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


  • Agur Itai

    () (Dutch Central Bank and European University Institute)


This paper argues that the growing US trade deficit has caused the decline of the WTO and the rise of regional trade agreements. Growing imbalances make countries more selective about who to cooperate with. This is formally shown in a three-country negotiation game that is based on a goods-market model. Subsequently, the model is parameterized and applied quantitatively. Using historical data, the model correctly predicts the date that US-Canada FTA talks began. Based on current data, moreover, the model paints a bleak picture for multilateralism: US exports to China would have to triple for a new WTO round to stand a chance. But even this may be insufficient: a dynamic extension of the game shows that regionalism can have a lock-in effect. Nonetheless, this does not plead for tougher WTO rules on regionalism. As is argued both qualitatively and quantitatively, these may push countries to less, not more, cooperation.

Suggested Citation

  • Agur Itai, 2008. "The US Trade Deficit, the Decline of the WTO and the Rise of Regionalism," Global Economy Journal, De Gruyter, vol. 8(3), pages 1-34, September.
  • Handle: RePEc:bpj:glecon:v:8:y:2008:i:3:n:4

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    References listed on IDEAS

    1. Robert W. Staiger & Kyle Bagwell, 1999. "An Economic Theory of GATT," American Economic Review, American Economic Association, vol. 89(1), pages 215-248, March.
    2. Pravin Krishna, 1998. "Regionalism and Multilateralism: A Political Economy Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 113(1), pages 227-251.
    3. Freund, Caroline, 2000. "Multilateralism and the endogenous formation of preferential trade agreements," Journal of International Economics, Elsevier, vol. 52(2), pages 359-376, December.
    4. Henrik Horn & Giovanni Maggi & Robert W. Staiger, 2010. "Trade Agreements as Endogenously Incomplete Contracts," American Economic Review, American Economic Association, vol. 100(1), pages 394-419, March.
    5. Kyle Bagwell & Robert W. Staiger, 2011. "What Do Trade Negotiators Negotiate About? Empirical Evidence from the World Trade Organization," American Economic Review, American Economic Association, vol. 101(4), pages 1238-1273, June.
    6. John Kennan & Raymond Riezman, 2013. "Do Big Countries Win Tariff Wars?," World Scientific Book Chapters,in: International Trade Agreements and Political Economy, chapter 4, pages 45-51 World Scientific Publishing Co. Pte. Ltd..
    7. Aghion, Philippe & Antras, Pol & Helpman, Elhanan, 2007. "Negotiating free trade," Journal of International Economics, Elsevier, vol. 73(1), pages 1-30, September.
    8. Bagwell, Kyle & Staiger, Robert W, 1990. "A Theory of Managed Trade," American Economic Review, American Economic Association, vol. 80(4), pages 779-795, September.
    9. Tammy Holmes, 2005. "What Drives Regional Trade Agreements that Work?," IHEID Working Papers 07-2005, Economics Section, The Graduate Institute of International Studies.
    10. Paul Collier, 2006. "Why the WTO is Deadlocked: And What Can Be Done About It," The World Economy, Wiley Blackwell, vol. 29(10), pages 1423-1449, October.
    11. Bhagwati, Jagdish & Greenaway, David & Panagariya, Arvind, 1998. "Trading Preferentially: Theory and Policy," Economic Journal, Royal Economic Society, vol. 108(449), pages 1128-1148, July.
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    Cited by:

    1. Grahame Thompson, 2011. "Financial Globalization? History, Conditions and Prospects," Chapters,in: The Handbook of Globalisation, Second Edition, chapter 2 Edward Elgar Publishing.
    2. Staiger, Robert W. & Sykes, Alan O., 2010. "‘Currency manipulation’ and world trade," World Trade Review, Cambridge University Press, vol. 9(04), pages 583-627, October.
    3. Kyle Bagwell & Chad P. Bown & Robert W. Staiger, 2016. "Is the WTO Passé?," Journal of Economic Literature, American Economic Association, vol. 54(4), pages 1125-1231, December.
    4. Kyle Bagwell & Robert W. Staiger, 2009. "The WTO: Theory and Practice," NBER Working Papers 15445, National Bureau of Economic Research, Inc.

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