International economic law Using the theories of Hegemonic Stability, Two-Level Game Analysis, Liberalism vis a vis Mercantilism,

and Conflict Deterrent, we survey the historical evolution of International Economic Law. We look at how
"International economic law" is an increasingly seminal field of international law that involves the “the body of rules and principles of action”, whether concrete or customary, have been established and
regulation and conduct of states, international organizations, and private firms operating in the have developed over time. A pattern of progression and regression of the openness of trade, mainly due
international economic arena.[1] As such, international economic lawencompasses a broad range of to self-interest, can be gleaned from the historical evolution of the International Economic Order, which is
disciplines touching on public international law,[2] private international law,[3] and domestic law applicable ultimately caused by the vertical dialectic between international and municipal law.
to international business transactions.[4]
Introduction
For several decades, international economic law was most often associated with international trade,
largely due to the fact that trade had developed the most mature multilateral legal institutions (e.g. the The historical development of International Economic Law goes in hand with the evolution of
GATT and later WTO) for governing international commerce. Today, however, a range of disciplines are International Trade, and International Relations in general. So long as states have come into existence,
routinely acknowledged as being as impactful and relevant to the field, including: and come to interact with one another for various reasons[1], trade has been integral to such relations.
Both political and economic interests have shaped each state’s foreign and trade policies, thereby
 International monetary law; contributing to the gradual development of institutions[2] that govern a network of relationships that form
the World Economy.
 International financial regulation (including banking, derivatives, insurance and securities
regulation); We thus trace the inception of the concept of the “nation-state”, why states form relationships with one
another, and the birth of trade as a whole. This paper is divided into two main periods – the Pre-1947
 International development; and Post-1947 World Orders. Corollarily, the discussion will run in parallel through the lenses of the two
main Hegemons that have existed throughout history – Great Britain (Pre-1947) and the United States
 International labor and services law; (Post-1947).

 International investment law, including international commercial arbitration;[5]

 International intellectual property law; Hugo Grotius, The need for a Trading Economy, and the Western Expansion

Modern International Economics traces itself back to Adam Smith’s “The Wealth of Nations” and David
 International tax law;
Ricardo’s “On the Principles of Political Economy and Taxation”; trade relations even further back –
Antiquity’s the Silk Road. Europeans would traverse the fabled route to obtain goods only found in the
 International environmental law;
East, while offering wares of their own.[3] Still, trade was not restricted to the land-based Silk Road.
Maritime trade in the East was burgeoning as well. China, during the Sung-Ming dynasties (960-1644),
 Sovereign debt and restructuring.
had tributary relations with other entities or trading empires in South East Asia.[4] The empires of
Because of the breadth of international economic activities and transactions, international economic law Majapahit, Srivijayam, and Malacca, from the 7th to 14th Centuries held eminence in trade during the
is a highly interdisciplinary field of study. Decisions in one area, such as tax or financial regulation, can pre-Colonial era.
impact the transmission of monetary policy, which can, in turn, impact the effectiveness or operation of a
However, it was only during the Age of European Discovery where trade had really begun to explode on
trade regime, and vice versa. Consequently, a wide range of notable governmental and
a global scale. The all too famous Spice Trade had a great impact on the Western World. Demand for
intergovernmental organizations are involved in formulating international economic law and policy.
spices reached even the Roman Empire (as well as its successor in Byzantine) and more importantly,
the Iberian Empires.[5] It instigated courses of actions that would vastly change the way the world
History of International Economic Law
worked. Profits generated from the flow of spices in the economy meant that these powers had more
capability to develop their society and their empire. Income, too, allowed for technological It was in “Mare Liberum” (The Free Sea, 1609) where he argued that the sea belonged to no particular
advancements. Driven by multi-layered motives, the Iberians set out to develop their maritime nation. It was international territory for the benefit of trade.
capabilities to explore the “New World”.[6] The bypassing of middle-men in the Spice Trade was a
consequence of this age of exploration and subsequent conquest. Spice Trade thickened globalization[7] Indeed, Grotius sentiments towards regulation, or the need for institutions to guide human relations,
and gave way to the rise of Western Imperialism. echoes deeply in Modern Institutional Economics. Douglass North, in 1991, defined institutions as
“humanly devised constraints that structure political, economic, and social interaction. They consist of
Western Expansion brought about by the Iberians were rooted in a three-fold cause – Gold, God, and both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules
Glory.[8] First, the economic gains from trade were too lucrative for them to pass up. Second, the (constitutions, laws, property rights).”.[16] North opined that a free-market alone was not enough to
Iberians thought it their duty to evangelize the “primitives of the new world”. Third, the political power properly allocate goods (and services). There are two derivatives to North’s thesis. First, that institutions
from sheer conquest was tantalizing as it was seductive. Maritime trading routes, both in the Atlantic and may be created by intentional design or have come up as a customary development. Second, that
the Pacific were gradually discovered and used extensively. Over time, such routes became customary, institutions by intentional design are meant to curb externalities. Observably, this closely runs in parallel
even being the subject of political demarcation.[9] As a treaty, Tordesillas became binding between to the first two sources of International Law – Treaty and Custom. A Treaty may bring about behavior or
Spain and Portugal; which may then be considered as one of the very first institutions that governed the recognizes ongoing practice (Custom).[17] Governments, then, create institutions, while keeping in mind
international economy.[10] those already in place, to bring about intended outcomes (as in regulation).

These trading routes in mind, piracy and conquest became commonplace. It was in this economic milieu It was this tug of war between two spectral endpoints that defined the development of the International
that Hugo Grotius had been exposed to. Hugo Grotius (1583-1645) was a Dutch Jurist, Theologian, Economy throughout history – Liberalism on one hand, and Mercantilism on the other.
Politician, and Philosopher. Due to his works “De Indis”, “Mare Liberum”, “De Jure Belli ac Pacis” and
many other treatises, he is credited as the Father of International Law. His conceptualizations on the Liberalism – The “Laissez-Faire” Economy
rationale for trade, and the legal implications of the same are fundamental to the development of
International Economic Law. Grotius writes: The Liberalist (or Neo-liberalist) perspective takes the view that the state “should play a limited, if not
constricted, role in the economy and society”.[18] Markets are left to their own devices, where
“God did not bestow all products upon all parts of the earth, but distributed His gifts over different equilibrium will be attained over time through economic forces, aggregated individual choices. This is the
regions, to the end that men might cultivate a social relationship because one would have need of the basic premise of Adam Smith’s quintessential term “The Invisible Hand”. David Ricardo built upon
help of another. And so He called Commerce into being, that all men might be able to have common Smith’s theory with his conception of Comparative Advantage – where each state is best off producing a
enjoyment of the fruits of the earth, no matter where produced.”[11] particular good where it is efficient at, and trades the same with other states.[19] In fact, this postulation
was typified by his strong opposition of Britain’s Corn Laws in 1815. The Corn Laws were a combination
He conceives economic relations as something natural, a necessary consequence of man’s social of trade barriers that limited the import of food/agricultural products into Britain.[20]
relations with one another; That work and trade go hand in hand in the optimal exploitation of Earth’s
natural resources. However, Grotius astutely observed that relations alone do not bring about optimal As Dilmaan and Balaam point out:
economic outcomes.[12] Externalities and rogue human behavior prevented economic activity from
reaching its full potential. At this point in time, he was referring to piracy.[13] To wit: “Economic liberals tend to focus on the domain in which nation-states show their cooperative, peaceful,
constructive natures through harmonious competition…international trade is seen as being mutually
“…It was through a common maritime right possessed by other free nations also, that the Roman people advantageous, not cutthroat competition for wealth and power.”[21]
were authorized to distribute fleets…to punish pirates captured at sea…”[14]
Mercantilism – Protectionist Thought
Further,
Protectionist thought is simple in premise – that the domestic economy must be protected, free from
“…the name of “pirate” [may be]…appropriately bestowed upon men who blockade the seas and impede interdependence and self-sufficient. The state plays an active role in the economy to achieve wealth and
the progress of international commerce”[15] power. To wit:
“[Mercantilism] accounts for one of the basic compulsions of all people and nation-states: to create and unconditionally. Still, as pointed out by Stein, such unilateral actions did not automatically bring about
sustain wealth and power in order to preserve and protect the nation’s security and independence from free trade.
any number of real and imagined threats. Historically, classical mercantilism connoted efforts by states
to promote exports and limit imports, thereby generating trade surpluses that would enhance state The Cobden-Chevalier
wealth and power while protecting certain groups within society”[22]
It was the 1860 Cobden-Chevalier Commercial Treaty that provided the base for a liberal trading order in
It can be gleaned that national security and state power, brought about by wealth, take precedence over the 19th Century. The impetus for the Cobden-Chevalier was both political and economic. At the time,
mutual benefit in mercantilist thought. To put it simply, National Interest always comes first.[23] British and French sentiments for the prevention of war over Italy was paramount.[29] It also needed to
improve relations in France due to deteriorating diplomatic ties with Russia.[30] France, on the other
The Hegemonic Stability Theory hand, wanted to break free from the restrictive diplomatic circumstances of the Congress of Vienna.[31]
Meeting such political objectives, Britain, too, was able to meet an economic one – British industries
The Hegemonic Stability Theory, as forwarded by Robert Gilpin, posits that a hegemon has two facets of needed export markets and sources for raw and agricultural products.[32] The cross-border flow of
power: economic efficiency and political and military strength.[24] It is the conceptual “policeman” who goods had helped an already strong economy grow even further, overcoming the threshold of being a
creates and maintains open markets. Stein, however, builds on this by submitting that a hegemon alone purely domestic economy. It was in this particular milieu that the Cobden-Chevalier was born.
does not create a liberal trading order. Rather, it is the result of an asymmetric bargain between states,
as instigated by the hegemon. He states: However, the road to the Cobden-Chevalier was not a mere meeting of the minds and concurrence of
political and economic agenda. Rather, it was the culmination of a gradual shift in economic landscape.
“I argue here that liberal international trade regimes did not, and indeed will not, emerge from the policies
of one state…Trade liberalization among major trading states is rather, the product of tariff bargains. The On Britain’s part, prior to 1860, it was unable to unilaterally adopt free trade policies due to its
hegemon must get others to agree to lower their tariffs as well. Without agreements, there can be no dependency on tariffs to raise revenue. From 1820 to 1910, customs revenue comprised of 20% of total
regime.”[25] government revenue (1820) to 44.2% at the most (1860).[33] Unilaterally adopting liberal policies, then,
would prove disastrous to the economy. Still, by 1860, the British economy had reached a threshold. For
This, then, provides us a lens through which we examine the subsequent historical development of the it to grow further, it needed markets to export its goods, as well as markets for raw and agricultural
International Economy from the 19th Century onwards. materials (it now being an industrialized nation).[34] The economic gains from trade would far outweigh
the financial benefits of maintaining customs duties. Gradual moves were made to lay the foundation for
liberalization – the repeal of the Corn Laws and Navigation Acts and, eventually the ratification of the
Cobden-Chevalier.[35]
British Hegemony – The Golden Era of Trade
Most Favoured Nation: Basis for Wider Liberalization
The Industrial Revolution in Britain brought about a significant shift in the dynamics of the world
economy. With Great Britain’s ascent into Hegemony, its competitive economy needed export markets At first, France had no economic incentive in ratifying the Cobden-Chevalier. Nevertheless, the political
and, in return, was willing to trade for raw materials as inputs for further production.[26] Plainly, British payoffs from increased relations with Britain was too inviting. Accordingly, the Most Favoured Nation
Hegemony effectively set the stage for a liberal trade regime. Its economy had already reached a point clause (MFN) was devised to protect both French and British interests. Under the MFN, Britain was to
where it needed to internationalize.[27] unilaterally grant France concessions; France, on the other hand, was to selectively grant concessions,
maintaining old tariffs (or even increasing tariffs) towards other nations.[36] France was allowed to use
Britain’s Corn Laws and Navigation Acts were highly protectionist policies. The former imposed
the principle of cost-equalization – where they would offset lost customs revenues from Britain by
significantly high tariffs on food imports, while the latter prohibited foreign ships from trading in British
increasing tariffs elsewhere.[37] The MFN further included that each nation be granted “any other tariff
colonies and gave preference to British ships carrying goods to Britain.[28] Their repeal in 1846 and
concessions it might later give any other state”.[38] This effectively created a trading subsystem.[39] The
1849 respectively signified a basal shift in economic thought. The country had opened its doors to trade
two nations would enjoy the benefits of free trade only between themselves, while discriminating against
others. To quote Stein: “Thus, the Cobden-Chevalier Treaty, generally regarded as ushering in the era of
free trade, actually legitimated discriminatory liberalization. Britain and France liberalized the exchanges A hypothesis begins to exhibit at this juncture. We hypothesize that a liberal economic order, in its
between them, but the treaty allowed them to retain (as France did) higher duties or prohibitions against infancy at least (or at this point in time considering the network of bilateral MFNs), is based solely on
other countries”.[40] political and economic considerations, not customary law. (Bilateral) Treaties that were concluded evince
political and economic agenda at the time. Thus, when such treaties expire, the considerations upon
While the Cobden-Chevalier may have discriminated nations not a party to it, it provided the base for which they are built may have already changed. There can be a total reversal of economic practice
international trade up to the end of World War II. It provided the base for wider liberalization.[41] In the based on such treaties, even long-standing ones. Alternatively put, there is no evidence that can be
years that had passed since the conclusion of the Cobden-Chevalier, it had outgrown its English channel gleaned to say that opinio juris exists when states enter into trade agreements. Perhaps it is this very
origins. France, in 1867, had concluded eleven more trade agreements, while Britain concluded four fact that led to the variance in foundations for the creation of the international trade network post-World
more: all with the Cobden-Chevalier’s MFN as a base.[42] The (sub)system of MFNs became larger [43], War II.
linking thirteen European nations.[44] Multilateralism, in this case, was effectively created by a “spaghetti
noodle bowl”[45] of bilateral agreements. A dense web of bilateral agreements, serving as base for To quote the 2013 World Trade Report:
multilateralism proved to be fragile at best.[46]
“One of the striking features of the 19th-century economic system – if it can be termed a “system” – is
Nevertheless, 19th attempts to integrate at a deeper level through policy coordination cannot be that it evolved piecemeal and autonomously, not by international design and agreement. Trade relations
understated. In 1873, the International Telegraph Union was established to harmonize immensely varied were underpinned by a patchwork quilt of separate bilateral undertakings, while the international gold
telegraph regulations and tariffs.[47] In 1883, the International Conference for Promoting Technical standard entailed only countries’ individual commitments to fix the price of their domestic currencies in
Uniformity in Railways sought was held to link national railway networks.[48] In 1893, the United terms of a specific amount of gold. In this lack of overarching structures and institutions lay the system’s
International Bureau was created to execute the Berne Convention (to protect intellectual property rights fundamental and inherent weakness. In the absence of formal international constraints or scrutiny, most
for literary and artistic works) and the Paris Convention (to protect industrial property).[49] The legacies European countries gradually raised the level of their tariffs in the last three decades of the 19th century
of these fledgeling movements live on to this day. to protect domestic producers against the increasing global competition that had flowed from falling
transport costs.”[53]
The Fragility of the Subsystem

In spite of the economic gains created by the network of MFNs, it was this very same network that
proved to be the downfall of the “Golden-Era” of trade. According to the 2007 World Trade Report: The Interwar Period: World War I and II, reluctance of American Hegemony

“The European Trade Treaty Network started to falter when the initial trade treaties came due for “Wartime protectionism destroyed an [only] somewhat liberal economic order”[54] – Arthur Stein
renewal in a changed political and economic environment. During the Great (European) Depression
between 1873 and 1896, prices of internationally traded goods decreased steadily, falling by one third The Interwar period, from 1918-1939, upheld heavy government intervention as opposed a laissez-faire
over the period. While the United Kingdom remained strongly committed to its free trade principles and philosophy. Nascent continental European states[55], as well as [naval and land] blockades, proved to
low tariff policy up to World War I, countries in continental Europe which had large agricultural sectors be a combination conducive for protectionist systems. Internally, newly created states would use tariffs to
and less developed industrial sectors started to increase tariffs. …Demands by agricultural lobby groups protect their infant industries; citizens, too, expected government to play a role in the economy by
for stronger protection against highly competitive overseas supplies also encouraged others such as the providing social protection and minimizing unemployment.[56] Such an increase of government functions
iron and steel and textile industries to seek higher protection”.[50] into the social and economic sphere is legacy of war felt to this day. Externally, blockades, a dislocation
in production, and a disruption in trade patterns heralded the death knell of 19th Century Trade.[57]
A decline in economic growth rates fueled protectionist movements even further.[51] When the bilateral
agreements came due for renewal, under a changed political and economic environment, nations would By this time, the United States of America was now the world’s strongest economy.[58] While Britain,
raise their general tariffs – to be used as bargaining chips for the renegotiations.[52] Britain demanded France, and Italy retracted the MFNs granted to Germany in the Allied Economic Conference of 1916,
more concessions than mere status quo renewal; concessions to which France (and other nations) could President Woodrow Wilson of the United States called for even greater equality of trade in his Fourteen
no longer bargain to. Points Programme.[59] In 1920, the League of Nations was created. It aptly sponsored conferences for
the development of economic relations.[60] Still, no material results came into being, the economic States to assume its Hegemonic role. In the London Monetary and Economic Conference of 1933, the
effects of war had never been truly addressed.[61] Ultimately, Wilson’s call went unheeded. By refusing “gold block” of European countries insisted that foreign exchange be pegged at the rate of the American
to join the League of Nations, The United States validated its reluctance to assume the hegemonic role dollar. President Roosevelt refused to accede to such a direction.[77] Thus, the vacuum created by the
that once belonged to Britain.[62] As with Britain, it had reached an economic threshold. Yet this time, it abandonment of the Gold Standard remained unfilled. Without a common currency, trade simply cannot
was unwilling to lower its trade barriers unilaterally.[63] occur.

Furthermore, the United States had a long-standing history of see-sawing between high and moderate The direction of the international economy changed, however, with the so-called “New Deal” philosophy.
tariffs. The Dingley Act of 1897, at the time, was considered to have imposed the highest import duties in The direction of the “New Deal” introduced the Reciprocal Trade Agreements Act of 1934.[78] By
American law.[64] In 1913, however, the American Congress reduced tariffs with the Underwood Tariff providing the President to negotiate duty reduction as much as 50%, it signified America’s commitment
Act. While it featured a strikingly reduced tariff system, it was still considered high by European to liberalized trade based on a general, unconditional application of MFNs.[79]
standards.[65] Then, in 1930, the Smooth-Hawley Act provided for another increase in trade barriers.
Because the United States was now the premier economic power, such an act had global repercussions,
mostly in the form of retaliations.[66] Global flows became unstable, and any inkling of willingness to
open to trade, by any nation, was shattered.[67] Post World War II – Economic Security and Conflict Deterrent: The Rise of Bretton Woods (IMF
and World Bank), GATT, WTO
Worse, the reaction of various states towards The Great Depression (and Great Slump in Britain) was to
raise tariffs and devaluing their currencies even further.[68] Recovering from the effects of the First The inter-war experience had shown the crucial role of economic integration in maintaining the political
World War, European countries had already imposed significantly high trade barriers, even without the stability of the world order.[80]
paradoxical reaction towards the economic downturn of the 1930s.[69] Higher tariffs allowed for more
“The new system was both similar to the 19th Century and very different”[81]
government revenue which, in turn, provided more government income for post-war rebuilding. Low
trade barriers became unrealistic due to the fragile political fabric of the time.[70] Indeed, the international economic system bore many comparable and contrasting points with the
“Golden-era” of trade. A dense web of treaties featuring MFNs, again, became the basis for a liberalized
The Gold Standard, The Imperial Preference System, and The New Deal: A Transitory Period
world economy. Drawing from the lessons of history, though, the pivotal distinction lay in the fact that
British Hegemony in the 19th Century brought with it the birth of a global financial system, in the guise of multiple bilateral agreements were concluded simultaneously, as if a multilateral system was being
the Gold Standard. By 1880s, it had become the lynchpin for trade. Germany, the USA, Denmark, created. In 1947, then, the General Agreement on Tariffs and Trade (GATT) was instituted in
Norway, Sweden, France, Belgium, Switzerland, the Netherlands, and many more had adopted the Gold Geneva.[82] The GATT featured a package of 123 bilateral trade agreements, all with MFN clauses.
standard, fixing their national currencies in terms of gold.[71] The Gold standard operatively eliminated
Post War Recovery and Conflict Deterrent: GATT, IMF, World Bank
the instabilities, or economic uncertainties of trade at the international level. In many respects, it was this
very standard that provided for remarkable stability and economic certainty featured from the 1870s – The GATT was established in 1947, by twenty-three (23) countries, with negotiations spanning three
1914.[72] This, however, all changed when Britain broke away from the standard in 1931. The Great rounds.[83] Again drawing from the inter-war experience, trade (and full utilization of comparative
Depression and devaluation of currencies had prompted Britain to abandon the standard, lest its advantage) was now seen as the panacea for post-war recovery[84], no longer the increase in trade
economy sink.[73] The United States and sixteen other countries followed suit.[74] barriers seen post-WWI.
British Hegemony officially ended a year later when it established the Imperial Preference System in the The 1942 Atlantic Charter and 1942 Anglo-American Lend-Lease agreements set the stage for the
Ottawa Agreement.[75] MFNs were abandoned, general duties were increased, and economic creation of the GATT.[85] The architects of the new world order now saw multilateralism as an effective
concessions were only extended towards the Crown’s colonies.[76] conflict deterrent.[86] Thus, multilateralism was now by design, rather than an incident of a network of
bilateral agreements.
The combination of US abandonment of the Gold Standard, the establishment of the Imperial Preference
system, and America being the premier economic power, all put considerable pressure on the United
The GATT’s preamble states that its function was to promote economic development through rising “The Parties to this Agreement,
standards of living and full employment by “entering into reciprocal and mutually advantageous
arrangements directed to the substantial reduction of tariffs and other barriers to trade and to the Recognizing that their relations in the field of trade and economic endeavor should be conducted with a
elimination of discriminatory treatment in international commerce”.[87] The agreement was divided into view to raising standards of living, ensuring full employment and a large and steadily growing volume of
two main parts. Part I featured the mandate of MFNs by all contracting parties; while Part II obligated real income and effective demand, and expanding the production of trade in goods and services, while
parties to implement the agreement “to their fullest extent not inconsistent with national legislation”.[88] allowing for the optimal use of the world’s resources in accordance with the objective of sustainable
development, seeking both to protect and preserve the environment and to enhance the means for doing
Notwithstanding, the reduction of trade barriers was not an urgent matter. The creation of an so in a manner consistent with their respective needs and concerns at different levels of economic
international monetary system for the promotion of post war recovery took precedence over anything development.
else.[89] It would provide the foundation for all other international economic institutions. Thus, the
International Monetary Fund (IMF) and International Bank for Reconstruction and Development Recognizing further that there is need for positive efforts designed to ensure that developing countries,
(IBRD/World Bank) were established in 1944 at the Bretton Woods Conference.[90] Collectively, these and especially the least developed among them, secure a share in the growth in intentional trade
two refer to the Bretton Woods institutions we know today. The IMF filled the vacuum brought about by commensurate with the needs of their economic development.
the abandonment of the Gold standard – initiating exchange rate stability and allowing for freedom of
determination in each nation’s economic development.[91] Being desirous of contributing to these objectives by entering into reciprocal and mutually advantageous
arrangements directed to the substantial reduction of tariffs and other barriers to trade and to
In developing the international economy under the new framework, European post war recovery the elimination of discriminatory treatment in international trade relations.
happened to be one of the most pressing and arduous issues that need to be addressed. America, now
holding the mantle of hegemon, understood that worldwide recovery depended on the reconstruction of Resolved, therefore, to develop an integrated, more viable and durable multilateral trading system
European trade.[92] Development of intra-European trade became so crucial to post war recovery that encompassing the General Agreement on Tariffs and Trade, the results of past trade liberalization
the United States insisted preference among themselves and discriminate against other nations, efforts, and all of the results of the Uruguay Round of Multilateral Trade Negotiations.
including itself.[93] America’s Marshall Plan was used as an incentive, where $12 Billion was given as
Determined to preserve the basic principles and to further the objectives underlying this multilateral
aid, and European nations were free to stipulate the distribution of the same.[94] Consequently, the
trading system,…(emphasis supplied)”[100] (emphasis further supplied)
European Economic Community (EEC) and the European Free Trade Association was established in the
1950s.[95] Further provisions highlight the credence given to third world nations, such as the preference in terms of
the amount of tariff reduction and the schedule for the same.[101] The agreement even makes slight
World Trade Organization[96]
exceptions, allowing for measured protectionist measures for developing countries.[102]
In the aftermath of World War II, many nascent nations have been founded. Decolonization around the
The Doha Round
world has produced third-world countries who, for the most part, feature underdeveloped economies due
to their former dependence on its colonial ruler. The World Trade Organization, like the EEC before it, After the Uruguay Round, a recent round of renegotiations had commenced, the Doha Round. It had
saw multilateral trading as a key to economic development. It ensures that trade runs smoothly and begun in 2001 and has yet to be concluded to this day. Its impasse brought to the forefront a glaring
nations, whether developing or developed, have equal footing in their interests and dispute issue with multilateral negotiations, the the conciliation of multiple interests would inevitably produce a
resolution.[97] deadlock as no consensus, fitting each and every single concern, could be made. In spite of a bias
towards developing countries, reality favored the developed nations.[103]
Ultimately, the WTO was born out the GATT’s last and largest negotiating round – Uruguay from 1986 –
1994.[98] Signed by 124 countries, the Uruguay Round finally culminated in April 15, 1994 with the Among the points of contention is Mode-IV of the General Agreement on Trade Services, otherwise
Marrakesh Agreement; and, on January 1, 1995, the WTO came into being.[99] known as the temporary free movement of natural persons.[104] By coming to an agreement for cross-
border movement of services, developing countries would gain an advantage in the export of labor. This,
The principles of mutual development is enshrined in the Preamble of the WTO Agreement. To wit:
however, is frowned upon by politically powerful countries as it may lead to the displacement of their own It bears reiterating – the International Economic System has never been more stable.
labor forces. Deadlock ensues as a result.
International Economic Order
Waves of economic regionalization has emerged during times of protracted multilateral
negotiations.[105] The European Single Market Act of 1986 and the North American Free Trade The term international economic order refers to the set of proscribed rules, norms, and procedures that
Agreement were results of the drawn-out Uruguay Round. The Association of South East Asian Nations regulate the cross-border exchange of goods, services, and capital. While economists have persistently
followed suit and other regional agreements. While regional agreements are undeniably easier to preached the virtues of an open economy since David Ricardo (1772–1823), leaders have been warier
negotiate than multilateral agreements, it brings up the memories of the 19th Century International because of a combination of ideological concerns, domestic politics, and realpolitik.
Economic System, where bilateral agreements (producing a spaghetti noodle bowl effect) were the
foundation. Still, modern institutions like the WTO, IMF, and World Bank now provide for a stable frame At present, the idea of an international economic order seems inextricably linked to multilateralism.
in the international economic system. These institutions were designed to prevent the errors of the past. However, in the century prior to 1945, almost all of the global economic rules were established at the
bilateral or unilateral level. The opening of the global economy to trade in the mid-1800s was due to the
The foundations of the international economic system have never been more stable. Cobden-Chevalier Treaty (1860) between France and Great Britain, and the decision to extend most-
favored nation trading status to new trading partners (Stein 1984; Lazer 1999). As for capital markets,
the gold standard was a creation of British hegemony; its large domestic market and deep capital
markets compelled other countries to operate by the Bank of England’s rules (Eichengreen 1996).
Conclusion
These arrangements were temporarily suspended during World War I (1914–1918), and then
The world has come a long way from Grotius’ treatises on the natural need to trade and piracy on the disintegrated after 1930. The British tried to sustain the pre-war order, but their economic power had
high seas. Economic relations has been integral to human life since man has started to interact with one waned, and the United States refused to act as a supporter of the system (Lake 1983). The interwar
another. Grotius, along with a long line of philosophers and economists, succinctly point out that the economic system was characterized by high tariffs and beggarthy-neighbor policies, in which countries
optimal use of the world’s resources is through shared production and trade. However, in the natural engaged in competitive devaluations of their currency as a means to improve their balance of trade
state of world affairs, trade cannot occur without institutions guiding human activity. Throughout history, (Kindleberger 1973).
we see the development of institutions both at the domestic and international levels, mostly as a result
efforts to liberalize. During and after World War II (1939–1945), the United States was bound and determined to foster an
international economic order that would prevent the high tariff barriers and beggarthy-neighbor policies
The institutions created show a lack of any tradition or any custom in the economic sphere. Treaties and of the 1930s. This included a global trading system to ensure that all participating members received
various agreement build institutions specifically to prescribe or curb particular activity, not recognize any nondiscriminatory treatment in traded goods. To aid in trade expansion, the United States also pressed
customary practice. In the interwar experience, we see the fragility of a web dense of bilateral for currencies to be fixed in value relative to the dollar, which in turn could be exchanged for gold. Great
agreements established in the 19th Century. After World War II, the world has corrected its mistakes Britain was reluctant to accede to this kind of regime, because it undermined the British system of
from the past. The United States, as the hegemon, catalyzed post war recovery and spearheaded the imperial preferences, threatened currency runs on the war-torn European economies, and potentially
creation of multilateral institutions. This created a more stable international economic system and a more constrained the autonomy of domestic policymakers.
effective conflict deterrent. Political and economic circumstances have significantly changed throughout
history, putting a strain on long-established institutions unable to cope like the GATT (in its original form). In 1944 a conference in Bretton Woods, New Hampshire, hammered out a compromise that John
Thus, the WTO was created to precisely addressing changing needs and circumstances, the reality of Gerard Ruggie (1982) famously labeled “embedded liberalism.” The world trading system was opened,
recently independent nations and underdevelopment being one of them. and exchange rates would be fixed. Governments, however, were still given significant policy leeway to
ensure full employment policies at home.
Notwithstanding the absence of any customary practice, or any evidence thereof, we clearly see how
institutions, as the body of rules and principles of action, have been created, evolved, and rectified the To ensure the stability of the system, the United States endorsed and funded the creation of international
mistakes of the past. financial institutions (IFIs) to monitor and enforce the international economic order. The International
Monetary Fund (IMF) was designed to prevent a balance-of-payments crisis among the participating The growing reliance on official financial flows came as an important shift in economic ideas was taking
countries. The World Bank was intended to help the European economies recover from the war. In place. The IFIs moved away from promoting Keynesianism and toward more neoclassical policies of
contrast to the one-country/one-vote principle of other international organizations, decision-making balanced budgets, trade liberalization, and low inflation.
power in the IFIs was weighted by economic size.
At the same time, the newly sovereign nations of the third world began to contest the market-friendly
The third leg of the international economic order was to be the International Trade Organization (ITO). rules that underpinned embedded liberalism. A slow decline in commodity prices caused worsening
However, the proposed institution was never created due to the U.S. Senate’s failure to ratify the Havana terms of trade in the developing world in the 1970s, and led governments to be suspicious of the
Charter. As a result, the General Agreement on Tariffs and Trade (GATT)—originally designed as an vicissitudes of market forces. Inspired by the success of the Organization of Petroleum Exporting
interim facility until the ITO came into existence—became the international regime governing trade. Countries (OPEC) cartel in increasing the price of oil, these countries proposed a “new international
economic order” (NIEO; Cox 1979) in the 1974 United Nations General Assembly. The NIEO included
The GATT was considered to be a weaker institution compared to the IFIs. Despite this gap in several initiatives, including orderly market arrangements to stabilize commodity prices, institutionalized
institutional strength, however, the trade regime yielded significant results. Between 1950 and 1970, forms of technology transfer, and changes in trade rules to allow the third world greater access
merchandise trade levels grew at twice the rate of the global economy. In contrast, Bretton Woods was to Organization for Economic Cooperation and Development (OECD) markets while protecting their
short-lived; western European countries did not make their currencies convertible until 1958, and the home markets from foreign competition and the presence of multinational corporations. All of these
United States unilaterally ended the fixed exchange rate portion of the Bretton Woods agreement in requests were resisted by the advanced industrialized states, and the structure of IFI voting guaranteed
1971. At crisis junctures, the United States acted outside the IFIs to promote its stated interests, a veto by the G-7 countries in those venues (Krasner 1985). With the debt crisis of the early 1980s, third
deploying greater resources in the process. In the late 1940s, for example, the resources committed to world solidarity on the NIEO collapsed, with little achieved beyond a modest increase in UN development
the Marshall Plan dwarfed those of the World Bank. In the mid-1990s, the United States provided its own funds.
financing to bail Mexico out of its financial crisis.
The end of the cold war and the rise of economic globalization expanded the assigned tasks of the IFIs
The failure of the IFIs to fulfill their intended functions was also due to the economic contradictions to include everything from advising transition economies, to establishing common financial codes and
contained within Bretton Woods. As capital controls were removed, it became next to impossible for standards, to promoting democracy, to combating corruption. The leverage of the IFIs in these issue
countries to maintain the “unholy trinity” of fixed exchange rates, open capital markets, and monetary areas, however, has been limited to countries that cannot borrow from private capital markets.
policy autonomy (Cohen 1993). The United States also ran into the “Triffin Dilemma”—it was incapable
of simultaneously increasing international liquidity while pledging to keep the dollar convertible into gold. The GATT morphed into the World Trade Organization (WTO) in 1995. Although the WTO has stronger
enforcement mechanisms, the rising influence of developing countries like China, India, and Brazil has
The collapse of Bretton Woods in 1971, the rise of the third world in the form of the Group of Seventy- threatened to paralyze its ability to expand trade further. A partial response to the gridlock within the
Seven (G-77), and the oil shocks of the 1970s led to a bifurcated, contested international economic WTO has been a proliferation of regional and bilateral trade agreements outside the WTO’s purview.
order. To handle exchange rates, the Group of Seven (G-7) countries (Canada, France, Germany,
Italy, Japan, the United Kingdom, and the United States) supplanted the IFIs. This ad hoc arrangement At the start of the twenty-first century, the international economic order remains relatively open for trade
proved moderately successful over the next two decades in managing the floating exchange rate system and finance, though there are no clear rules for migration. Increasingly, the focus of international
among the G-7. The IFIs found themselves bereft of their original purpose at the same time that economic negotiations has shifted to questions about business and social regulation (Braithwaite and
developing countries were hit by the oil crises of the 1970s. These institutions increasingly focused their Drahos 1999; Slaughter 2004). As China begins to challenge the United States as the economic
resources toward the developing world. The debt crisis of the 1980s ensured that many developing hegemon, the stability of the current system will soon be open to question.
countries needed the imprimatur of the IFIs in order to secure external financing. The IMF in particular
exploited the conditionality of loans to developing countries in order to affect national macroeconomic Bretton Woods Agreement
policies.
What is the Bretton Woods Agreement
The Bretton Woods Agreement is the landmark system for monetary and exchange rate management introduced in December 1945 when 29 members signed the Articles of Agreement. The Bretton Woods
established in 1944. It was developed at the United NationsMonetary and Financial Conference held in Agreement also created the World Bank Group, which was set up to provide financial assistance for
Bretton Woods, New Hampshire, from July 1 to July 22, 1944. Under the agreement, currencies were countries during the reconstruction post World War I phase.
pegged to the price of gold, and the U.S. dollar was seen as a reserve currency linked to the price of
gold. End of Bretton Woods Agreement

BREAKING DOWN Bretton Woods Agreement The Bretton Woods Agreement was dissolved between 1968 and 1973. An overvaluation of the U.S.
dollar led to concerns over the exchange rates and their tie to the price of gold. President Richard Nixon
The Bretton Woods Agreement remains an important part of world financial history. The creation of called for a temporary suspension of the dollar’s convertibility. Countries were then free to choose any
the International Monetary Fund (IMF) and valuation of gold and foreign exchange rates remain exchange agreement, except the price of gold. In 1973, foreign governments let currencies float, which
important to this day. The agreement also made currencies convertible for trade and other current put an end to the Bretton Woods system.
account transactions. The strong value of the U.S. dollar eventually led to the collapse of this system
after more than 20 years. (from wiki)

U.S. President Richard Nixon called for a suspension of the Bretton Woods Agreement in 1971 when it The Bretton Woods system of monetary management established the rules for commercial and
collapsed. The agreement was dissolved between 1968 and 1973. In 1973, the agreement officially financial relations among the United States, Canada, Western Europe countries, Australia,
ended. and Japan after the 1944 Bretton Woods Agreement. The Bretton Woods system was the first example
of a fully negotiated monetary order intended to govern monetary relations among independent states.
Setting Up the Bretton Woods Agreement The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary
policy that maintained its external exchange rates within 1 percent by tying its currency to gold and the
Delegates from 44 countries met to create a new international monetary system. The main goals of the ability of the IMF to bridge temporary imbalances of payments. Also, there was a need to address the
meeting of the 730 delegates were to ensure a foreign exchange rate system, prevent competitive lack of cooperation among other countries and to prevent competitive devaluation of the currencies as
devaluations and promote economic growth. well.

Preparation for this event took two years. The primary designers of the system were John Maynard Preparing to rebuild the international economic system while World War II was still raging, 730 delegates
Keynes, of the United Kingdom, and Harry Dexter White, the chief international economist of the from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire,
Treasury Department. Keynes’ plan was to establish a global central bank called the Clearing Union. United States, for the United Nations Monetary and Financial Conference, also known as the Bretton
White’s plan limited the powers and resources of each country. In the end, the adopted plan took ideals Woods Conference. The delegates deliberated during 1–22 July 1944, and signed the Bretton Woods
from both, leaning more toward White’s plan. agreement on its final day. Setting up a system of rules, institutions, and procedures to regulate
the international monetary system, these accords established the International Monetary Fund (IMF) and
In 1958, the Bretton Woods system became fully functional. This happened as currencies became the International Bank for Reconstruction and Development (IBRD), which today is part of the World
convertible. In order to convert currencies, countries settled their international balances in dollars, while Bank Group. The United States, which controlled two thirds of the world's gold, insisted that the Bretton
U.S. dollars were fully convertible to gold. The exchange rate applied at the time was $35/ounce. Woods system rest on both gold and the US dollar. Soviet representatives attended the conference but
Keeping the price of gold fixed and adjusting the supply of dollars was the responsibility of the United later declined to ratify the final agreements, charging that the institutions they had created were
States. "branches of Wall Street".[3] These organizations became operational in 1945 after a sufficient number of
countries had ratified the agreement.
Creation of Two New Institutions
On 15 August 1971, the United States unilaterally terminated convertibility of the US dollar to gold,
One of the major items that came about from the Bretton Woods Agreement was the creation of the IMF.
effectively bringing the Bretton Woods system to an end and rendering the dollar a fiat currency.[4] This
It was created to monitor exchange rates and lend reserve currencies to nations. It was formally
action, referred to as the Nixon shock, created the situation in which the U.S. dollar became a reserve
currency used by many states. At the same time, many fixed currencies (such as the pound sterling) also same. This discrepancy in value planted the seed for the collapse of the Bretton Woods system three
became free-floating. decades later.

Bretton Woods System and 1944 Agreement Why It Was Needed

The 1944 Bretton Woods agreement established a new global monetary system. It replaced the gold Until World War I, most countries were on the gold standard. But they went off so they could print the
standard with the U.S. dollar as the global currency. By so doing, it established America as the dominant currency needed to pay for their war costs. It caused hyperinflation, as the supply of
power in the world economy. After the agreement was signed, America was the only country with the money overwhelmed the demand. The value of money fell so dramatically that, in some cases, people
ability to print dollars. needed wheelbarrows full of cash just to buy a loaf of bread. After the war, countries returned to
the safety of the gold standard.
The agreement created the World Bank and the International Monetary Fund. These U.S.-backed
organizations would monitor the new system. All went well until the Great Depression. After the 1929 stock market crash, investors switched to forex
trading and commodities. It drove up the price of gold, resulting in people redeeming their dollars for
The Bretton Woods Agreement gold. The Federal Reserve made things worse by defending the nation's gold reserve by raising interest
rates. It's no wonder that countries were ready to abandon a pure gold standard.
The Bretton Woods agreement was created in a 1944 conference of all of the World War II Allied
nations. It took place in Bretton Woods, New Hampshire. The Bretton Woods system gave nations more flexibility than a strict adherence to the gold standard. It
also provided less volatility than a currency system with no standard at all. A member country still
Under the agreement, countries promised that their central banks would maintain fixed exchange retained the ability to alter its currency's value if needed to correct a "fundamental disequilibrium" in
rates between their currencies and the dollar. How exactly would they do this? If a country's currency its current account balance.
value became too weak relative to the dollar, the bank would buy up its currency in foreign exchange
markets. That would lower the currency's supply and raise its price. If its currency became too high, the Role of the IMF and World Bank
bank would print more. That would increase the supply and lower its price.
The Bretton Woods system could not have worked without the IMF. Member countries needed it to bail
Members of the Bretton Woods system agreed to avoid trade wars. For example, they wouldn't lower them out if their currency values got too low. They'd need a kind of global central bank they could borrow
their currencies strictly to increase trade. But they could regulate their currencies under certain from in case they needed to adjust their currency's value and didn't have the funds themselves.
conditions. For example, they could take action if foreign direct investment began to destabilize their Otherwise, they would just slap on trade barriers or raise interest rates.
economies. They could also adjust their currency values to rebuild after a war.
The Bretton Woods countries decided against giving the IMF the power of a global central bank. This
How It Replaced the Gold Standard power involved printing money as needed. Instead, they agreed to contribute to a fixed pool of national
currencies and gold to be held by the IMF. Each member of the Bretton Woods system was then entitled
Before Bretton Woods, most countries followed the gold standard. That meant each country guaranteed to borrow what it needed, within the limits of its contributions. The IMF was also responsible for enforcing
that it would redeem its currency for its value in gold. After Bretton Woods, each member agreed to the Bretton Woods agreement.
redeem its currency for U.S. dollars, not gold. Why dollars? The United States held three-fourths of the
world's supply of gold. No other currency had enough gold to back it as a replacement. The dollar's value The World Bank, despite its name, was not the world's central bank. At the time of the Bretton Woods
was 1/35 of an ounce of gold. Bretton Woods allowed the world to slowly transition from a gold standard agreement, the World Bank was set up to lend to the European countries devastated by World War II.
to a U.S. dollar standard. Now the purpose of the World Bank is to loan money to economic development projects in emerging
market countries.
The dollar had now become a substitute for gold. As a result, the value of the dollar began to increase
relative to other currencies. There was more demand for it, even though its worth in gold remained the The Collapse of the Bretton Woods System
In 1971, the United States was suffering from massive stagflation. That's a deadly combination
of inflation and recession. It was partly a result of the dollar's role as a global currency. In
response, President Nixon started to deflate the dollar's value in gold. Nixon revalued the dollar to 1/38
of an ounce of gold, then 1/42 of an ounce.

But the plan backfired. It created a run on the U.S. gold reserves at Fort Knox as people redeemed their
quickly devaluing dollars for gold. In 1973, Nixon unhooked the value of the dollar from gold altogether.
Without price controls, gold quickly shot up to $120 per ounce in the free market. The Bretton Woods
system was over.