stop the bus that the free-rider can be ride,to achieve this goal you can adopt the "the modification and withdraws of tariff concession" which was shown in the GATT/WTO.