Trade Cooperation in an Age of Geopolitics
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Bibliographic details
- Authors: AADITYA MATTOO, MICHELE RUTA, ROBERT STAIGER
- Published: June 2, 2026
Executive summary
- For decades the multilateral trading system—rooted in the General Agreement on Tariffs and Trade (GATT) in 1947 and embedded in the World Trade Organization (WTO) in 1995—was designed for a world where governments rarely used trade for geopolitical goals.
- The United States and China now often refer to each other as geopolitical rivals and increasingly use trade policy to advance strategic objectives: limiting technology transfers, restricting exports of critical products, and pursuing national security goals.
- Despite rising geopolitical rivalry, research shows strategic rivals can still benefit from trade cooperation; however, the existing institutional framework must adapt to accommodate geopolitical objectives.
The power problem
- Standard models: governments raise tariffs to improve real income by manipulating terms of trade (the price of exports relative to imports); uncoordinated tariff policy leads to inefficiently high protection.
- Geopolitical rivalry alters incentives: governments care about relative power as well as absolute welfare, making tariffs attractive because they damage rivals’ industries as well as affect terms of trade.
- Implication: A country might reject a highly beneficial trade deal if it would make its adversary stronger, or implement a damaging trade measure because it would hurt its adversary even more.
- Theoretical foundation: John Mearsheimer’s logic that states motivated by relative power concerns may forgo gains that advantage rivals underpins the strategic use of trade policy.
Cooperation amid rivalry
- Noncooperative equilibrium: Geopolitical rivalry drives up tariffs in a Nash equilibrium, producing higher protection and less trade than in a world without rivalry.
- Despite this, economic efficiency still matters: Governments that care at least somewhat about citizens’ welfare can adopt policies that make both countries better off.
- Condition for cooperation: Unless rivalry becomes so extreme that governments care only about dominating their adversary, enlightened self-interest can still underpin negotiated cooperation—even between strategic adversaries.
The adjustment problem
- Historical transition: Moving from a high-tariff world after World War II to a low-tariff era took decades of GATT/WTO negotiations; reciprocity and nondiscrimination were key pillars enabling that transition.
- Two possible adjustment paths when geopolitical rivalry erupts:
- "War and redemption"
- Description: Allow the old agreement to collapse, trigger a trade war that pushes tariffs higher, and later negotiate a new agreement through traditional reciprocal tariff reductions.
- Trade-offs: Economically costly and likely requires lengthy negotiations; fits within existing multilateral framework.
- Immediate institutional innovation
- Description: Negotiate an immediate transition along the frontier of possible efficient outcomes, avoiding economic disruption.
- Trade-offs: Requires the country less shocked by geopolitics to make concessions that reduce its welfare relative to the status quo; this is neither reciprocal nor mutually advantageous in the traditional sense and cannot be accommodated by the WTO’s principle of reciprocity.
- Multilateral complications: The WTO principle of nondiscrimination (any trade benefit extended to one member must be extended to all) complicates bilateral transfers between rivals and can harm third countries.
- Empirical illustration: The 2020 Phase One agreement between the United States and China included Chinese commitments to buy specific quantities of US goods; World Bank research at the time predicted exporters in Europe, Latin America, and elsewhere would have been hurt if China redirected imports from those regions to the US. The agreement’s outside-multilateral nature highlights the current system’s inability to accommodate necessary geopolitical adjustments.
Policy proposal: a geopolitical exemption
- Purpose: Create space within the multilateral trading system for geopolitical adjustment while protecting third countries.
- Core design:
- Allow strategic rivals to make discriminatory tariff adjustments under strict conditions as an exemption to reciprocity and nondiscrimination.
- Require that any discriminatory adjustments between rivals leave world prices between the rivals and third countries unchanged, thus limiting trade diversion.
- Precedent: The trading system already permits certain forms of discrimination (for example, preferential trade agreements/free trade areas) provided they meet strict conditions such as covering “substantially all trade” among members and not raising barriers against nonmembers.
- Implementation challenges: Technical complexity in enforcing the rule that world prices remain unchanged; nevertheless, without such an institutional accommodation geopolitical adjustments will occur outside the multilateral framework or not at all, both with severe costs for neutral countries.
Preserving cooperation: recommendations and implications
- Core argument: The return of geopolitics does not eliminate the economic case for cooperation; negotiated agreements remain beneficial even among strategic rivals.
- Institutional imperative: The trading system must adapt—adding new mechanisms to preserve core functions while accommodating strategic competition.
- Proposed mechanism: The geopolitical exemption would establish safeguards to maintain the integrity of the multilateral system while acknowledging and managing strategic rivalry, enabling adjustments without disruptive trade wars or undue costs on third countries.
Source: Trade Cooperation in an Age of Geopolitics; AADITYA MATTOO, MICHELE RUTA, ROBERT W. STAIGER; June 2026.
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