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The US Trade Deficit, the Decline of the WTO and the Rise of Regionalism

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  • Itai Agur

Abstract

This paper argues that the growing US trade de.cit has caused the decline of the WTO and the rise of regional trade agreements. A country in de.cit prefers to retain market power against countries with a large surplus. Multilateral cooperation restricts its choice. This notion is formalized in a three-country game in which countries negotiate multilaterally and, if that fails, bilaterally. The multilateral agreement only holds for sufficiently even trade balances. When one country's deficit grows too large, a regionalist equilibrium emerges. A VAR analysis shows that the US trade balance explains over 50% of the variation in regional trade agreements.

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Bibliographic Info

Paper provided by European University Institute in its series Economics Working Papers with number ECO2007/17.

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Date of creation: 2007
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Handle: RePEc:eui:euiwps:eco2007/17

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Keywords: Regionalism; RTA; Multilateralism; WTO; Trade balance; US trade deficit;

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Cited by:
  1. Robert W. Staiger & Alan O. Sykes, 2008. ""Currency Manipulation" and World Trade," NBER Working Papers 14600, National Bureau of Economic Research, Inc.

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