Liberal Mercantilism: Exchange Rate Regimes, Foreigh Currency Denominated Debt and Trade Disputes
Abstract: Governments have long used trade policies to manage their external finances, though explicit mercantilism has fallen out of favor since its 18thth century intellectual apex, and especially since the expansion of GATT/WTO in the second half of the 20th century. We argue that governments still use trade policy to manage foreign exchange, but that they do so through the more liberal practice of bringing trade disputes at the GATT/WTO. To test our theory we identify conditions that increase the need for foreign exchange: dwindling foreign reserves under managed exchange rates and large foreign currency denominated debt stocks, and correspond these data to the timing and frequency with which countries bring disputes at the GATT/WTO. We find support for our hypotheses in a data set of low- and middle-income countries from 1974 through 2004. Our findings have three additional implications. First, we provide an explanation for differences in dispute participation rates among developing countries. Second, we suggest a new link between exchange rate regimes and trade policy. Third, we emphasize the currency denomination of government debt as an important determinant of government behavior.