Trade Imbalances and Multilateral Trade Cooperation

42 Pages Posted: 16 Nov 2012

See all articles by Juan A. Marchetti

Juan A. Marchetti

World Trade Organization (WTO)

Michele Ruta

Economic Research Division, WTO; Columbia Business School - Economics Department; International Monetary Fund (IMF)

Robert Teh

World Trade Organization (WTO)

Date Written: November 13, 2012

Abstract

Rising current account and merchandise trade imbalances marked the years before the global financial and economic crisis. These imbalances either contributed to or precipitated the crisis and to the extent that they create systemic risks, it is desirable that they be reduced. There are many factors related to macroeconomic, structural, exchange rate and financial policies that contributed to the imbalances. The inability to manage these issues at the international level reflects the 'coherence gap' in global governance. This paper examines the contribution that the WTO can make in its three areas of activities — negotiations, rule-making and dispute settlement — to deal with trade imbalances and with the main factors leading to them, including exchange rate misalignments. First, market opening efforts in services, including in the area of financial services, can reduce policy-related distortions and market imperfections in surplus countries that lead to the build-up of unsustainable imbalances. Second, in the context of a broad international effort to coordinate macroeconomic, exchange rate and structural policies to deal with the roots of imbalances (the first-best solution), there is a general efficiency argument that could be made for the use of WTO-triggered trade actions to enforce cooperative behavior towards rebalancing. Absent this first-best response, trade rules alone would not provide an efficient instrument to compensate for the weaknesses in international co-operation in macroeconomic, exchange rate and structural policies.

Keywords: trade imbalance, current account, exchange rates, international policy coordination, WTO, international sanctions

JEL Classification: F13, F31, F32, F42, F51

Suggested Citation

Marchetti, Juan A. and Ruta, Michele and Teh, Robert, Trade Imbalances and Multilateral Trade Cooperation (November 13, 2012). Available at SSRN: https://ssrn.com/abstract=2175512 or http://dx.doi.org/10.2139/ssrn.2175512

Juan A. Marchetti

World Trade Organization (WTO) ( email )

154 Rue de Lausanne
CH-1211 Geneva 21
Switzerland

Michele Ruta

Economic Research Division, WTO ( email )

Rue de Lausanne 154
CH-1211 Geneva
Switzerland

HOME PAGE: http://www.iue.it/Personal/Fellows/MicheleRuta/Welcome.htm

Columbia Business School - Economics Department ( email )

420 West 118th Street
New York, NY 10027
United States

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Robert Teh (Contact Author)

World Trade Organization (WTO) ( email )

154 Rue de Lausanne
CH-1211 Geneva 21
Switzerland

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