TABLE OF CONTENTS
Introduction - Robert C. Feenstra, Alan M. Taylor
DOI: 10.7208/chicago/9780226030890.003.0001
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Coping with Shocks and Shifts: The Multilateral Trading System in Historical Perspective - Douglas A. Irwin, Kevin H. O’Rourke
DOI: 10.7208/chicago/9780226030890.003.0002
[multilateral trading system, beggar thy neighbour, prisoner's dilemma, free trade]
This chapter describes the multilateral trading system over the last two centuries. At catastrophic moments (“shocks”) when the system has lacked shock absorbers, political economy forces have then tended to emerge intent on using protectionist devices as an alternative tool to offset, or at least cushion, such shocks. Also, lower frequency perturbations (“shifts”) have strained the commitment to free trade, as when more gradual trends in comparative advantage (whether for technological or geopolitical or other reasons) have forced dramatic changes in trade patterns, industry structure, and factor rewards, creating a political backlash. Thus, institutions matter: even if unilateral policymaking could in theory deliver a free trading system with adequate shock absorbers, historical observation of such regimes expose the perils of beggar-they-neighbor actions and a Prisoner's Dilemma outcome. The parallels with the present are clear, and the paper draws attention to the important but often neglected linkages between the sustainable success of free trade regimes and the political and technocratic ability of countries to manage the pressures that openness exposes. (pages 11 - 42)
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International Policy Coordination: The Long View - Barry Eichengreen
DOI: 10.7208/chicago/9780226030890.003.0003
[Macroeconomic policy, Coordination, Gold standard, Bretton Woods]
The chapter takes a long view of the evolution of macroeconomic policy coordination. The record shows that coordination is more likely in limited technical areas, when there is institutional support, when it is needed to preserve an existing regime from failure, and when nations are not in conflict on other issues. For example, as the classical gold standard matured, although policymakers had not overtly created the regime, once it was there they had a stake in its continued smooth operation. It was the outbreak of wars and the Depression that derailed the gold standard. Only in the wake of these failures did more serious efforts take hold as conflict abated and the costs of earlier mistakes loomed large, with Bretton Woods system and later the EU project. The gaps between the technocratic solutions and political realities, in the U.S., Europe, China, or elsewhere, have often been a key stumbling block. In 2008–09, central bank and G20 cooperation showed that grave enough dangers could focus minds, but once the cliff edge receded problems of collective action resurfaced. International macroeconomic cooperation remains as fragile as ever. (pages 43 - 90)
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Can the Doha Round Be a Development Round?: Setting a Place at the Table - Kyle Bagwell, Robert W. Staiger
DOI: 10.7208/chicago/9780226030890.003.0004
[World Trade Organization, Reciprocal bargaining, Doha Round, Reciprocity]
The authors argue that certain features in the design of the current WTO round, as well as a number of path-dependent conditions inherited from past trade rounds, may make success difficult to attain. First, the attempt to maintain a “special and differential treatment” (SDT) regime in the negotiations for developing countries — that is, an exception to the usual norm of reciprocity as in the case of developed countries — may prove to be a significant barrier to the achievement of successful negotiations. Developing countries also face the problem of being “latecomers” to negotiations, meaning that developed nations have already removed tariff cuts on a wide range of goods making reciprocal bargaining difficult. Another design problem in the Doha round concerns agriculture, where the setup tries to encourage reductions in home agricultural subsidies. In this setting, unlike symmetric market-access bargaining over tariffs, the gains may be small, hard to identify, or nonexistent. Changes in the design on the Doha round may be needed if negotiations are to move forward. (pages 91 - 130)
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Preferential Trade Agreements and the World Trade System: A Multilateralist View - Pravin Krishna
DOI: 10.7208/chicago/9780226030890.003.0005
[Preferential trade agreements, Trade liberalization, Multilateral agreements]
After several decades a reasonable assessment of preferential trade agreements (PTAs) can be made using evidence drawn from a broad sample of experiences. The results are mixed, but there is doubt that PTAs are, as yet, a big factor. PTAs currently cover only a small fraction of trade in terms of the actual amount of liberalization achieved (that is, above and beyond multilateral agreements). Intra-PTA trade shares are small in most cases and the institutional aspects of “deep integration” do not seem to be advanced that much by PTAs. PTAs have not achieved as much as might be thought, and that the multilateral process has been, and remains, central to the trade liberalization process. (pages 131 - 164)
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Trade and Industrialization after Globalization’s Second Unbundling: How Building and Joining a Supply Chain Are Different and Why It Matters - Richard Baldwin
DOI: 10.7208/chicago/9780226030890.003.0006
[Development theory, Globalization, First unbundling, Second unbundling, Supply chains]
Why has so-called high development theory still failed to show how poor countries can succeed and narrow the gap with the rich world. The paper argues that transformations in the workings of trade created by today's globalization require a new theory. The key is to note that in past eras, the globalization of trade only enabled a “first unbundling” via the separation of the locales of factory production and end consumption. But the last 20 years saw a completely new mechanism, the supply chain, where the different parts of the manufacturing process can be split up by locale. This “second unbundling” is as revolutionary as the first, if not more so. Creating disruptive niche opportunities, the supply chain allows many different value added slices to be produced in myriad locations as the factory itself is unbundled. (pages 165 - 214)
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Facing the Climate Change Challenge in a Global Economy - Lee Branstetter, William Pizer
DOI: 10.7208/chicago/9780226030890.003.0007
[Climate change, Greenhouse gas, Externality, Kyoto agreement, Carbon tariffs]
Large, adverse effects of climate change are predicted in the decades to come and past greenhouse gas (GHG) emissions have missed supposedly agreed and achievable targets, a reflection of two deep problems of intergenerational and transnational collective action. One is that the full benefits of action today are uncertain and will not be felt until the distant future; the second is that, unlike most “local” pollution, GHG is a global externality problem, and most political decisions are national. In light of these problems, current “top down” approaches, e.g., Kyoto, may not be fruitful, compared to “bottom up” action at national or regional levels. With multi-speed policies “carbon tariffs” might also help address the externality problem, but could be a source of political friction. (pages 215 - 256)
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Multilateral Economic Cooperation and the International Transmission of Fiscal Policy - Giancarlo Corsetti, Gernot J. Müller
DOI: 10.7208/chicago/9780226030890.003.0008
[Fiscal policy, International coordination, Great Recession, Cross-border spillovers]
The problem of fiscal policy coordination across countries has been thrust into the spotlight by the Great Recession The authors attack this question using both theory and empirics, and find evidence that, using standard identification methods, US fiscal shocks do generate quite large spillovers across the Atlantic. In theory it is quite hard to generate large cross-border spillovers: the “financial channel” matters, but doubts about solvency would undermine the mechanism. Thus international coordination may be helpful if it creates and sustains “fiscal space” so that truly solvent countries avoid self-fulfilling sovereign crises. (pages 257 - 300)
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The International Monetary System: Living with Asymmetry - Maurice Obstfeld
DOI: 10.7208/chicago/9780226030890.003.0009
[International monetary system, Bretton Woods, Foreign reserves, Triffin paradox, Lender of last resort]
The international monetary system faces a growing asymmetry between advanced and emerging nations, echoing the pattern of the late Bretton Woods System. Emerging countries facing the threat of capital flow reversal, have resorted to self-insurance via foreign reserve hoarding. But given “fear of floating” they wish to limit exchange rate volatility through intervention, possibly for competitive export reasons, and/or to avoid boom-bust economic cycles. But this configuration of the world economy is most likely inefficient, resulting from coordination failures and institutional weaknesses. And it may self-destruct if a fiscal variant of the 1960s Triffin Paradox eventually undercuts the creditworthiness of the shrinking set of safe haven governments. These problems could be addressed by better multilateral cooperation, in the IMF or elsewhere, to provide better lender of last resort options, to enable more emergency liquidity, and to avoid currency wars. (pages 301 - 342)
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Global Macroeconomic and Financial Supervision: Where Next? - Charles A. E. Goodhart
DOI: 10.7208/chicago/9780226030890.003.0010
[Financial globalization, Euro area, Fiscal union, Lender of last resort]
Two key challenges impede progress in improving oversight, one political and one analytical. The political problem is the clash between national sovereignty and policymaking and the international linkages brought about by financial globalization. The analytical problem is that macroeconomics has made slow progress, and macro-finance models with plausible frictions, incompleteness, or imperfections, are still in their infancy. A key testing ground is the Euro area, where key architectural problems stand in the way, such as the lack of a fiscal union, asymmetric adjustment, no well-articulated lender of last resort, the national nature of most banks which hold “subsidiary sovereign” government debt. To prevent or mitigate crises, some authorities, most likely the IMF, may need to warn of, or try to impede, debt-augmenting imbalances ex ante, and may need greater powers to quickly restructure debts ex post. And despite major changes since the 1980s, the crisis shows that the Basel banking regime remains a work in progress, with serious shortcomings evident in the laxness and procyclicality of the current rules. Thus, the tasks ahead for macroprudential policy design remain challenging. (pages 343 - 382)
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