Falling Dominoes? The Impact of the US Exit from Free Trade on the Sustainability of Trade Cooperation

This paper quantitatively evaluates other countries' optimal tariffs and the prospects of sustaining international trade cooperation when a large player — the United States — exits the cooperative trade regime. To guide the analysis, we rely on an analytical characterization of the optimal tariff in a simplified multi-country trade model with endogenous labor supply. A country's optimal import tariffs are a function of its trade partners' expenditure shares on its goods, and the trade and labor supply elasticities. In both the simplified model and the full quantitative multi-country, multi-sector global network model, the impact of the US withdrawal from free trade on other countries' optimal tariffs and the sustainability of the cooperative trade regime is minimal. This is because quantitatively, the key determinants of these objects — domestic and international trade shares of other countries — change little from the US withdrawal. This main finding is not sensitive to the trade or labor supply elasticities. Thus, the fall of the US free trade domino is unlikely to cause further dominoes to fall.