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Part I: Theoretical perspectives and a historical background

Week 1: Introduction to the Course. What is IPE? Why do we study it? Issues and
leading approaches. Major theoretical perspectives in the IPE. Liberalism, realism and
Marxism (and their neo- versions).

Week 2: Applying theoretical tools in real-world-phenomena. Short historical

background to global economy. Which century is more globalized: the 19th or the
21st? From Pax-Britannica and Pax- Americana.

Week 3: Post-war IPE: institutionalization and multilateralism. “The Bretton Woods

Trio”. The Cold War, its alliances, internationalization and institutions. “Golden era,”
crises and new approaches.

Part II: Political economy of international trade

Week 4: Bretton Wood Institutions and their impact on global economy. Design and
politics of the international trade regime. WTO and Challenges. Pressing Issues for
Poor Countries. EU and the WTO: Conflicts and conformity.

Week 5: Operation of Bretton Woods institutions. Politics of decision-making in

international trade. IMF and the World Bank. Evolution and expansion of
organizations. Critiques and challenges.

Week 6: Political economy of trade. Society-centered approaches and their pitfalls. An

overview of trade theories.

Week 7: State-centered approach and its pitfalls. Free trade versus protectionism



The world economy is globalized, which means that countries are interdependent, connected
and that they share products (their design, production and sell). When we have an economic
exchange, it usually turns out to have losers and winners (if Apple sells more, Samsung sells
less and vice versa; if you increase tariffs on a product, international companies sell less –
national companies that produce steel benefit). This, many times, has international
consequences: after the steel tariffs, the European Union and Japan retaliated by raising their
own and investigating the USA in the WTO. Sometimes these situations are easier to see than
others. Global economic forces also determine our career opportunities (before you could be
employed in local textiles, now it’s easier to have technological job opportunities).


1. We live in a Global Economy:

2. The products we probably consume are as likely to come from a distant country as from

3. Global economic forces play a large role in determining many of our career opportunities
The opportunities available are far different than 30 years ago. 

4. International Political Economy (IPE) studies how politics shape developments in the global
economy and how the global economy shapes politics. 

5. It focuses on the enduring political battle between the winners and losers from global
economic exchange. 

Global economic exchange

• Global economic exchange raises the income of some people and lowers the income of


• The distributive consequences of global economic exchange generate political competition

in national and international arenas:

The winners seek deeper links with the global economy in order to extend and

consolidate their gains. 

The loser try to erect barriers between the global and national economies in order

to minimize or even reverse their loses. 

Why do we study it?

• To understand how the political battle between the winners and losers of global economic
exchange shapes the economic policies that government adopt. 

• This is represented by the example of Bush’s administration’s decision to raise tariffs on

imported steel in spring 2002. American steel firms prompted this decision because they
were losing from trade. The higher steel had consequences on other groups (e.g. enterprises
that use steel to produce goods, or foreign steel producers). These groups turned to the
political system to try to reverse the Bush administration’s decision. In the US, the
Consuming Industries Trade Action Coalition (CITAC) pressured the Congress to lower the
steel tariff. The EU and Japan threatened to retaliate by raising tariffs on goods that the US
exports to their markets. 

In South America, in the 60s and 70s, it was tried to

invest in industry to get out of agricultural economies
(which are always poorer), and trying to make it through
import substitution, tariffs and the like.


Thus, we need to analyze the actors’ interests in the global economy. In order to do
that, we need to analyze the four issue areas of International Political Economy taking into
account that they are intertwined and we must connect them for further analysis:

1. International Trade System: there are 164 members in the World Trade Organization
(WTO), which is in the center of any international exchange. This institution has been
working in a lot of areas since it was created and it punishes countries that don’t use
adequate measures. It also studies the creation of the measures taken to improve the
trade among nations. However, it has been diminished by regional agreements
between countries that give preferential access to markets to their members (such as
the NAFTA).
2. International Monetary System (IMF): it facilitates transactions between countries (for
example, from dollars to yens and vice versa). Tt has been questioned lately because
austerity measures sometimes didn’t work as predicted: they didn’t bring the wealth
that they were supposed to, and this creates a slowing or collapse of the global
economy. Thus, the IMF doesn’t have the power that it used to. In this class, we are
going to study the currencies and exchange rate system. To give an overview: when
you devaluate your currency, exports are cheaper and you can sell more, and thus it
can be a way to face deficit. The IMF had more efficiency in the 50s and 60s because
countries had a fixed exchange rate system pegged to the dollar. Right now, the EU
has a fixed exchange rate between its countries and floating with other countries (and
thus it is a mixed exchange rate). When it is floating, sometimes business is more
difficult (which value is certain currency going to have tomorrow?), but countries are
freer (have autonomy over their monetary decisions as they don’t depend on another
3. Multinational Corporations System: MNCs are corporations that operate in at least
two different countries (cross-border management and production) and act according
to different laws and measures in each country. Examples of them are Ford Motor
Company, General Electric and General Motors. There are more than 82,000 MNCs in
the world that employ +77 M people, and comprise 1/3 of world trade. Sometimes
governments give a lot of rights away to bring international corporations (because of
job creation usually and because Foreign Direst Investment is very important), but
sometimes corporations press governments for them to give them those rights (and
they are many times questioned because of their actions). Because of this, they are
very controversial. What is their economic impact? 

4. Economic Development: it is tried to be achieved through a pool of trade policies that
sometimes come from social interest and sometimes from national interest. Asian and
American countries, during the 60s, 70s and 80s, tried the measures mentioned before
in order to achieve a raise of income through industrialization. Some succeeded with
import substitution (NICs from Asia) and some didn’t (Africa and South America). We,
as analysts, would like to know what strategies caused these differences in results. It is
important to highlight the development of China: it was supposed to be a communist
country (in autarky), but liberalization in the economy succeeded, and they turned
from an agricultural to an industrialized country. It grew very much at the beginning,
now it does so less (economies are cyclical, and it is easier to grow much when you
have a lot of room for improvement.). 




Thus, as we know, the allocation of resources implies very difficult decisions. This is so
because resources are finite, which means we have to decide what to use them for, and these
decisions have consequences for welfare and distributions (there are better and worse choices
regarding these two areas).

There are studies regarding these topics:

• Explanatory studies: they are why-questions. What decisions do governments take related
to the economy and why? 

• Evaluative studies: they assess the policy outcomes, judge them and make alternatives if
they are considered negative. 

• Welfare evaluation: does a specific policy raise or decrease welfare? 


• Mercantilism: theory born in the 16th and 17th centuries, when Absolutism controlled
all countries. The main goal was for the national economy to be promoted: the state’s
accumulation wealth was the most important. They wanted a surplus on the balance
of payments (higher exports than imports), and thought that exploiting manufacturing
was the best choice because it would create more wealth. The state has a big role for
this school, as it is the one which has to control that the production is well-directed.
Modern mercantilists believe the same, but have substituted manufacturing for
computers and telecommunication for their choice of profit-industries. 

• Liberalism: Adam Smith and others (like Ricardo, father of the term comparative
advantage) said that the individuals – and not the state – are the ones who should be
rich. They wanted to alter the government’s economic policy. They were against any
intromission of the state in the economy out of regulation, protection of
ownership/resources and correction of market failures. Each one produces the
products that cost less for them to produce and makes voluntary transactions in a
market-based economy. 

• Marxism: the main book describing this theory is The Capital (Karl Marx, 1867), which
is a very complex book and a critique to capitalism. It basically states that the
difference between the surplus that the entrepreneurs earn and the one that the
workers earn is huge and only increases because capitalism is focused on never ending
production that ends up in the hands of elites. Thus, salaries for workers will only
decrease and decrease because of cost cutting (since profits are falling due to
decreasing marginal returns, the only source for cost-cutting are wages) until the clash
of classes takes place. After this clash and the revolution, a communist country will
arise. Before this clash, the state is an agent of capitalism controlled by a few firms
that has promoted colonial structures before World War II and less intensive but still
dominance structures after it. For Marxism, the state has to have a role that makes
workers earn more than they do under capitalism to have material independence. 

Thus, the vision of Liberalism focuses on the welfare consequences of resource

allocation. On the other hand, Mercantilism and Marxism both focus on different aspects of
distributional consequences of the economic system.

The problems each view faces are: for Mercantilism, how to compete to attract and
maintain the desired industries; for Liberalism, although the market is harmonious, the state
needs to create a good framework for markets; and for Marxism, the problem to deal with is
the distributional conflict between labor and capital and also between industrialized and non-
industrialized economies.

Here we can see a table of the comparative of the three schools of thought:

There are other influential International Political Economy theories:

1. Hegemonic stability theories (Keohane, Organski): the international system is more likely to
remain stable when a single nation-state is the dominant world power, or hegemon. 

2. World-systems theories (Wallerstein): inter-regional and transnational division of labor,

which divides the world into core countries, semi-periphery countries, and the
periphery countries. 


The approach followed by this book is not one of the

three main schools of thought: it is the interests &
institutions approach.

This approach focuses on the interactions that create

policies: where they come from, how they aggregate
and finally how they create policies. We assume that
people will prefer policies that increase their incomes.

Based on this, we have two mechanisms through which interests are formed:

1. Material interests: they arise from our personal positions in the economy. In our previous
steel example, you will be for or against tariffs depending on where you work (in the steel or in
the car industry?). Where you work shapes what you prefer.

2. Ideas: they are mental models that give us beliefs about causes and effects in the economy.
That is, we can believe either in the comparative advantage model by Ricardo or in the infant
industry argument. What is true doesn’t matter: what powerful people believe does.

Based on these mechanisms, this approach examines political institutions to see how
these interests are shaped into policies. Political institutions pass the rules that create the
groups which make decisions (based on majority in democracies or in economic power in
international institutions). The non-compliance of these groups with the rules creates issues
for the system (especially in the international system, which has no enforcement mechanism).


How do governments and domestic interests affect foreign economic policy?

What are the roles of political power and international institutions in shaping the
terms of trade flows and capital transfers?

How does a nation’s economic growth and technological prowess1 affect its
international influence?

What are the sources of the development gap between the North and the South?

What are the sources of and barriers to international cooperation?

Why do different development strategies succeed or fail?

Distributional consequences, evaluative studies, explanatory studies, ideas, interests,

Liberalism, market failure, Marxism, material interests, Mercantilism, political institutions,
welfare consequences and welfare evaluation.



Fiscal policy is concerned about spending, taxes and borrowing by the Central Bank
government. Keynes established that fiscal policy should not be tied to a rigid balanced
budget: it could be used to manage the economy and smooth out the business cycle of
expansion and recession. However, sometimes this creates inflation and deficit spending
problems because of the increase in spending and decrease in taxes.


Monetary policy consists on the efforts by the Central Bank to manage money supply
and interest rates. This is done through:

1. Open market operations: pumping or draining funds from the banking system. This
consists on either expansionary policy (the Central Bank buys bonds and thus puts
money on the system) or contractionary policy (the opposite occurs). 

2. Managing the discount rate1: when the discount rate increases, so does the price of
money. This discourages borrowing and thus slows economic growth down. The goal
of this is to provide stability, face financial panics and control inflation. 


The exchange rate is the price of a currency in terms of another. The foreign exchange
market is the market in which the world’s currencies are traded. Also, the exchange trade
system has a set of rules governing how much national currencies can appreciate and
depreciate in the foreign exchange market.

Governments use several ways to influence exchange rates. There are three types of
exchange rate systems:

1. Fixed exchange rates: it involves government intervention to keep the price of a currency
from moving up and down. The government establishes this fixed price of currency in terms of
some international standard (either gold or a stronger currency). They maintain this fixed price
by buying and selling the currency they are pegged to in the foreign exchange market.
Governments hold a stock of other countries’ currencies as foreign exchange reserves. This
prevents the currency from changing its value. This was the system before the First World War
and from 1958 to 1973.

2. Floating Exchange system: a currency’s value is determined entirely by market forces,

without government intervention. The value of a currency in terms of another is determined

entirely by private actors, who purchase and sell currencies in the foreign exchange market. 

3. Fixed but adjustable exchange rate: the national currency is largely pegged or fixed to a
major currency, but can be readjusted from time to time within a narrow interval. The periodic
adjustments are usually intended to improve the country's competitive position in 
the export

The value of the money is sometimes controlled because it affects the price of goods and
services abroad and at the home market. Changing the prices of exports and imports affects
the nation’s overall balance of trade.


The balance of payments is an accounting device that records all international

transactions between a particular country and the rest of the world for a given period
(typically, a year). These transactions are divided into two broad categories:

1.Current account: non-financial records, merchandise. 

2. Capital account: financial flows, that is, the capital that flows in and out of the economy. 

The current and capital accounts must be mirror images of each other: if there is a
current account deficit, the country is importing more than it is exporting, and thus the
financial flows are incoming and we have a capital account surplus. On the opposite, if there is
a current account surplus, the country is exporting more than importing, and so it is sending
financial flows outside and it has a capital account deficit. This signals whether the country is a
debtor (first case) or a creditor (second case).

When there is an imbalance of payments, the country must apply an adjustment.


Trade deficit is an economic measure of international trade in which a country's

imports exceeds its exports.

It represents an outflow of domestic currency into foreign countries. How is this


We could decrease the value of the dollar (being that our domestic currency), which
would lower our export price, whose demand and volume would thus increase. Also, our
imports price would increase, and thus its demand and volume would decrease. These two
mechanisms combined would lower our trade deficit.

We predict these changes through speculation in foreign exchange market. It also

affects inflation in domestic and international markets.


The world, before industrialization, had always been protectionist. Why did this
change? In the 19th century, the world economy looks a little like our own (before, trade was
managed by empires): there was an increase in trade of manufactured goods,
interdependence and participation. However, participation was not even.


In 1750, Great Britain had a big domestic market: they were productive in agriculture,
had a monetary economy, a lot of labor mobility and abundance of capital. When they applied
new techniques of production – which caused a sharp declines in cost and thus prices –, they
started to produce a lot more wool and cotton cloth. As their prices were so low, exports rose
from 1784 to 1814, where it ended up needing an open international economy.
This new technology was based on new machinery and new forms of organization.
Also, the large British military helped to retain their benefits. Thus, they started to want freer
trade: they were in need of supply of materials from other countries. Mercantilist barriers
seemed irrelevant and an obstacle to growth.

Thus, there was a free trade demand from manufacturers, who had an increasing
importance in Great Britain versus the agricultural producers, who wanted to keep their tariffs.
Free trade demands, supported by the claim that if Britain lowered their tariffs so would other
countries (which had had a raise on protectionism after 1815) and British exports would rise
again, caused the Repeal of the Corn Laws.

After this, other countries did lower their tariffs (in 1860, Britain and Franc signed the
Cobden- Chevalier Treaty to eliminate tariffs), and so the British traded food for manufactured
goods. They thus shaped the international economy through their unilateral freeing of trade.


From 1850 to 1875 there was an increase in trade. This was mainly caused by the
political unification of Germany, who wanted a big market and international influence.
Because of this, railroads were starting to be built all across Europe, which boosted progress in
Europe along with the increase in textile production of Germany and France and the
continuing growth of Great Britain.

The USA, Australia and New Zealand imported European manufactured goods and
exported food also to Europe. The multilateral division of labor based on geography that was
in place in Europe and Germany’s rising with the help of Great Britain also helped to increase
trade. More tariffs were lifted (for example, in the German Zollverein or in the USA).


There was a change in industrialization: we are in the era of the Second

Industrialization. Great Britain suffered a sharp decline in favour of Germany and the USA and
emerging markets in India, Japand and China. This was so because production shifted to
chemicals, oil, electricity and steel, where the USA and Germany had advantages. The USA had
advantages in raw materials and a big domestic market that was unified by the railroad,
telegraph (reducing costs) and managerial capitalism. In Germany, the education was scientific
and they innovated a lot in chemicals and tools, along with steel and coal production. USA and
Europe were more connected because of steamships. There was a massive US growth.

Thus, interdependence also rose: there were more financial transactions, the gold
standard was in place and there was private international cooperation. However, there was a
problem: no international public cooperation to manage the financial and trade international
system. Speculation rose around the gold standard and British hegemony was put into

Although Great Britain was still dominant, its relative importance was declining since
they couldn’t adapt to managerial capitalism and they had a small domestic market, without
economies of scale of benefits from the new technologies. Thus, they remained in the old
industries. However, London still retained its power with the gold standard. Let’s review this a
little better:


Under the gold standard, developed in the 1870s, the value of any currency is defined
as an equivalent to a certain quantity of gold at a fixed rate. Central Banks are committed to
change national currency at this fixed rate. Gold is used just as reserve value and exchange
ratio. In this system, the Pound was the world currency, and London was the financial centre
and liquidity provider, even when Great Britain was declining in importance.


They provided long-term price stability, stable exchange rates (which causes less
uncertainty in international trade and freer capital movements) and price-specie flow
mechanism (Hume’s very controversial Quantitative Theory of Money2).

2 M·V = P·Y, where M = money supply, V = velocity and it’s constant, P = Price and Y = GDP,
which is also constant.
The system functioned as
described at the left: gold
inflows and outflows
controlled economies.


The Central Bank has to do continuous interventions to maintain the value of the
national currency (drops in gold reserves). Also, the money supply’s growth is insufficient to
suit economic growth needs, which causes deflation and stagnation. This harms debtors and
benefits creditors, which causes growing inequality and social unrest.

The gold standard was too tightening to face economic recessions (impossibility of
expanding monetary policy), and it needs social rest (no strikes against wage deflation), free
capital movements and no state intervention. This caused its collapse.


The monetary trilemma states the impossibility of having at the same time monetary
sovereignty, capital mobility and fixed exchange rates.

This is so because if you have an exchange rate fixed and monetary autonomy (can
increase and decrease money supply), when you move your money supply up, capital will flow
to other countries because the interest rate returns will be higher there, and the country will
lose its monetary autonomy (depends entirely on other countries. Thus, you can either have
free capital mobility and exchange-rate management, free capital mobility and monetary
autonomy (letting exchange rates flow) or monetary autonomy and exchange-rate

Since the gold standard implies the last two features, Central Banks lose monetary
policy as a tool to solve economic recessions.

The main problem from this period was the great interdependence and how it was
managed. It contributed to the depression (1873-1896) after financial panics, the effects of the
Civil War of the USA and the effects of the French reparation debt. This happened when there
was an oversupply of wheat, which decreased its price, and Europe raised tariffs again. This
made earnings fall and international trade to slow down.

Due to these financial crashes, national leaders see trade in mercantilist terms, as a
weapon in international competition. The ideas of mutual gains of free trade were retreated in
the years before 1913, when the WWI started after a military competition and the creation of


Thus, there were three major impediments for international economic stability during
this period:

1. Nations failed, after the first world war, to manage domestic and international
economic systems. They could not find a way to move capital from surplus to deficit
countries and did not implement managerial capitalism. 

2. The failure of the world’s largest economy, the USA, to accept a leadership role. 

3. The ferocity of the downturn in the world after the 1929 crisis guaranteed a retreat to

autarky and protection as nations struggled to defend their domestic economies. 

The USA helped the Allies during the war, for which they owed $10 billion. The USA
thus was a creditor, along with Japan. Europe was not competitive because their industries
were destroyed and their financial systems too. They had no gold standard and an oversupply
of money (and thus inflation). Moreover, the USA insisted on reparations to be payed as soon
as possible (while they raised tariffs, harming European imports), and so did France, imposing
an impossible task on Germany. The Pound’s return to the Gold Standard was artificial: Great
Britain could not meet their gold demands and they had no capital surplus to lend.

This combination of facts promoted that, after the 1929 crisis (having had already
restrictions on credit in 1928 by the USA that also harmed economies), the debt system
collapsed in 1931 and the payments were stopped. The economies entered a recession
marked by massive gold withdrawals and falling profits.

We need to remember the monetary trilemma for this topic (see previous topic).


The years following the Second World War produced epoch-changing changes in the
world economy: unprecedented prosperity, development of new international economic
institutions, explosion in world trade and an extraordinary expansion in international

This was possible because of the following reasons: the changing role of the USA form
the previous period, the cooperation between European countries, the threaten of Cold War
and MNCs.


Because of the war, Europe is in a bad shape, not only regarding infrastructure but also
regarding the economic structure of the country, which is completely war-oriented. Moreover,
Europe is facing a short supply of basic resources like food. Thus, the USA’s policy will be
directed towards helping Europe once the countries within that continent have explained what
they exactly need.


The expansion in world trade was generated by:

1. The recovery of Western Europe and Japan. 

2. Decline/elimination of tariffs. 

3. Convertible currencies and more openness. 

4. Availability of oil at stable and cheap prices, since imported oil became the primary
source supporting economic output when before it was coal. Its imports rose.


The Bretton Woods System represented the first time that governments made
exchange rates a matter of international cooperation and regulation. The system pretended to
enjoy exchange-rate stability and domestic economic autonomy. These are its main

1. International Monetary Fund: designed to manage exchange rates and payments

imbalances across nations. It gave short-term loans for reversion of deficit (usually
combined with other contractionary policies) or, when a serious imbalance took place,
allow countries to alter their exchange rate (devaluate their currency). 

2. World Bank: supplements private capital from international investments. In the 50s
and 60s it lent a lot of money to the Third World: over $10 billion each year. 

3. GATT: serves as negotiating forum for the reduction of tariffs and other barriers to
trade. It was created between 1948 and 1948 along with the ITO, which the USA finally


In 1944, a multilateral conference in Bretton Woods of 44 countries took place. It

established an explicit code of conduct for international monetary relations and institutional
structure centred on the IMF.

This system was based on a fixed exchange rate that did not entail a loss of domestic
economic autonomy. However, it is important to stress the growing strength of labour unions,
who avoid falling output and rising unemployment. This poses a political constraint on
domestic adjustment.

Four innovations are key in this system:

1. Exchange-rate flexibility: fixed but adjustable exchange rates (explained above). 

2. Limit capital flows: free capital flowed destabilized exchange rates in the interwar
period. Capital crossed borders and was brought back at the first sight of difficulty in
the host country. This caused disequilibrium in creditor and debtor countries, as deficit
financed through foreign capital and there were many payment deficits. This
has changed. 

3. Stabilization fund: credit mechanism of a pool of currencies contributed by the
member countries (quota): 25% gold and 75% national currency. A government can
draw from the 
fund when it faces balance-of-payments deficit. This was explained

4. Objective IMF: to monitor the member countries’ macroeconomic policy and balance
of payment positions. It decides when a devaluation is warranted, it manages the
stabilization fund and so it limits the opportunistic behaviours of competitive
devaluations and abuses of 


At first, it was very difficult to implement Bretton Woods. Countries, at first, needed to
import foods and capital good in order to reconstruct their economy. The USA exported $ to
Europe in foreign aid through the Marshall Plans. The official price of gold was of $35 an

This was based on a balance of payment deficit plan from the US, since more dollars
flowed out from the US than in. At the end, by 1959, European governments had accumulated
sufficient dollar and gold reserves to accept fully convertible currencies.

Thus, the dollar became the system’s primary reserve asset: it was used in
international payments, foreign exchange reserves and to intervene in the foreign exchange
market. Thus, the stability depended on the ability of the US to exchange dollars for gold at
$35 an ounce.



In 1957, some European countries signed the Treaty of Rome and created the
European Economic Community. This was promoted by the USA and France, who wanted
international market power and ability to control Germany.

After this, the Customs Union and the European Coal and Steel Community were
created as well, which tried to reduce tariffs and restrictions for trade. This promoted a lot of
growth, and after that Europe was able to accept full currency convertibility and close the
payments gap and peg their currency to the dollar.


Multinational Corporations started investing in Europe, which has promoted

globalization. However, all this Foreign Direct Investment by USA citizens abroad, together
with the economic boost of Europe, made the capital market outside the USA very big.

Having the USA huge deficits because of all of their military spending in the Cold War
and their expansionary policies of military Keynesianism and reducing taxes. Thus, at the end,
the international capital market exceeded that of the USA by a lot.


During the 60’s there is a dollar glut as a consequence of balance of payment deficit
(expansionary policy) because of what we have stated before:

1. Military expenditures and expanded welfare program and home. 

2. Unwillingness of Presidents Johnson and Nixon to finance these expenditures with

The consequence of the dollar overhang was the decreased confidence on the US
government and dollar. This is so because the quantity of gold held by the USA was lower than
the dollar held by foreign countries. Thus, foreign claims on American gold grew larger than
the amount of gold the US held. In 1971, speculative attacks began to occur and gold
withdrawals took place.

There were three options to save the system:

1. Devalue dollar against gold. 

2. Restrain economic activity in the US to reduce American imports. 

3. Expand economic activity in the rest of the world in order to increase American exports. 

However, the US government was unwilling to adopt any of these measures, and
instead it was paralyzed by political conflict. They tried other policies, such as getting the EEC
to lower their trade barriers or creating the stabilization fund. However, these policies did not
help enough.

In 1971, the USA had had several years of economic deterioration, and a crisis caused
the USA to suspend the gold convertibility, raise tariffs and depreciate the dollar. Other
countries started to reject the Bretton Woods System. 1972 was a stable year, but again in
1973, a massive crisis brought the system down, and most advanced countries abandoned
their fixed exchange rates and floated their currencies. This marks the end of the US


The oil situation also harmed the USA. US oil production was stagnated, and the wars
in the Middle East together with US barriers restricted oil production. However, oil demand
was ever-rising, and thus at some point oil prices rose a lot. This intensified the crisis.


There is no way available to maintain stable exchange rates and simultaneously

preserve domestic economy.
When forced to choose between a fixed exchange rate and domestic economic
autonomy, governments have opted for the latter.



International consumption and production has increased a lot because of the rapid and
long growth in world trade. Global markets rest on political structures such as the GATT and
the WTO. The World Trade Organization is an institution that negotiates, enforces and revises
trade rules after their establishment in 1947. It has 164 members nowadays but it still is a
small institution (635 staff and $170 Million as budget). It is at the center of the trade system
as it provides a forum for trade negotiations/administrators, it administers he trade
agreements that governments conclude and it provides a mechanism through which
governments can resolve trade disputes.

The WTO system is based on two principles:


It is the economic rationale that justifies its existence. It states that opening up trade
entails an increase in standards of living for everyone. When trade is free (absence of barriers),
the gains from trade are higher.


This principle ensures that each WTO member faces identical opportunities to trade
with other WTO members. Within the WTO, there are two forms of non-discrimination:

1. Most-favored nation (MFN): prohibits governments from using trade policies to provide
special advantages to some countries and not to others (article 1 of GATT). There are two
exceptions to this: trade regional agreements (RTAs, such as the NAFTA or EU) and General
System of Preferences (GSP, lower tariffs for developing countries).

2. National Treatment: prohibits governments from using taxes, regulations and other
domestic policies to provide an advantage to domestic firms at the expense of foreign firms.
You need to treat domestic and foreign versions of the same product identically once the
product is inside the market.


Also, the WTO is based on many rules. There are hundreds of them, the first ones
established in 1947. They can be proscriptive (prohibition against government discrimination)
or prescriptive (requirement to protect intellectual property). Also, right now, governments
have concluded 60 distinct agreements.


1. Inter-governmental bargaining: it is the primary decision-making process. It entails

negotiations to liberalize trade (tariff and non-tariff barriers). This process is done
through bargaining rounds. These bargaining rounds start at a Ministerial conference,
where they establish an agenda. Later, lower-level officials conduct negotiations on
the agenda topics, which outline the final agreements. Then, there is another
Ministerial Conference where they establish the final agreement. Governments ratify
the agreement and agree to implement it on a timetable. To this day, 8 of these
bargaining rounds have been concluded. Ninth is the Doha Round1, that started on
2001 and finished in 2015 with no success.
2. WTO dispute settlement mechanism: there is a punishment when there is a violation
of agreement or any non-compliance through a quasi-judicial tribunal. Countries have
to either alter the offending policy or compensate the country/countries harmed.

So, by creating rules, establishing a decision-making process to extend and revise it

and enforcing compliance there is a rule of law in international trade relations. However, there
are challenges to the system, which we will see on the next page.


Through 70 years of functioning, the WTO and ITS have experienced their critics,
although their core principles have remained stable. Now, the WTO faces new challenges that
may affect these principles.


The power for developing countries has been growing since 1985 as more of them
joined the WTO. It is difficult to gain consensus with different levels of development and
interests, but since the 80s a new bloc of emerging economies (Brazil, China and India at the
leadership) has been very influential.

Their topics into the agenda are the liberalization of agriculture and promoting
development policies. The cooperation on these issues they have carried out has been
institutionalized in the Group of 20. Current bargaining brings together governments
representing countries with very different economic structures: high technology, labor-
intensive manufactured goods and agriculture.

Therefore, at the WTO, since these countries are more important, new policies will
entail liberalization of sectors – such as agriculture in the EU or technology in developing
countries – that will not survive international competition.


NGOs are a powerful force outside the organization as they press for answer on
consumer and environmental issues. During the last years, NGOs have emerged trying to
influence the organization. They have three main areas of concern:

1. Poverty and developing countries.

2. Consumers.

3. Environmental interests.

NGO’s critic the WTO saying that rules are rigged in favor of the rich through tariffs
and other barriers: domestic subsidies (agricultural) benefit the rich and increase poverty and
inequality in developing countries. Oxfam stated that if developing countries increased their
exports just 5% this would generate 7 times as much as they receive in aid ($135 billion).
Although trade is a powerful source of wealth, the poor are being left behind.

Also, they discriminate on patents and public health, since they are privatized and
medicines are too expensive for them to be expanded in these countries. Last, Foreign Direct
Investment (FDI) is questioned: they entail reduced capacity for research and development in
developing countries, growing dependence on technology imports for them as well, erosion of
employment standards (due to TNCs many times), real financial transfers made have been
reduced to attract investors and tax avoidance or profit repatriation.

Since the 90s, NGOs have complained because the balance struck by WTO rules is too
favorable to business and insufficiently protective of consumer and environmental interests.
The WTO decision- making is a process where producer interests are heavily represented and
consumer interest almost excluded. Thus, this process could be changed.


Regional Trade Agreements (RTAs) are trade agreements between two or more
countries, usually located in the same region of the world, in which each country offers
preferential market access to others. They take two basic forms:
1. Free trade areas: they reduce barriers among the countries that are in the agreement
but keep their own specific barriers for countries outside their agreement. An example
is the NAFTA. 

2. Custom unions: they reduce/eliminate barriers among the countries within the
agreement and establish a common barrier policy for countries outside it. An example
is the EU. 

RTAs are inherently discriminatory, but they are consistent with the article 24 of GATT
and allowed at the WTO. However, there are some worries relating to them: they are rapidly
proliferating (why are they doing RTAs and not simple negotiating within the WTO?), more
than half are bilateral and they are densely concentrated in Europe and the Mediterranean

Their appearance could respond to several motives: quickness to open up to trade,

seek EU membership, secure access to a particular market, show commitment to free trade or
increase bargaining power at the WTO (the USA’s threats).

Now, is the proliferation of RTAs a challenge or a complement to WTO? It could be

either way, and only time can tell. If it creates more trade than diverts trade, it’s a
complement, but that is very difficult to measure.


The EU and its member states became original member of WTO. This custom union has
a common commercial policy under article 113 EC (restricted to trade policy), confirmed by ECJ
(Opinion 1/94). However, they still have competences in services and intellectual property
rights (as confirmed by ECJ).

What about TTIP?

The Transatlantic Trade and Investment Partnership is a series of trade negotiations

between the US and US. It is basically a bilateral trade agreement for reducing regulatory
barriers to trade regarding food, safety law, etc. Now, it has been rejected by the USA under
the Trump presidency.