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

  • Itai Agur

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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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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