Trade Policy, Exchange Rates, and the Globalization Surge of the 1990s

<span>The decision by developing countries to open up their economies to
foreign trade and investment in the 1980s and 1990s was a momentous event in world
history. How and why did this trade policy revolution take place? Most accounts
of trade politics stress domestic interest groups or trade agreements as
driving policy changes, but these explanations fail in this period. This paper notes
that many import restrictions were imposed for balance of payments purposes, as
a way of avoiding a devaluation and protecting foreign exchange reserves from
depletion under fixed exchange rates. A shortage of foreign exchange in the
mid-1980s forced countries, under the guidance of economists, to shift to a more
flexible exchange rate system that boosted export earnings and made import
controls unnecessary for payments balance. Just as seen during the Great Depression, the exchange rate was a key factor in a country's trade policy.</span><br>