Leading up to the meeting at Bretton Woods, New Hampshire in 1944 there was much economic instability. Each states ability to control the worth of their currency, as well as, the fact that there was a multitude of currencies that were not universal, led to this instability. It was clear that there was a need to create a consistent method for developing the value of countries’ currencies in relation to one another. The idea was to create new rules and institutions to govern international trade and monetary relations.
This meeting at Bretton Woods directed the creation of a fixed exchange rate policy. It is also responsible for the immergence of the World Trade Organization (WTO), the International Monetary Fund (IMF), and the World Bank. This set of rules and institutions is known as the Liberal International Economic Order (LIEO). The LIEO is based on the concept that persuasion to buy something should replace being forced to buy something. Because the U.S. stepped in to help the overwhelmed IMF and World Bank after World War II, the dollar became a “universally” accepted “parallel currency.” The Marshall Plan, then provided Western European states with billions of dollars in aid so they could buy the necessary goods (from the U.S.) to rebuild their country, in turn, creating an economy that would benefit the U.S. in the long run.
In the 60s, it became increasingly important to find a solution for fear of the commercial domino theory being brought on by globalization. Therefore, in 1971, President Nixon stopped all exchange of U.S. dollars for gold, giving way to a new system for determining exchange rates where these rates were affected by market forces instead of any one government, also known as, a floating exchange rate. Regrettably, this new system has created a rise in financial crises that are compounded by many countries inability to make interest payments on their debt. One should also acknowledge that there are no real barriers to the huge amounts of foreign exchange, which leads to a highly fluctuating value for currencies. An example of the affects of the Domino Theory at work lies in Hong Kong, 1998 when the market there crashed; foreign investors (predicatively) reacted immediately by pulling all of their investments out, which led to declines in markets in Asia, London, Frankfurt, New York, and Paris. Surprisingly, even with that outcome, there have been no reforms implemented to help prevent a global economic crash.
According to Kegley, without reform of the international financial system countries are only left with one option; the choice between “dollarization or regionalization” (323), therefore, leading to the 2002 European adoption of a regional currency union in order to sever dependence on the U.S. dollar. This was the creation of the Euro. However, the Euro remains highly controversial, as critics believe it to be a “political change designed to create a European super state” (Kegley 323). China also plays a big part in the international economic community, although, not the most desirable role. China continually refuses to increase the value of the Yuan. This makes it easier for them to sell enormous amounts of their products at cheap prices and gain foreign currency, building their GDP. Regardless of the above-mentioned crises and problems with the current system, the U.S. dollar will continue to be an internationally accepted currency as long as the U.S. continues to have economic and military supremacy.
The U.S. has played an even larger role concerning international trade. “In the period immediately following World War II, when the United States became the world’s new political hegemon, it simultaneously became the preeminent voice in international trade affairs” (Kegley 323). The U.S. chose to push for a liberal approach to trade, including but not limited to, free trade. The U.S., among others, determined that the mercantilism and protectionism approach in regards to trade contributed to the Great Depression of the 1930s, therefore, deciding to try something new. U.S. pressure led to the General Agreement on Tariffs and Trade (GATT) in 1947. GATT is now known as the WTO and it promotes international trade and tariff reductions, thus encouraging trade between those in the international community. All states contend for the same thing, more exportation and less importation; however, if the liberal ideal of reciprocity is to prevail and encourage trade among all actors then all states must abide by the same set of rules and regimes. The Uruguay Round, which began in 1984, was responsible for formation of the WTO, “a new IGO with ‘teeth’” (Kegley 324). However, critics say, the WTO decreases state sovereignty and hurts efforts to protect the environment.
Prior to the Uruguay Round was the Kennedy Round, which had many industrial tariffs cut in half and also a code on dumping was agreed upon separately. The Tokyo Round included the first serious discussion concerning nontariff barriers. Both of these preceded the Uruguay Round. Free trade and Globalization remain a real matter of controversy for many who feel they are getting the raw end of the deal. On the other hand, it remains indisputable that “three-fourths of the globe’s countries derive at least a third of their national income from exports, and by 2015 this percentage is expected to increase to about two-fifths for the world” (qtd. in Kegley 327).
The formation of the North America Free Trade Agreement (NAFTA) created a situation in which trade could occur among Canada, Mexico, and the United States without the same tariff penalties as, for example, China would have to pay in order to trade with any of those three. Critics believe that this creates tariff preferences and that a division of the Global market place by these blocs is an obstacle to the LIEO of Global free trade, perhaps leading them to revert or continue to be mercantilist or protectionist in nature. This would be a threat to free trade. Subsidies, or more particular, farm subsidies in the U.S. are a threat to free trade by providing a competitive advantage to the U.S. over foreign producers of the same goods.
The future of international trade and economic growth, literally, hang in a balance. The question remains: will trade barriers be reduced in the future? Many speculate upon the answer to that question. However, if 2005 is any indication, where as many as 60 countries had established a multitude of non tariff barriers for restricting trade with the rest of the world, then it remains highly likely that they will not being disseminating any time in the near future. It is merely second nature for many countries to not look beyond the benefits of free trade and simply choose to seemingly protect their own interests by restricting importation into their country, which, in reality, the long-term results are exactly the opposite.
Kegley, Charles W. World Politics: Trend and Transformation. 11th ed. United States: Thomson Wadsworth, 2007.
Is free trade really the way to go, or should some changes be made???
