Essays on the most favored nation clause and the world trading system

This thesis consists of two essays, which provide theoretical insights on the formation of Most Favored Nation clubs and its effects on the world trading system.; The most favored nation (MFN) clause is an integral part of all trade agreements administered by the World Trade Organization (WTO) and is widely understood to be the central pillar of the multilateral trading system. In the first essay, motivated by the General Agreements on Tariffs and Trade (GATT), endogenous formation of a club based on the most-favored-nation (MFN) principle is investigated. For this purpose, a simple four-country oligopoly model is used. In this set up, production costs vary across countries and trade is intraindustry in nature. Coalition proof Nash equilibria of two different games---Open and Exclusive Membership---of club formation are analyzed to evaluate the incentives that individual countries have to join an MFN club whose membership requires them to adopt non-discriminatory tariffs towards one another. The analysis hinges on the insight that when production costs across countries are unequal, a non-discrimination requirement does not affect them the same way. In fact, while aggregate world welfare increases with the size of the MFN club, high cost member countries can be worse off relative to tariff discrimination even though such membership is entirely voluntary. Furthermore, non-members lose due to the formation of an MFN club even if club members cannot raise tariffs on them. Among the clubs that have the same number of members, those formed by lower cost countries are more beneficial to world welfare.; In the second essay, a similar partial equilibrium oligopoly model with three countries is examined but this time in a dynamic setting. Does the MFN principle of non-discrimination facilitate multilateral cooperation? Using a repeated game approach, we address this question in an oligopolistic three country model of intraindustry trade where production costs differ across countries. The analysis delivers two main results. First, both under MFN and tariff discrimination the incentive constraint of the high cost country determines whether or not free trade is sustainable. Second, the high cost country is more willing to cooperate multilaterally under MFN relative to tariff discrimination.