Article

The Inconsistent Quartet: Free Trade Versus Competing Goals

Martin Daunton

in The Oxford Handbook on The World Trade Organization

Published in print May 2012 | ISBN: 9780199586103
Published online November 2012 | | DOI: http://dx.doi.org/10.1093/oxfordhb/9780199586103.013.0003

Series: Oxford Handbooks in Politics & International Relations

 The Inconsistent Quartet: Free Trade Versus Competing Goals

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The World Trade Organization is obviously concerned with trade policy, and this volume focuses on the ways it has operated in dealing with the highly contentious issues of multilateral trade liberalization, the shaping of rules and the balancing of interests, the creation of coalitions, and the nature of dispute resolution. How does the pursuit of free trade or multilateral trade connect with two other aspects of international economics, exchange rates and capital flows? The trade-off between fixed (or flexible) exchange rates, free (or controlled) movement of capital, and an active (or passive) domestic monetary policy forms the so-called ‘trilemma’ or ‘unholy trinity’ as set out in the Mundell-Fleming model. This article expands the discussion of the ‘trilemma’ to focus on the ‘inconsistent quartet’, thereby highlighting the trade-offs that have to be made between trade, exchange rates, capital controls, and domestic monetary policy. It discusses balance of payments, the inconsistent quartet and the gold standard before 1914, the inconsistent quartet between the two world wars, Bretton Woods, the development of floating exchange rates, and the great recession.

Keywords: World Trade Organization; free trade; monetary policy; trilemma; inconsistent quartet; exchange rates; capital controls; balance of payments; gold standard; Bretton Woods

Article.  11524 words. 

Subjects: Politics ; International Relations ; Political Economy

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