Traders' Dilemma : Developing Countries' Response to Trade Disputes
If trade tensions between the United States and certain trading partners escalate into a full-blown trade war, what should developing countries do? Using a global, general-equilibrium model, this paper first simulates the effects of an increase in...
| Main Authors: | , , , , |
|---|---|
| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2018
|
| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/115171541615454756/Traders-Dilemma-Developing-Countries-Response-to-Trade-Disputes http://hdl.handle.net/10986/30846 |
| Summary: | If trade tensions between the United
States and certain trading partners escalate into a
full-blown trade war, what should developing countries do?
Using a global, general-equilibrium model, this paper first
simulates the effects of an increase in U.S. tariffs on
imports from all regions to about 30 percent (the average
non-Most Favored Nation tariff currently applied to imports
from Cuba and the Democratic Republic of Korea) and
retaliation in kind by major trading partners—the European
Union, China, Mexico, Canada, and Japan. The paper then
considers four possible responses by developing countries to
this trade war: (i) join the trade war; (ii) do nothing;
(iii) pursue regional trade agreements (RTAs) with all
regions outside the United States; and (iv) option (iii) and
unilaterally liberalize tariffs on imports from the United
States. The results show that joining the trade war is the
worst option for developing countries (twice as bad as doing
nothing), while forming RTAs with non-U.S. regions and
liberalizing tariffs on U.S. imports (“turning the other
cheek”) is the best. The reason is that a trade war between
the United States and its major trading partners creates
opportunities for developing countries to increase their
exports to these markets. Liberalizing tariffs increases
developing countries’ competitiveness, enabling them to
capitalize on these opportunities. |
|---|