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The Danger of Collapse of the Rule-Based International Trading System and How to Prevent It

Paper Session

Saturday, Jan. 4, 2020 2:30 PM - 4:30 PM (PDT)

Marriott Marquis, Marina Ballroom D
Hosted By: Society of Policy Modeling & American Economic Association
  • Chair: Dominick Salvatore, Fordham University

Why Trump Shot the Sheriffs: The End of WTO Dispute Settlement 1.0 (with Soumaya Keynes)

Chad P. Bown
Peterson Institute for International Economics


As of December 10 2019, the WTO's 25 year old system of resolving disputes has broken down. This paper explains why. It describes the dysfunctional system that preceded the WTO, where the US dealt with politically troublesome imports by using voluntary export restraints, and increasingly resorted to the "aggressively unilateral" Section 301 policy to resolve its trade concerns. The WTO was a compromise between the rest of the world and the United States, whereby the US accepted some constraints with the expectation that the new system of binding dispute settlement would serve its interests. But while the creation of the WTO resolved some concerns about American unilateralism in the short term, its system of handling disputes has turned out to be politically unsustainable.

The Trade War: Missing Macroeconomic Effects

Barry Eichengreen
University of California-Berkeley


The macroeconomic effects of U.S. tariffs and foreign retaliation have been surprisingly small to date. Does this mean that the macroeconomic effects of the collapse of the global trading system would also be limited? I consider different perspectives on this limited macroeconomic fallout, including (i) that it takes a lot of Harberger Triangles to fill an Okun's gap; (ii) that the macroeconomic fallout is coming but has yet to materialize; and (ii) that the largest effects operate through the impact on global geopolitics and cooperation (or lack thereof).

The Value of the Multilateral Trading System

Robert Koopman
World Trade Organization


Recent developments in global trade include actions by major global traders that lie outside the norms of behaviour of the WTO over the last 20 years. Member frustrations with the slow pace of negotiations and concerns about strategies and behaviors of other members approaches to trade and economic development have created unprecedented stresses on a system of rules and commitments that have long encouraged global trade growth and increased economic integration. In this paper we explore the potential value of the multilateral trading system, particularly the WTO, and emphasize that the value goes well beyond the headline of tariff reductions, but that value is also found in increased certainty and transparency. The paper also shows that while preferential trade agreements may provide some backstop to the multilateral system their implicit costs from rules of origin may limit their ability to replace the MTS, particularly in the area of goods trade.

Macroeconomic Effects of Tariffs

Jonathan Ostry
International Monetary Fund


One of the most pressing issues on the international agenda these days is protectionism. Economists have long been aware of the senselessness of protectionism, and that freely-functioning markets (free trade) best allocate resources, at least in the absence of distortions, externalities, or other market failures. When there are such failures in any case, tariffs are almost never the optimal solution to such problems. With protectionism once again making headlines, seemingly for macroeconomic objectives, it seems an appropriate time to study what, if any, the macroeconomic consequences of tariffs have been in practice. Using straightforward methodologies, and a half-century of data for about 150 countries, tariff increases are found to be associated with adverse macroeconomic and distributional consequences (on output, productivity, unemployment, and inequality). The aversion of the economics profession to the deadweight losses caused by protectionism seems warranted.
Dominick Salvatore
Fordham University
JEL Classifications
  • F1 - Trade
  • E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy