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

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 led countries, under the guidance of economists, to adopt more flexible exchange rate arrangements that boosted export earnings and made import controls unnecessary for payments balance. Like during the Great Depression, the exchange rate regime was a key factor behind a country’s trade policy.