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

Itai Agur ()

No ECO2007/17, Economics Working Papers from European University Institute

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.

Keywords: Regionalism; RTA; Multilateralism; WTO; Trade balance; US trade deficit (search for similar items in EconPapers)
JEL-codes: C72 C73 F13 F32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int
Date: 2007
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