Effects of Multilateral Trade Liberalization on Prices∗

To analyze the effects on prices of simultaneous tariff reductions by multiple importing countries, we construct a simple three-country model where a good is produced by a monopolist with non-constant marginal cost and imported by two countries. We specifically compare two representative tariff-reduction formulas: the "fixed-amount" and the "uniform percentage" reductions. The uniform percentage reductions may increase the consumer price in the importing country whose initial tariff is lower. Thus, importing countries with relatively low tariffs may prefer a bilateral trade agreement to a multilateral one to ensure consumer gains. JEL Classification Numbers : F12, F13, F15