Globalization in an Age of Crisis:
Multilateral Economic Cooperation in the Twenty-First Century

Bank of England, London, England
September 15 and 16, 2011
Robert C. Feenstra, University of California, Davis and NBER, and Alan M. Taylor, University of Virginia and NBER, Organizers

Conference participants

Standing left to right: Gerardo della Paolera [GDN], William Pizer [Duke], Maurice Obstfeld [Berkeley], Douglas Irwin [Dartmouth], Charles Bean [Bank of England], Danny Goroff [Sloan Foundation], Julianne Newbould, Paul Keating [fmr PM, Australia], Alan Winters [Sussex], Subir Gokarn [RBI], Barry Eichengreen [Berkeley], James Proudman [Bank of England], Robert Staiger [Stanford], Tony Venables [Oxford], Kyle Bagwell [Stanford], Richard Baldwin [Graduate Institute, Geneva], Valeria Czukasi [WTO, Uruguay], Alex Bowen [LSE], Pravin Krishna [Johns Hopkins SAIS], Robert Anderson [WTO], Charles Goodhart [LSE], Charlene Barshefsky [fmr USTR], Richard Berner [US Treasury], Richard Portes [LBS], Ernesto Zedillo [fmr President, Mexico], Andres Velasco [fmr Finance Minister, Chile], Giancarlo Corsetti [Cambridge].Seated: Alan Taylor [Virginia], Mervyn King [Bank of England], Robert Feenstra [UC Davis].

Douglas A. Irwin, Dartmouth College and NBER, and Kevin H. O'Rourke, Trinity College and NBER
Free Trade and Multilateralism in History

Irwin and O'Rourke examine the role of multilateral cooperation in trade policies over the past century. They argue that the goals of multi-lateralism include regime openness (inclusiveness of all willing countries) and trade openness (low trade barriers and stability of policy). There have been four regimes over the past half millennium: mercantilism (1492-1815), the nineteenth century treaty network (1860-1914), the interwar non-system (1919-1939), and the postwar GATT/WTO regime (since 1947). Although world trade has increased secularly over time, trade cooperation has been challenged by what the authors call "shocks" and "shifts." Shocks are sudden collapses in trade due to economic downturns, or wars, which could give rise to protectionist pressures. Shifts are changes in comparative advantage or geo-political dominance that can also give rise to protectionist pressures or regime changes. The researchers find that shocks other than world wars rarely give rise to major changes in trade policy (the Great Depression being an important exception), while shifts are more dangerous in risking the closing of markets.

Barry Eichengreen, University of California, Berkeley and NBER
International Policy Coordination: The Long View

Eichengreen surveys 150 years of international monetary and financial cooperation with the goal of identifying the circumstances under which it is most likely to occur. He argues, first, that cooperation is most likely when it centers on technical issues, such as central bank swaps and credits or prudential supervision and regulation, as distinct from more high-profile and politicized monetary and fiscal policies. Discussions of technical issues tend to be undertaken by specialists who, possessing shared training and background, are well positioned to reach common understandings and achieve intellectual consensus on what needs to be done. Second, cooperation is most likely when it is institutionalized - when procedures and precedents create presumptions about the appropriate conduct of policy and reduce the transactions costs of reaching an agreement. Third, cooperation is most likely when it is concerned with preserving an existing set of policies and behaviors (when it is concerned with preserving a "policy regime") than when it is directed at altering policies. Having sunk costs in establishing a regime, policymakers with an investment in it will have an incentive to cooperate in its preservation. Fourth and finally, monetary, macroeconomic, and financial cooperation are most likely in the context of broad comity among nations. Conflict over other issues, whether economic or not, complicates efforts to reach agreement even on technical economic and financial policies. It does not provide a favorable backdrop for policy coordination. Eichengreen concludes by using these insights to assess the prospects for effective international economic policy coordination today.

Kyle Bagwell and Robert W. Staiger, Stanford University and NBER
Can the Doha Round be a Development Round? Setting a Place at the Table

A fundamental objective of the Doha Round of WTO negotiations is to improve the trading prospects of developing countries. The 2001 declaration from the WTO Ministerial Conference in Doha, Qatar, commits the member governments to negotiations aimed at substantial improvements in market access with a view to phasing out export subsidies, while embracing "special and differential treatment" for developing countries as an integral part of all elements of the negotiations. Bagwell and Staiger find that these stated aims are incompatible from the perspective of their economic analysis; thus, if these aims are pursued as stated, then they conclude that they are unlikely to deliver the meaningful trade gains for developing countries that the WTO membership seeks. Second, in attempting to integrate its developing country membership into the world trading system, the WTO may face a "latecomers" problem that, while occurring also in earlier rounds, is unprecedented in its scale in the Doha Round, and which could potentially account for the current impasse. Third, the researchers argue that the stated aims of the Doha Round can form the basis of a coherent plan for solving the latecomers problem and delivering trade gains for developing countries, and that the impasse at Doha might be broken, with one key substantive change: the Doha Round must move away from the non-reciprocal special-and-differential-treatment norm as the cornerstone of the approach to meeting developing country needs in the WTO, and instead developing countries must come to the bargaining table in markets where they are large and negotiate reciprocally with each other and with developed countries.

Pravin Krishna, Johns Hopkins University and NBER
Preferential Trade Agreements and the Multilateral Trade System

About two decades have passed since the recent debates over the virtues of preferential trade began. The collective experience of countries on both the preferential and multilateral fronts during this time has allowed for an empirically based discussion of a number of different questions on this topic. Krishna reviews developments in international trade during this period in an attempt to evaluate a range of analytical arguments in this area. Taking a multilateralist perspective, he makes several points. First, despite the proliferation of preferential trade agreements (PTAs) in recent years, the actual amount of liberalization that has been achieved through preferential agreements is actually quite limited. Second, while the literature offers mixed views on whether liberalization achieved through preferential agreements has been welfare improving in practice, a few studies point to significant trade diversion in the context of particular PTAs, which serve as a cautionary note against casual dismissals of trade diversion as a merely theoretical concern. Equally, adverse effects on the terms-of-trade of non-member countries also have been found in the literature, highlighting the potential for PTAs to negatively impact outsiders. Third, while a rich empirical literature has found mixed results on the question of whether tariff preferences help or hurt multilateral liberalization, the picture is different with the more elastic tools of trade policy, such as antidumping duties (ADs): the use of ADs against non-members appears to have dramatically increased while the use of ADs against partner countries within PTAs has fallen. Fourth, despite the rapid expansion of preferences in trade, intra-PTA trade shares are relatively small for most PTAs. This suggests that multilateral initiatives involving trade with the rest of the world remain relevant to most member countries of the WTO.

Lee G. Branstetter, Carnegie Mellon University and NBER, and William A. Pizer, Duke University
Facing the Climate Change Challenge in a Global Economy

Over the past two decades, the international community has struggled to deal constructively with the problem of mitigating climate change. This is considered by many to be the preeminent public policy challenge of our time, but real progress has been disappointingly slow. Branstetter and Pizer provide an abbreviated narrative history of international policy in this domain, with a special emphasis on aspects of the problem, proposed solutions, and unresolved issues that are of interest to international economists and informed observers of the global economic system. They also discuss the potential conflict that could emerge between free trade principles on the one hand and environmental policy imperatives on the other.

Richard E. Baldwin, Graduate Institute, Geneva and NBER
Trade and Industrialization after Globalization's 2nd Unbundling: How Building and Joining a Supply Chain are Different and Why it Matters

Baldwin notes that revolutionary transformations of industry and trade occurred from 1985 to the late-1990s: specifically, the regionalization of supply chains. Before 1985, successful industrialization meant building a domestic supply chain. Today, industrializers join supply chains and grow rapidly because offshored production brings elements that took Korea and Taiwan decades to develop domestically. These changes have not been fully reflected in "high development theory" - a lacuna that may lead to misinterpretation of data and inattention to important policy questions.

Giancarlo Corsetti, University of Cambridge, and Gernot J. Mueller, University of Bonn
Rethinking Multilateral Policy Cooperation in the Twenty-First Century: What Do We Know about Cross-border Effects of Fiscal Policy?

The global financial crisis has been met by a global fiscal expansion in 2009-10, amidst calls for explicit policy coordination. These calls were motivated by the notion that national fiscal policies generate positive international output spillovers, defining a common interest in coordinated actions in order to sustain global demand. But as the state of public finances deteriorated sharply, renewed calls for coordinated measures starting in 2010 were met with increasing resistance, partly as a result of conflicting views on their appropriateness, partly as a result of difficulties in defining a common interest at stake. Against this background, Corsetti and Mueller investigate the international repercussions of domestic fiscal policy measures. After a brief analysis of the fiscal response to the crisis, they rely on standard empirical and theoretical models to study the external effects of U.S. spending expansions on the euro area and on U.K. output. Their results are consistent with views commonly held in policy circles: domestic fiscal policy measures tend to generate sizeable cross-border effects, especially in deep recessions. However, the role of trade appears to be limited for the international transmission mechanism which they find, instead operating mostly via international financial markets. This finding has relevant implications for fiscal policy in the current stage of the crisis. As sovereign-risk premia emerge in several European countries, the transmission of fiscal policy is likely to be different relative to in economies where there is still room for fiscal action. Likewise, the cross-border effects of fiscal measures are likely to depend on the state of public finances. The authors discuss these issues, stressing that the actual common interest - namely, stabilizing financial markets - now requires considerably different fiscal measures across countries, yet possibly coordinated at global level.

Maurice Obstfeld, University of California, Berkeley and NBER
The International Monetary System: Living with Asymmetry

Obstfeld analyzes current stresses in the two key areas that concerned the architects of the original Bretton Woods system: international liquidity and exchange rate management. Despite radical changes since World War II in the context for liquidity and exchange rate concerns, they remain central to discussions of international macroeconomic policy coordination. To take two prominent examples of specific (and related) coordination problems, liquidity issues are paramount in strategies of national self-insurance through foreign reserve accumulation, while recent attempts by emerging market economies to limit real currency appreciation have relied heavily on nominal exchange rate management. A key message of this paper - an obvious point, but one that nonetheless is a key starting place for predicting a range of tensions in any system of international monetary arrangements - is that a diverse set of potential asymmetries among sovereign member states provides fertile ground for a variety of coordination failures.

Charles A. E. Goodhart, London School of Economics
Global Macroeconomic and Financial Supervision: Where next?

Goodhart notes that there are two main problems with achieving such supervision. The major structural difficulty resides in the discord between trying to combine an international, global, market economy with a system of national sovereignty, and having the political, military and legal powers remain with the nation state. The somewhat lesser, analytical complication involves the need to incorporate financial frictions, wherein default, money, and financial intermediaries play an essential role, into analytical models. This second problem should be soluble; the first problem less so. It could, in principle, be met by making financial systems more localized, but this runs counter to the European ideal. Moreover, there is no good way of making surplus countries participate in the adjustment process. Surplus countries will always claim, with considerable justification, that they have persistent positive current account balances because they are virtuous, productive, frugal, and so on. The deficit countries should be encouraged to copy them, not vice versa. Rather than complain about excessive current account surpluses, Goodhart argues that more attention should be given to the dangers and problems inherent in the counterpart (net) capital flows into the deficit countries. For example, did the capital flows from China to the United States and from Northern to Southern Europe really benefit the peoples of the creditor countries? There should be some presumptive indicators of the sustainability of borrowing countries, which, if triggered, should require downgrades of their credit ratings, unless the IMF, as a neutral arbitrator, rules otherwise. Similarly, there should be presumptive indicators of unsustainable credit/asset price expansion within each nation state, which could quasi-automatically trigger counter-cyclical regulatory tightening, unless the relevant authority explains, in public, why this might not be needed.

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