Trade, Capital Flows and the Balance of Payments

With the opening of an economy to the rest of the world, the economic and financial situation of each agent no longer depends solely on the economic decisions made by his or her fellow citizens, but also on the decisions made by foreign economic agents. This dynamic, which introduces more complexity into the economic system, is double-edged. It undeniably increases economic freedom: indeed, the possibility of carrying out transactions with foreign countries opens up new consumption and investment choices for economic agents. But, at the same time, it introduces new constraints: foreign consumers now compete with domestic consumers for goods produced by domestic firms, foreign firms compete with domestic firms for payments from those same consumers, and the complex investment strategies of international banks and asset managers affect investment, exchange rates as well as domestic prices. Not surprisingly, one of the most fundamental and long-standing controversies in economics concerns the effects of economic openness on social provisioning. In the context of the Anthropocene, this problem is now coupled with new questions: what is the impact of trade flows on CO2 emissions? Should we roll back international financial liberalization? Will the international financial architecture have to be reconfigured to achieve the Sustainable Development Goals? These are some of the issues addressed in this chapter.