Traders' Dilemma: Developing Countries' Response to Trade Disputes

21 Pages Posted: 8 Nov 2018 Last revised: 9 Nov 2018

See all articles by Shantayanan Devarajan

Shantayanan Devarajan

World Bank Middle East and North Africa Region

Delfin S. Go

Development Prospects Group, The World Bank

Csilla Lakatos

World Bank

Sherman Robinson

World Bank

Karen Thierfelder

United States Naval Academy - Department of Economics

Date Written: November 7, 2018

Abstract

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.

Suggested Citation

Devarajan, Shantayanan and Go, Delfin S. and Lakatos, Csilla and Robinson, Sherman and Thierfelder, Karen, Traders' Dilemma: Developing Countries' Response to Trade Disputes (November 7, 2018). World Bank Policy Research Working Paper No. 8640. Available at SSRN: https://ssrn.com/abstract=3280666

Shantayanan Devarajan (Contact Author)

World Bank Middle East and North Africa Region ( email )

1818 H Street, NW
Washington, DC 20433
United States

Delfin S. Go

Development Prospects Group, The World Bank ( email )

1818 H Street
Washington, DC 20433
United States

Csilla Lakatos

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Sherman Robinson

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Karen Thierfelder

United States Naval Academy - Department of Economics ( email )

589 McNair Road
Annapolis, MD 21402
United States

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