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Table 17-27 Each year the United States considers renewal of Most Favored Nation

ID: 1173819 • Letter: T

Question

Table 17-27 Each year the United States considers renewal of Most Favored Nation (MFN) trading status with Farland (a mythical nation). Historically, legislators have made threats of not renewing MFN status because of human rights abuses in Farland. The non-renewal of MFN trading status is likely to involve some retaliatory measures by Farland. The payoff table below shows the potential economic gains associated with a game in which Farland may impose trade sanctions against U.S. firms and the United States may not renew MFN status with Farland. The table contains the dollar value of all trade-flow benefits to the United States and Farland Farland Impose trade sanctions against Do not impose trade sanctions U.S. firms against U.S. firm US trade value -E $140 b States status with Farland Farland trade value $75 bFarland trade value $5 b $130 b United Dont renew MEN ustrade value. $65b Renew MFN statusUS. trade value $35 bU.S. trade value with Farlandland trade value5 arland trade value 275b wwth Farland Refer to Table 17-27. Assume that trade negotiators meet to discuss trade policy between the United States and Farland. If neither party to the negotiation is able to trust the other party, then O a. each should assume that the other will choose a strategy that optimizes total value of the trade relationship O b, the Nash equlibrium will provide the largest possible gains to each party O c Farland negotiators should assume that United States negotiators will implement a policy that is in the mutual best interest of both countries ?d. each should follow its d manant strategy.

Explanation / Answer

Answer

This question actually implies the case of Prisoner's dilemma

Option (d) seems correct. The dominant strategy don't renew MFN for US and impose trade sanctions against US firms for Falkland.

Option (a) is incorrect because, with the case of non-trust, the total value of trade relationship will be at lowest. The other party will not choose the strategy that optimizes total value of trade relationship rather it will choose that strategy that provides more trade value to its own country (self-interest)

Option (b) is incorrect. The Nash equilibrium is actually "Don't renew MFN and impose trade sanctions against US firms". This is not the largest possible gains to each party.

Option (c) is incorrect. The assumption is incorrect since the US negotiators will implement only that policy that is in their self-interest. It also depends what strategy Falkland negotiators are following.

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