Impediments to Trade in Services: Measurements and Policy Implications: Volume 36 (Routledge Studies

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In this respect there is fertile ground to explore the impact that these ideas can have—especially their strength and legitimacy—in shaping behavior and policy. There is practically no economic policy in Latin America today that does not define itself as pragmatic. The agenda features the economic and social demands of growth and redistribution, as well as demands for citizen participation. While the United States remains the main guarantor of investment or the most dynamic market for exports, agreements with Washington cannot be excluded from or diluted in the agenda of any Latin American country.

In practice, the search is for creative formulas that allow government leaders a freer hand than with a merely ideological approach. Acknowledgment of the errors that hamper understanding of many public-policy processes has led some academics to focus on rediscovering the importance of ideas, beliefs, and research in making and sustaining policies. In this context, research especially research rooted in national demands can serve as a focal point for members of a community to share symbolic maps and beliefs regarding the characteristics of the milieu and the consequences of policies.

Thus the explanations of decision making in a context of uncertainty require, in addition to shared interests and institutional factors, cognitive elements, mental maps to tackle uncertainty, to arrange the possible visions of reality in proper order, to assess consequences, and to share perspectives on action to be taken.

The cognitive elements make it possible to build an intersubjective consensus among the actors, one that constructs or reconstructs their identities and interests. Shared knowledge shapes the actors and their interests, a circumstance that also alters their behavior. But how should the link between research and policy making be examined? Before answering that question, a few points should be clarified.

In economic matters, the adoption of ideas has certain specific qualities. Hall suggests that a new system of economic ideas will materialize in a society when there is a clear need for them, as well as a political outlook that is consistent with that need. Summarizing the empirical and theoretical literature on the role and power of ideas, and making reference to the European and U. In contrast to how new economic notions spread in industrialized countries, in developing countries international pressures should be regarded as an active factor in building ideas and models, rather than as a mere condition or circumstance.

Education and economic training in select universities is a crucial transmission mechanism in the creation of thought communities.

Moreover, the abundance of information emanating from international organizations, as well as being a window of opportunity offered by conditionality, facilitates the creation of broad and active networks for cooptation. External political and economic interests are present in the world of ideas by omission or commission: While institutions can produce stable and predictable patterns of behavior, ideas can influence policy outcomes only under certain circumstances.

Often there is more than one way to resolve a problem, and that is when related research helps frame the debate and focus attention on possible policy options underpinned by evidence and convincing argument. The sociology of revealed policy preferences suggests that whoever supports or opposes a particular policy and the resources it commands will condition change. Hence class or sectoral interests have a greater or lesser impact at different moments in time.

In short, the third driver of change—national policy and the configuration of interests reflected by it—is the dominant factor. To understand this dimension, attention must be paid to the distribution of institutional power and its relationship to the construction of communities of beliefs and knowledge production, the so-called espistemic communities. Unlike other transnational networks, such as trade unions or professional and business associations, these communities are linked by an issue and a set of analytical methodologies that apply to the development of their subject matter.

Because of this joint development, they can strengthen their own position and technical resources at the national level. The question that arises, then, is how the knowledge that the epistemic communities produce can be introduced into the public management of national policy—a question to be addressed by analyzing the interactions between the two spheres of policy design. The management of trade negotiations is revealing the need to introduce new kinds of knowledge and new skills into public administration. This means that, though academics and researchers probably have not had a significant role in changing trade policies, in the wake of wholesale opening there is a constant need to draw sustenance from that development in several ways.

In the subsections that follow is a description of cases in which our own research shows how government capacities constrain or affect the policy instruments used to meet the goals of their mandates. We hope to draw some lessons from these experiences. Although they are not limited solely to trade issues in the strictest sense, they are all important for their link to trade, and especially to the way the negotiations are conducted and their consequences.

The first case concerns the physical infrastructure for international trade, an area in which regulatory failings in the s led to an inadequate supply of roads and excessive costs for users in Latin America. In the late s, a Brazilian undertaking sought to remedy this situation in South America. A similar undertaking was begun in Mexico during the same period in the form of the Plan Puebla-Panama, which sought to improve connections between Mexico and the Central American countries.

In this case the instruments of influence are essentially technical, since the funding of these projects combines private capital with the financial resources of each country. For the purposes of our analysis, which is concerned with the importance of research in trade and integration policies, IIRSA offers several lessons. Second, it is interesting that these programs, which have substantial impact on trade relations, can become accepted very rapidly by all other South American countries when there is a shortage of alternative national projects and many more regional-level initiatives in this field.

Third, it is worth noting the continued lack of academic interest, and perhaps the lack of capacity in each country and regionally, to assess the progress of IIRSA as a structure that could alter the ways in which trade is conducted in South America. Energy integration is a second case in which the combination of privatization and deregulation in the s with new regulatory frameworks for private initiative gave rise to serious policy and market failures at the start of this decade. These failures were evident in the energy crises in Brazil in 6 and Argentina in , the unsettled supply of Argentine gas to Chile from 7 onwards, and the sharp social protests in Bolivia between and in favor of nationalizing the gas industry, which had been privatized only in South American energy integration played an important role in all these cases.

In this context of continuous and even mounting conflict, a new series of initiatives has arisen under the coordination of the various national governments.

It is still too early to talk of a South American energy integration scheme, but some significant steps have been taken: In a context of high energy prices, energy is gaining importance in Latin American trade, especially intraregional commerce. For a study of the links between research and trade policies in Latin America, the energy issue offers other lessons. In contrast to infrastructure, in the area of energy there is a strong regional research network, the Latin American Energy Organization OLADE , which supports the national bodies responsible for energy policy, as well as several transnational and local business groups that undertake studies of the issue.

There are also national research groups in universities and other centers financed by domestic business associations in most of the leading countries, especially following the wave of privatizations in the s. Thus the research that informs the discussions about and subsequent implementation of policies or policy changes is, to some extent, acting on behalf of the interests that finance it, be they national bureaucracies or business lobbies in the energy sector. This is a serious problem for academics and researchers working on trade matters, since energy agreements have a marked impact on the other trade agendas under negotiation, as has recently been evident in the Andean Community, Mercosur, and the bilateral talks with the United States.

This lack of impartiality in the information provided and in much of the analysis of energy makes it even harder to include such material in more general studies of trade and integration issues. Apart from these specific examples, in all developing countries there are important experiences in the field of training for trade policy making.

This is partly because of the strong growth of trade-related technical assistance from multilateral institutions and development organizations, by means of training courses for public officials. Of particular note is the technical assistance provided by the WTO. Since the start of the Doha Round, the WTO has had an expanded mandate and a very generous budget to help developing countries improve their capacities to implement and make use of multilateral trade agreements.

Much of the training consists of coaching in the legal complexities of the commitments that countries made before they had acquired the appropriate analytical skills. The programs are designed to provide the skills needed to meet the commitments on agriculture, services, intellectual property, technical barriers, and phytosanitary rules that developing countries have assumed and must implement. Only a very small part of this training concerns WTO rules on drawing up regional and preferential agreements, on the more common negotiating practices in multilateral discussions, or on the several possible interpretations of a single clause.

Economics Research International

There is no training on how to put in place systems to monitor separate and unfulfilled commitments that could adversely affect acquired rights. Such assistance is valuable in itself for public officials working in areas related to trade negotiations, but several problems prevent the knowledge imparted through this assistance from empowering developing countries in global trade. These problems can be grouped into the areas of design and reception. The technical assistance is designed in such a way that it is biased toward ensuring that countries comply with the rules, but without instruments to monitor if there is compliance elsewhere and thus determine if rights are being infringed.

In other words, there is a bias toward acceptance of the status quo in multilateral trade negotiations, since the rules are taught as they have been written and the emphasis is on the gains from implementing them. No mention is made of the costs of implementation, such as rules related to intellectual property, government procurement, and other matters that remain fundamental to development policies in Latin American countries.

Second, many of the courses are designed without regard for the huge differences in size, resources, and development levels among the recipient countries. The courses are devised with the idea that the same knowledge is equally useful to everybody, as evident in the frequent choice of examples drawn from countries that are very different from the one in which a particular course is being given for example, in a course on services for Latin American countries, reference is made to the case of India in order to explain how the WTO services agreement is implemented in a national economy.

That is to say, although a set of skills and aptitudes is transmitted, that happens in the form of a decalogue of duties and rules that help recipients take part only passively in a framework of established regulations, with no chance of seeking to bring about change. This knowledge might help to increase the technical capacity of the governments, but reception of it is generally defective because the candidates selected to receive the training are not adequately spread among the various ministries and offices affected by each of the agreements.

There is a strong bias in designating the officials to be trained: Partly because of that, developing countries are unprepared to deal with the mounting pressure of multilateral trade disciplines on the margins of independent policy see Chapter 7 , by Botto and Peixoto Batista. Second, because of the high rate of turnover among skilled staff and the lack of instruments to create institutional memory that stores the knowledge received, public officials trained by the WTO often leave their posts.

The bureaucracies thus lose the opportunity to apply the knowledge acquired by those people, who in only a few cases have a chance to train their replacements. This failure by national, trade-related agencies to retain the technical capacity received is fostered by a constraint on the part of the WTO: These latter groups receive only short courses on the general work of the WTO in the global trading architecture. For the purposes of our analysis, it is important to highlight how technical assistance, which is apparently neutral, comes accompanied by a mechanism to transmit a set of ideas that fosters the construction of thought communities.

Technical assistance conceived as merely neutral ceases to be a condition or circumstance and becomes, in effect, an active factor in reproducing the given distribution of costs and benefits. Even within the WTO paradigm, moreover, and taking account of its internal dynamics, it is widely known that, often, the implications of what is negotiated are not all known at the time of the negotiations. In other words, the very design of the agreements does not conceive of a sole interpretation.

If technical assistance terms itself neutral, in fact it interprets in order to ensure a form of implementation: Interpretation, on the other hand, not only is ambiguous; it also cannot be static. On the contrary, the interpretation of what has been negotiated changes over time. In the field of law, this is not an easy matter to resolve. Is justice provided solely through what the books say or also through what is imposed or applied in real life? Or rather what, independently of the hallowed books, obliges compliance with the code of an age? It generates a mental map of conformity, one that is often dysfunctional for the interests of the recipient countries, perpetuating rules of the game in which the initial winners guarantee that they will persist.

This masks the presence of weak links in the agreements, links that could be used as windows of opportunity to renegotiate commitments or to demand rights that have been eroded. Without space to explore the possibilities of new contractual arrangements, the veil of ignorance is maintained beneath the impartial cloak of technical knowledge—a subtle means of reproducing the status quo by means of technical assistance. If to know, research, and learn means focusing on what already exists in order to acquire new knowledge, what should research bring to the negotiations?

In these cases, research directly affects the general framework for the adoption of a policy direction. Research is not undertaken in a vacuum: As we argued in the preceding sections, research and policies are the outcomes of a cycle in which events lead to new ways of thinking and new policies. Consequently, new problems are often uncovered and thus new developments—ideas and recommendations—arise in the same process. Both thought and policies, however, are strongly influenced by interests that in turn are shaped by the consequences of the policy.

Research, therefore, is part of an unequal world in which producing results or disagreeing with them is not only costly but often impossible unless adequate resources are available. To analyze the challenges posed by permanent trade negotiations, it is important to view negotiations as a process of interaction between policy makers and private interests.

An exogenous obstacle to international trade—be it market access or essential resources—will spur enthusiasm for research that seeks to explain or surmount such obstacles. Similarly, international trade agreements that can be seen as resolving market access issues represent a window of opportunity for empirical research. Each stage of the cycle requires different kinds and sources of research. All trade-negotiating processes can be divided into at least four stages:. Each of these see Table 1.

In this case, in the reforms of the s and the conclusion of FTAs with the United States, espistemic communities have played a central role. In general the most influential research has come from outside the region, especially from international organizations. As the negotiating process advances, there is a need for data and concrete responses. At the same time, a constant flow of research is needed to revise, refine, and adapt a policy so as to move forward on technocratic terms, choosing instruments, setting timetables, classifying products.

How can the policy of opening be adapted to national circumstances? What are the sectoral costs? What is the value and impact of a negotiating offer? It is during these stages of refinement and adaptation that national-level research grows in line with the need for specific responses and plays the most important role—as most of the cases studies in this book demonstrate. In this stage there is intense product-by-product bargaining, bringing business groups to a state of alert and prompting them to turn to research.

In this case research plays a central role in ordering and arbitrating among interests. The novelty and complexity of the negotiations calls for experts and opens a window of opportunity for national knowledge and research to exert an influence. The studies in this book show how, through their participation in the decision-making process, academics were asked to identify international experiences in order to lessen the uncertainty prompted by these new challenges, as well as to obviate the costs associated with the negotiations and seek compensatory modifications.

In turn, both the governments and society as a whole are engaged in a learning process see Chapter 3 on the role of think tanks in the Southern Cone , through which the experiences of completed negotiations have been examined and in many sectors the outcomes have been called into question. In the context of a regional political mosaic that is experiencing marked change, there is a striking reassessment of the role of the state and less acceptance of the free market as a promoter of economic activity and a leader of certain development initiatives.

In this regard it can be expected that the convergence of this new faith in state activism with a trade policy that is subject to a greater degree of democratic discussion will form the basis of a more stable consensus on economic policy than has prevailed in the distant and recent past.

There is vigorous renegotiation not only in Venezuela, Bolivia, and Ecuador, but also in bastions of greater orthodoxy such as Colombia, Peru, and Chile. These endeavors stem from a haste to cover social costs and reduce poverty, an urgent agenda in a democratic context and in light of the outcomes of the s reforms.

These circumstances bring with them a necessary endogenization and nationalization of research output. Impact and quantification studies of negotiating offers, for example, are increasingly produced at the national level in most countries. Moreover, research-supported coalitions have been formed for the purposes of trade negotiations. This is how alliance building in the WTO should be understood. This group is far from being a typical, defensive, developing-world alliance.

On the contrary, it expresses the booming export interests of market actors from agro-industry, industry, and services, and it has devised technical proposals on a wide range of issues on the multilateral agenda. Linking the concerns of its civil societies with those of its business sectors, it has begun to engage in a kind of trade diplomacy geared to securing greater internal consensus and thus greater legitimacy than in the recent past.

In this sense we are witnessing a process through which trade negotiations are seeking their institutional course at the same time as they are being internalized in the policy discussion of the democracies. Given the diversity of interests and sometimes of ideologies, which are normally evident in every country of the region, as in any other, there are vigorous debates about the sectors to be liberalized, the means and time frames for liberalization, and what concession to ask of trading partners. What many today might see as resistance is really the result of the time needed to calculate costs and benefits on the one hand, as well as for democratic consultation; and on the other hand for harmonization among the membership of the negotiating alliances that the countries have joined.

Once the analysis and consultation have been carried out, moreover, the countries must build technically reliable agendas that pay due regard to the array of interests at stake. The social costs borne by many countries undoubtedly make this discussion a difficult one, but they also spur governments and civil societies to think at length about what proposals to make now, to consider what to accept and what to reject, and to explore the limits of their resistance to external pressures.

In this regard national research makes a fundamental contribution to considering possible scenarios and, through them, to transforming uncertainty—defined as inexact knowledge of future events—into a risk that can be assessed and, more importantly, shared in the democratic debate. Throughout this chapter we have sought to investigate the links between academic research and the implementation of trade policies that are in a state of permanent negotiation.

Why the insistence on this context of permanent negotiations? The state of the negotiations gives rise to a reconfiguration of incentives, which has distributive implications. And those incentives are permanently under negotiation, being weakened and rebuilt, thereby affecting costs and benefits. We have examined different approaches that have been taken in an effort to respond to the main questions in a still incipient debate. And we have outlined different kinds of changes, identified by different kinds of research, that transform uncertainty into manageable risk—thereby providing policy with stability, visibility, and direction.

Contextual factors shape policies and research, and they also have a direct influence on the relationship between the two. In this initial exploration of the issue we have sought to argue for what we judge to be the first response to the questions posed: This dual exercise will facilitate the reappropriation of expertise as fallible knowledge in designing policies that aim to meet their stated goals, establishing as a condition for those goals acceptance of positions from different social sectors.

Large policy changes emerge from battles lost. Research is undertaken on uneven ground in which producing results or disagreeing with them is not only costly but also, and often, impossible without vast resources.

Access Check

At present, the emergence of China and the consequences of the crises of globalization are clear examples of historic events that have immediate resonance in the Latin American economic debate. The lessons being learned from these events is that there is no magic key or single formula. These historic changes have affected the production of academic knowledge as well as the political future. Policy and social science thinking are intrinsically linked, even though they respond to somewhat separate dynamics.

The relationship between the two has changed in line with the evolution of social phenomena that call, with greater or lesser urgency, for intellectual and political assistance and intervention. The discussion developed in this book is important inasmuch as it assumes that this relationship is not conflict-free and is susceptible to change under more inclusive and pragmatic conditions.

External advisers and development gurus from elsewhere did not go to China. Hence it is important to recover the role of institutions engaged in intellectual work, in activities that make a significant contribution to thinking about society, its actors, its potential, and its contradictions, institutions that do not have a direct advisory role and whose aims differ from those of the public sector. It will be the task of an epistemic community, forged in the heat of these global phenomena, to think about how research can be linked to current policies in order to face the challenges posed by these paradigm shifts.

The future is being sketched in the present through the reflexive organization of the realms of knowledge.

The Effect of Exchange Rate Movements on Trade Balance: A Chronological Theoretical Review

We are grateful for the generous assistance of Jorgelina Loza and the always salutary, stimulating, and affectionate encouragement of Mercedes Botto. Final Report , , available at www. That evaluation, with field studies in nine countries, is used as a counterpoint to analyze the socialization of governmental technical personnel. No government has suggested closing its economy to the international market.

In fact, they very skillfully use those connections to the global and regional market in order to further their reform strategies. This section draws on a generous contribution of research studies by Pablo Heidrich, which are cited in the text. Though privatization of the energy sector in Brazil did not advance as much as in Argentina and Bolivia, the extreme cases were undertaken with a yet more inappropriate regulatory agenda that eliminated incentives to generate additional energy and reduced coordination among the generating plants. The regulatory failings of the private exploitation, transport, and distribution of natural gas in Argentina led to a situation in which the quantities of gas available for domestic consumption and export did not match the growth of domestic demand, obliging the Argentine government to reduce exports to Chile in order to meet domestic needs and secure promises of higher investment from the privatized companies.

For details see Uniren and Kozulj The multinationals have a research center that finances studies from universities and consultants at the Latin American regional level at www. Argentina, ; Bolivia, —; Brazil, ; Paraguay, ; Dominican Republic, ; Ecuador, and ; Peru, ; Venezuela, , , and ; Mexico, and ; Guatemala, ; Nicaragua, Evidences from the Andean Community.

Las negociaciones con el Banco Mundial. A Political Economy Approach. The Cognitive Factor in Economic Policy. Lessons and Experience in the Developing World. Experiencia reciente y problemas observados. Berkeley and Los Angeles: University of California Press. Robust and enduring economic integration demands structural changes in broad fields of the regulation of social life. Thus it is a serious mistake not to view it as a policy of the whole state. To treat regional integration as simply a part of trade policy is to give primacy to mercantilist conceptions of integration, which make up a kind of long-term cannibalism since they relinquish the process to the bipolar disorder of the market.

Apart from trade, when integration is also regarded as political integration, there is a risk of viewing it as simply a part of foreign policy, warranting the concentration of power in foreign ministries—even though their very nature hampers the coordination of a complex process of internal negotiation that is as important as or more important than international action on the matter. It should also be recalled, however, that regional integration processes have fostered institutional opening in those ministries, causing them to coordinate other state institutions and even private-sector organizations.

Hence, since regional integration is a typical issue of domestic and international governance, its practical viability and political legitimation depend on the capacity to do at least two things: The role of academia is linked to both of these challenges. We lack a specific dimension that allows for the controlled translation of technical knowledge into practical knowledge and the rationalization of political domination, since the light that in principle we could provide to inform political will over the technical power that it has, is either viewed as superfluous by the technocracy or is disregarded by those who prefer pure and simple decisions.

The antagonism between technical knowledge and politics is embedded in the unconscious technical expert 2 and in the political culture of our societies: Others claim that ethics is weaponless against an amoral learning and a politics that is often immoral. Nonetheless, there are no closed compartments in this field. While learning has a theoretical vocation the exploration of an object distinct from the consciousness that studies it , technical knowledge has a practical vocation it is not a matter of interpreting the world, but of changing it. Historically, technical knowledge based on learning has served industrial production and has responded to economic imperatives, especially to increase productivity and develop new markets.

Hence academic output is not neutral, neither in the goals that motivate it nor in the consequences of its use. In general terms, it is a matter of establishing that hyperspecialization:. The preponderance of immediate politics:. The two caricatured distortions cannot mask the fact that, in the current debate, these two variables are held to be indissociable, and there is a constant effort to balance them in the complex equations of power.

Whenever the discussion is about tools, ways, and means of attaining a given policy goal, that is a technical debate. The complementarity of the two ways of thinking is therefore evident. The production of technical knowledge is not solely a function of academia. Though the state has technical units, however, as does the private sector, it has large-scale demands for knowledge, especially in the hard sciences and cutting-edge research. In the last decade there has been a huge expansion of cooperation between the state and academia. In the field of the applied social sciences, particularly as regards international relations, the state has only limited demands for cooperation.

It tends to approach intellectuals who are favorites of the officials in office at any particular time, either directly or through the careful selection of consultants in the area of international technical cooperation, and to give primacy to the later justification of policy strategies. Similarly, when politicians choose from among the options, they are entering the field of professional or technical definitions Astori, This is the first reason why the plentiful academic output on Mercosur has filtered into the negotiating realm to only a limited extent: Rather, there is the temporary movement of national bureaucratic sectors to the regional institutional sphere.

Thus we can speak of sectors of the national bureaucracies responsible for negotiations, presumably specialized in regional integration, with a marked asymmetry among the member states in terms of the number and quality of the human resources assigned to technical work. According to the governments themselves, at the regional level they face the classic difficulties of retaining the best personnel in government service and of guaranteeing that they maintain the high level of specialization needed to deal with complex and changing circumstances.

At the same time there are chronic problems of coordinating the technical work emanating from the different areas of government; this is often a source of internal disagreements in the delegations. The regional negotiating process is markedly impoverished by the fluctuation between the predominance of a nonspecialized diplomacy 6 that is resistant to the technical culture of regional integration and b technocrats from different ministries forged in a culture of defending immediate national interests.

The end result is a technical deficiency that in some issues reaches the point of simple inconsistency. Its studies program became a negotiable matter among the national delegations, depleting its capacity to devise a thematic research field of its own—apart from meeting specific requests from the decision-making bodies. Not one agreement was signed with a university or a research institute. Finally, the controls on the juridical consistency of draft norms were suspended, even though Mercosur continues to have significant gaps in the area of legislative expertise and serious problems of systemic coherence that undermine its effectiveness.

On the contrary, at present a move toward transparency in the decisionprocess making would favor an increase in both its technical robustness and its legitimacy. The diversity of our opinions arises not because some are more reasonable than others, but only because we conduct your thoughts along different paths and do not consider the same things.

It is not enough to have a good mind; the main thing is to use it well. Daily experience teaches that, very often, ideas serve to give actions justifying motives rather than real motives Habermas, In this respect, we can begin to answer our question in the negative: In Mercosur, part of academia has been serving diplomatic corporations by assessing certain political decisions solely from the perspective of each member state. On the positive side, however, what is the role of intellectuals in regional integration?

When intellectuals take part in the political struggle to such an extent that they put themselves in the service of one ideology or another, they are said to have betrayed their mission as scholars; when they place themselves above the fray, their work is said to be fruitless, useless, and teacherly Bobbio, But this is a false dichotomy embedded in the collective mind.

In reality, intellectuals are more than producers or transmitters of ideas; they are also mediators, legitimators, and producers of social practices, and they play a highly political role Giroux, They can act as ideologues, drawing up the principles that justify and legitimate an action principles—guide and ethics of conviction , or as experts, indicating the proper knowledge needed to reach a particular end knowledge—means and ethics of responsibility Bobbio, The role of ideologues is even more important, given that political actors do not resist change itself but rather change that seems to go against their interests or against their idea of their interests.

This indicates that the trade account improves only if domestic output growth exceeds domestic absorption [ 37 ]. A currency devaluation improves trade balance if the substitution towards domestic goods in response to the relative price change boosts output more than absorption. In reality, this is more likely to happen in an economy characterized by excess capacity where the Keynesian multiplier effect works [ 38 ]. In an economy near full employment, or one facing strong production bottlenecks, output is not likely to increase and the trade balance could improve only if absorption decreases.

Inflationary pressures also undermine the relative price shifts that induce an increase in export production and a decline in consumption of imported goods [ 34 ]. In summary, trade balance under the Absorption Approach is a function of real income and absorption domestic consumption. Trade balance can improve if there is an increase in output or a decrease in domestic consumption or both.

Suppose is constant and the economy is not in full employment mostly in developing countries ; when currency devaluation occurs the ultimate effect is expected to be an increase in output, thus a trade balance improvement. As mainly championed by the contributions of Harry Johnson and Jacob Frenkel in the early s, nearly the same time the J-Curve theory emerged, the Monetary Approach suggests that devaluation should be understood in a monetary context. Thus, a balance of payments deficit is solely a monetary phenomenon mainly caused by excessive money supply [ 37 ].

Currency devaluation has an impact on the balance of payments only through its effect on real money supply. Therefore, a devaluation increases the balance of payment by increasing domestic prices and thereby reducing the real money supply. Devaluations fail if they are followed by further increases in the nominal money supply that reestablish the original disequilibrium.

The long-run effect on the trade balance is thus ambiguous [ 38 ]. When a country devaluates currency, the real value of the money supply decreases due to the increase in prices of traded commodities and services measured in the domestic prices. Mathematically, this can be shown as where is the nominal money supply, is money demand, is income output , and is the nominal exchange rate. The relation can be summarized as follows: The decline in consumption results ultimately in a reduction in absorption and trade balance improvement.

Research and International Trade Policy Negotiations

Additionally, as argued by Johnson [ 39 ], an increase in money supply gives rise to the level of real balances; thus, individuals forecast their wealth to rise, causing the level of expenditures to increase relative to income and the trade balance to deteriorate. Thus, the effect of money supply on the balance of trade is negative. In the same context, Miles [ 40 ] argues that the negative effect might not be observed in the following cases. First, the nominal money balance may be a small fraction of total wealth.

Second, the private sector may not perceive money as net wealth. Third, response of expenditures to changes in wealth could be insignificant. The most significant implication of the Monetary Approach is that if the monetary authorities expand money supply after devaluation to meet the new demand for money, the effect of devaluation is believed to be preserved. Some empirical studies argued that excess money supply might increase consumption and lower the trade balance [ 41 , 42 ].

This study systemized the theoretical literature on the effect of exchange rate movements on trade balance into four approaches, namely, a Standard Theory of International Trade, b Elasticity Approach, c Keynesian Absorption Approach, and d Monetary Approach. A special stress on the chronological order of appearance and development of each approach was presented throughout the paper. Although some researchers point out that the four approaches mentioned above are all correct in essence [ 34 ], many differences in the plausibility and empirical applicability can still be seen as discussed in the following three points.

First, although the Standard Theory of International Trade provided fertile grounds and gave some basics for the latter approaches, the theory barely discussed the effects of exchange rate on trade balance and merely championed free trade through the principles of Absolute Advantage of Adam Smith and the Comparative Advantage of David Ricardo. Additionally, this approach seems to be at odds with the Monetary Approach in a specific aspect; that is, the latter disagrees with the claim that exchange rate depreciation can improve trade balance perpetually as explained above.

Moreover, all other approaches disagree with the Standard Trade Theory in its claim that currency depreciation improves trade balance unconditionally. Second, the Keynesian based Absorption Approach and the Monetary Approach both focus on the macroeconomic linkages and identities, rather than the microeconomic relationships of the Elasticity Approach. Thus, the relationship between the trade-exchange rate issue and other macroeconomic variables could be better understood under these two approaches.

However, relatively few empirical studies investigated these two approaches. This might be due to the fact that both approaches were not substantially improved to cope with dramatic changes in the nature of the current account balance in post-Bretton Woods era, which left these two approaches underdeveloped and rudimentary. Third, the Elasticity Approach, which was origanally triggered by the novel ideas of Bickerdike [ 18 ], Marshall and Groenewegen [ 23 ] and passed through several stages of improvement for almost half a century, can be considered as the most important breakthrough in the context of assessing the impact of exchange rate on trade balance [ 34 ].

This is reflected by the enormous number of empirical studies which investigated it. However, the dynamic view of this approach, the J-Curve theory, gained most of the attention [ 43 ]. In fact, by assessing all the theories mentioned above, one can conclude that the J-Curve is the most affluent among all for the reasons stated in the following: The reasons mentioned above make the J-Curve approach one of the most tested, yet debated, theories in the literature.

The J-Curve provides vital information for monetary policymakers and economists [ 44 ]. The authors declare that there is no conflict of interests regarding the publication of this paper. Abstract This paper evaluates the current state of the literature concerning the effects of exchange rate movements on trade balance. Introduction As one of the widely used economic indicators, real exchange rate can be simply defined as the nominal exchange rate that takes inflation differentials among countries into account [ 1 ].

The Impact of Exchange Rate Movements on Trade Balance The various definitions of the real exchange rate can be mainly grouped into two main categories. Research Method This paper is theoretical in nature and specifically a review article on the determinants effect of exchange rate movement on the trade balance.

The Reviews and Approaches 4. Standard Theory of International Trade During the sixteenth to eighteenth centuries, Mercantilism was the dominant economic system of most industrial countries. Elasticities Approach, Marshall-Lerner Condition, and J-Curve Theory In elasticities approach, trade balance adjustment path is viewed on the basis of elasticities of demand for imports and exports.

View at Google Scholar M. The Washington Consensus Strikes Back?

International Monetary Fund, View at Google Scholar W. Zhang, International Trade Theory: To purchase short term access, please sign in to your Oxford Academic account above. Don't already have an Oxford Academic account? Oxford University Press is a department of the University of Oxford. It furthers the University's objective of excellence in research, scholarship, and education by publishing worldwide. Sign In or Create an Account. Close mobile search navigation Article navigation.

International Food Policy Research Institute. Correspondence to be sent to: Abstract International trade is likely to be a hugely important and interesting area for research by agricultural and applied economists in the next decade. For Permissions, please e-mail: For commercial re-use, please contact journals.

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