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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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  1. Freund, Caroline, 2000. "Multilateralism and the endogenous formation of preferential trade agreements," Journal of International Economics, Elsevier, vol. 52(2), pages 359-376, December.
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  16. Saggi, Kamal & Yildiz, Halis Murat, 2008. "Bilateral trade agreements and the feasibility of multilateral free trade," MPRA Paper 17561, University Library of Munich, Germany, revised 26 Jun 2009.
  17. John B. Burbidge & James A. DePater & Gordon M. Myers & Abhijit Sengupta, 1996. "A Coalition-formation Approach to Equilibrium Federations and Trading Block s," Department of Economics Working Papers 1996-05, McMaster University.
  18. Christian Broda & Nuno Limão & David Weinstein, 2006. "Optimal Tariffs: The Evidence," NBER Working Papers 12033, National Bureau of Economic Research, Inc.
  19. Pravin Krishna, 1998. "Regionalism And Multilateralism: A Political Economy Approach," The Quarterly Journal of Economics, MIT Press, vol. 113(1), pages 227-250, February.
  20. Emanuel Ornelas, 2005. "Rent Destruction and the Political Viability of Free Trade Agreements," The Quarterly Journal of Economics, MIT Press, vol. 120(4), pages 1475-1506, November.
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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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