The rise and fall of Bretton Woods Bretton Woods Agreement by 44 nations in July 1944 in New Hampshi

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• The rise and fall of Bretton Woods Bretton
  Woods Agreement by 44 nations in July 1944 in
  New HampshireInternational Financial System
  under US hegemony
• International Monetary Fund
• Aim as before 1914, currencies are backed by
  gold and freely exchangeable, and FX rates are
  fixed to prevent competitive devaluations. IMF
  act as a lender of last resort when members run
  temporary balance of payment deficit
• A technical note given fixed rates, balance can
  be achieved by (1) trade controls, (2) deflating
  economy (i.e. demand - imports), or (3)
  inflating economy (i.e., supply exports)
• A historical note American position burden on
  deficit countries to restore balance through
  deflation
• British position burden on surplus to restore
  balance through revaluation

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IMF

• IMF acts as lender of last resort, supervising
  and supporting fixed FX rates
• It is to lend FX when a members supply becomes
  scarce
• US dollar or pound is designated as FX reserves
• Currencies are pegged to dollar within 1 of par
  value, with dollar pegged to gold at 35 per
  ounce, unless fundamental disequilibrium occurs
  Currencies are made convertible
• IMF gold and currencies (capitalized at 8.8
  billion) to lend through subscription with a
  25/75 in gold and currency proportion IMF cannot
  force nations to change their FX rates
• Deficit countries have to seek IMF approval for
  borrowing in excess of half of their initial
  contribution

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Why collapse?

• A fundamental tension Imperatives of domestic
  macroeconomy stability and growth, and a fixed
  exchange rate
• Robert Mundell and JM Fleming government could
  simultaneously achieve only two out of three
  policy objectives of fixed exchange rates,
  international capital mobility, and monetary
  policy autonomy
• Impossible to maintain the system when
  international trade and investment flows are
  large relative to the size of major economies

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History of the international financial system
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History of the international financial system

• 1945-1960, US unilaterally ran the international
  monetary system, and funded other countries
  continued balance of payment deficit with a
  mixture of publicly controlled capital and FDI
• 1960- mid 1970s, other industrialized countries
  began running trade surpluses, US continued to
  act as the source of global liquidity but faced
  increasingly challenges from holders of
  internationally liquid assets culminating in 1971
  dollar devaluation
• After 1975 the international monetary system
  evolved a hybrid structure

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ITO GATT -- WTO

• ITO (by 50 nations in Havana 1948) to deal with
  trade and investment issues Say NO to
  quantitative restrictions unless under extreme
  balance of payment problems. Veil of ignorance
  for IMF, but less so for ITO! Impact on home
  employment It failed to get green light by US
  Congress
• Tariff negotiations continued along a protocol in
  ITO charter (1947), called GATT, and mainly about
  manufactured goods Now all the areas excluded
  from GATT non-tariff barriers, agriculture,
  services, and investment flows have become
  focal point of trade negotiations under WTO
  (1995)

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Production FDI

• Why FDI, if you can trade?
• Oligopolistic rent-seeking model (Stephen Hymer)
• Product cycle model (Raymond Vernon)
• Transaction cost approach (Oliver Williamson)
• Summery firm-specific assets
• Compete along a gradient of labor cost , skill,
  and technology

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Product cycle
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examples

• The case of US VERs, anti-dumping, anti-surge
  safe-guards, press for opening of
  non-manufacturing markets
• The case of China assembly