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

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.