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The US Trade Deficit, the Decline of the WTO and the Rise of Regionalism
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1725-6704
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EUI ECO; 2007/17
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AGUR, Itai, The US Trade Deficit, the Decline of the WTO and the Rise of Regionalism, EUI ECO, 2007/17 - https://hdl.handle.net/1814/7104
Abstract
This paper argues that the growing US trade deficit 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
su¢ ciently 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.