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Bretton Woods and Balanced Trade
Jesse Richman, 8/13/2018

In a recent piece in Project Syndicate, Roger Farmer gets some things right and some things wrong in assessment of the link between globalization, populism, and trade.  What he gets right, first, is the significance of the end of the Bretton Woods system of exchange rates in shaping the modern era.  

"After World War II, the world adopted the Bretton Woods system, whereby countries maintained fixed exchange rates against the dollar, and capital was largely immobile at the international level. When tourists from the United Kingdom traveled to France, Italy, or Spain, they faced restrictions on how many francs, lire, or pesetas they could buy; and international investment was constrained by a pervasive system of capital controls."

And then the decline of the Bretton Woods controls as the harbinger of what has come since:

"With the breakdown of the Bretton Woods system in 1971, the world embarked on a bold new adventure in globalization. The result was a massive reduction in global inequality, as capital flowed to places where wage levels were a tiny fraction of those in Western democracies."

But his next rhetorical move assumes an answer in economic theory that does not exist: 

"Economic theory predicts that when two countries engage in trade, both will emerge better off. But it does not tell us that every inhabitant of those two countries will be better off. On the contrary, it predicts that globalization will generate winners and losers, and decades of experience have borne that out."

This is the result of a static analysis of comparative advantage that is simply wrong.  In a world of mutable productivity, the blithe assertion that countries gain from trade simply does not hold as Gomory and Baumol showed some time ago.  Indeed, globalization can leave some countries winners and others losers.  

From that point the article treads some familiar ground in terms of the argument that capital mobility has disadvantaged workers, though without noting the concern that capital mobility may undermine the advantages of trade for capital rich countries made by Roberts and Schumer.  And without dealing with the inconsistent fact that capital mobility from capital rich to capital poor countries should generate a goods and services trade surplus for the capital rich when the opposite has happened.  It ends with a supposed dilemma:

"That finding presents a dilemma to those who seek to promote equality for all. The world as a whole is not a democracy and is unlikely to become one in the foreseeable future. If politicians in Western democracies continue to promote policies that erode the boundaries of the nation-state, they will be voted out of office by working- and middle-class citizens who are in direct competition with low-skilled workers in the developing world. Equality for all is an admirable goal. But in striving to achieve that goal, we must not risk the domestic equality gains that two centuries of social progress have delivered."

Ironically, though, the essay never mentions trade deficits at all.  One way to bring more of a balance to the advantages and costs of trade would be to impose policies that push trade into balance.  If trade is balanced, then workers in one country exchange goods and services of equal value with workers in another country.  And as a result both benefit.  What Bretton Woods offered was one way to keep trade relatively balanced.     

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