The Collapse of Global Trade: What a tangled web we weave
Published: September 2010
A unique feature of the financial crisis is the unprecedented collapse in global world trade. The objective of this paper is to explain some of that collapse as a move towards protectionism triggered not by nationalistic interests but by ‘competing’ objectives among trading partners from the Mundell-Fleming Trilemma. Even with the best of intentions, efforts towards internal rebalancing necessarily imply harming your trading partner unintentionally if they should be using conflicting policy objectives of the Trilemma. National interests are at odds between two such countries, and their policy prescriptions counteract and paralyse rebalancing and coordination efforts between nations. Policymakers may be forced into protectionist stances in an effort to counteract the internal rebalancing efforts of their neighbours.