Dynamics and Discriminatory Import Policy
Although the GATT prohibits discriminatory import tariffs, it includes means
for circumventing this prohibition. The previous literature uses static models and
discriminatory tariffs increase welfare. In a dynamic model, if governments lack
the ability to precommit, this is not necessarily true. For example, with consumer
switching costs, tariffs are higher for firms with higher market share. Rationally ex-
pecting such policies, firms price less aggressively. If switching costs are significant
relative to asymmetries, then higher prices can result in lower importing country
welfare. Thus it may be in interests of importers to abide by the GATT MFN
principle.
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