Chapter 8:Evolution of the

International Economic
System
Evolution of the International Economic System:
● From Bretton woods to WTO; Socialist economies
and the CMEA (Council for Mutual Economic
Assistance);
● Third World demand for new international economic
order;
● Globalisation of the world economy.
Let's have an overview of these topics first

Bretton Woods Conference (1944):

● Established to rebuild the global economic order after
World War II.
Created two key institutions:
1. International Monetary Fund (IMF)
● To stabilize exchange rates and provide short-term
loans to countries facing balance-of-payments issues.
2. World Bank
● For long-term reconstruction and development
projects.
Other important decision at Bretton Woods Conference
● Introduced a system of fixed exchange rates,
pegging currencies to the US dollar, which was
convertible to gold. The Bretton Woods system required
End of Bretton Woods fixed exchange system(1971): a currency peg to the U.S. dollar
● US suspended the gold convertibility of the dollar which was in turn pegged to the price
due to economic imbalances, leading to a system of of gold.
floating exchange rates.
Formation of GATT (1947):
● General Agreement on Tariffs and Trade aimed to
reduce trade barriers and promote multilateral
trade.
World Trade Organization (WTO) (1995):
● Successor to GATT, with expanded scope covering
trade in services, intellectual property, and
dispute resolution mechanisms.
● Aims to ensure fair trade practices and reduce
protectionism globally.
● India is a founding member of the WTO since 1
January 1995 and a member of GATT since 8 July
1948.
● It is the only global international organization
dealing with the rules of trade between nations.
● It came into existence on January 1, 1995 and has
its headquarters in Geneva, Switzerland.
● All major decisions are made by the WTO's
member governments, either by ministers (who
usually meet at least every two years, known as
Ministerial Conference ).
Socialist Economies and the CMEA (Council for
Mutual Economic Assistance)

CMEA Formation (1949):

● Created by the Soviet Union to counter
Western economic influence(Marshall Plan)
and coordinate the economic policies of socialist
states.
Key members:
● USSR, Eastern European countries, Cuba,
Vietnam, and Mongolia.
Focused on:
● Trade within the bloc using barter or
non-convertible currency.
● Joint industrial projects and technology
transfers.
Challenges and Collapse (1991):
● Inefficiency and lack of competitiveness due to
centralized planning.
● Collapse of the Soviet Union marked the end of
the CMEA and integration of its members into
the global market economy.
Third World Demand for a New International Economic Order
(NIEO)

Emergence (1970s):
● Developing countries (Global South) sought fairer trade
terms, better access to technology, and greater control over
their natural resources.
● Influenced by decolonization and disparities between
developed and developing nations.
Key Demands:
● Restructuring of international trade to reduce dependence
on exports of primary goods.
● More significant role in global economic decision-making
institutions like the IMF and World Bank.
● Debt relief and preferential treatment in trade agreements.
Outcomes:
● Limited success due to resistance from developed
countries.
● Formation of groups like the G-77 and UNCTAD (United
Nations Conference on Trade and Development) to push for
NIEO principles.
Globalization of the World Economy
Definition:
● Integration of national economies into a global economic system
through trade, investment, technology, and movement of people.
Key Drivers:
● Technological advancements (telecommunications, internet).
● Reduction in trade barriers through WTO and regional trade
agreements (NAFTA, EU).
● Growth of multinational corporations
Impacts:
Positive:
● Increased economic growth and access to markets.
● Spread of technology and ideas.
● Reduction of poverty in some regions (e.g., East Asia).
Negative:
● Widening inequality between and within nations.
● Exploitation of labor and environmental degradation.
● Economic vulnerabilities (e.g., financial crises due to interconnected
markets).
Contemporary Challenges:
● Rise of protectionism and trade wars.
● Debate over fair globalization, emphasizing sustainable and inclusive
growth.
Evolution of the International Economic System from
Bretton Woods to WTO

● Liberal International Economic Order (LIEO) was

established after 2nd World War.
● It was believed that LIEO is conducive for peace (14
points of Woodrow Wilson, golden arches theory).
● However, USA established the order because USA’s
prosperity is dependent on free trade.
● It is supported by hegemonic stability theory given by
scholars like Robert Gilpin.
● According to theory, there is no invisible hand in
international political economy, there is need of global
policeman.
● IMF, World Bank, GATT are the pillars of new
international economic order.
Evolution of the International Economic System from Bretton Woods to WTO

Present status of global international liberal economy

● USA, which had built the liberal international economic order and has been the champion of globalization,
free trade and economic interdependence has adopted an entirely opposite policy i.e. America first.
● America first is not only the feature of its strategic policy but also foreign trade policy released in
2018. Currently USA has initiated tariff war. Many of US decisions are unilateral.
For example:
1. Trade war between USA and China. We can say that it was triggered by USA first by increasing the
tariffs on imports from China.
2. USA has also tried to undermine the platform of G7, APEC. USA has threatened to come out of
NAFTA, calling it worst trade deal ever.
3. Trump also declared WTO also as the ‘worst trade organisation’ ever made and if it does not shape up’,
USA will withdraw from WTO.
This trend in the policy of USA towards international economic order was since Obama administration.
Obama administration also has not done anything to end the deadlock on Doha declaration at WTO or to
bring significant reforms in IMF. Obama preferred to weaken multilateralism in trade by initiating the trade
deals like [Link] has withdrawn from TPP, thus Trump is going back to the policy of isolationism.
There is only a different of posture between Trump and Obama. Trump is more offensive in his approach.
Tariffs, threats and twitter had become the hallmark of Trump’s approach to foreign policy.
Reason behind such actions of the US.
● US actions have to be seen in the background of the rising challenge of China to US hegemony. Up till
now USA was thinking that China aims to challenge the hegemony but now USA is convinced that China
aims to displace USA, determined to establish its own hegemony. Hence tougher actions are needed
before it becomes too late. China will soon surpass USA as a world’s largest economy in nominal
GDP terms.
The future of liberal international economic order?
● Though some scholars predict the end of globalization, but others suggest globalization 2.0. Since
China have benefited by globalization, it has a huge interest in maintaining liberal international
economic order.
● At World Economic Forum in 2017, China proclaimed that it is ready to take the burden of leadership
of globalization. We may expect China led international economic order.
● Pax Americana giving way to Pax Sinica.
● Other countries of the world are not interested in the retreat of globalization e.g. Canada, France,
● Germany, BRICS countries, have opposed USA’s protectionist approach.
● But it is extremely doubtful if China can replace USA. China cannot provide such a huge market to
rest of the world like USA. China’s growth is export oriented and it is also China’s compulsion. It has
become the manufacturing hub because of the lower wages. If China has to increase its internal
demands, it has to increase wages. Once it increases wages, it will lose its competitiveness.
WTO – World Trade Organization

Purpose of WTO
● WTO establishes the rule of law in international trade. It replaced GATT.
GATT was limited to trade in goods (manufactured goods) but over a
period of time, there has been a growth in international trade in
agriculture, services, new areas of international trade keep on emerging
like IPRs, now e-commerce, fisheries and other areas.
Logic of WTO
● Aim of WTO is to establish free trade. The concept of free trade is based
on Ricardo’s theory of comparative advantage. Comparative advantage
creates win-win situation for all. Each country will have the entire world
as a market. Hence the mantra is ‘trade rather than aid’ for poverty
alleviation.
WTO principles
Since the objective of WTO is to establish free and fair trade rules, members
agreed on following fundamental principles.
1. To make trade free by reducing the tariff and non tariff barriers.
2. Adopt the principle of non-discrimination. This requires two principles:
MFN status, national treatment.
3. Special and differential treatment-Developing countries and LDCs will be
given some exemptions to make the trade free.
4. Transparency and Predictability.
Argument of US at WTO
● According to USA, China has not adhered to the fundamental principles, it only takes the advantage
without offering reciprocal benefits.
● China has denied market access to foreign companies.
● This is one of the reason why rest of the world has negative balance of trade with China.
● China has coerced American companies to transfer technology to the Chinese firms, thus violating IPR
norms.
WTO BODIES
1. Ministerial council
● Summit level body where ministers of trade and commerce meet.
2. General council
● Administrative body/executive body.
3. Trade policy review board.
● This will ensure the transparency and predictability by reviewing the trade policies of different countries. It
will nd out in case a member country is violating the norms.
4. Dispute settlement body (DSB)
● The dispute settlement body has been one of the significant innovation of WTO so that countries can
resolve their trade disputes in a peaceful manner. Appellate body is a part of DSB, consisting of 7
members which pronounces judgements on various disputes.
5. There are different councils like Council on Trade and Goods, IPR etc
The WTO's top-level decision-making body is How a dispute is settled at WTO?
the Ministerial Conference, which usually meets
every two years. Below this is the General
Council.

There are two main ways to settle a dispute once a

complaint is filed in the WTO –
1. Mutually Agreed Solution
● the countries find a mutually agreed solution,
particularly during the phase of bilateral
Consultations;
2. Through Dispute Settlement Body
● Through adjudication which includes ruling by a
panel and if not satisfied, challenging that ruling at
the appellate body
Issues with DSB of WTO

● The smooth functioning of the WTO’s dispute

settlement mechanism hit a roadblock when the US
blocked appointments of members in the appellate
body (AB).
● Though the AB stopped functioning on December
10, 2019, the panels are still working.
● Appellate body 7 member body, which is defunct
since members have not been appointed for last 4
years hence not able to meet its quorum of 3
members.
WTO round of talks
Singapore Round,1996
● In 1996, 1st ministerial meeting took place in Singapore.
● Developed countries brought new issues known as Singapore issues.
● It included trade facilitation, government procurements, competition policies, investments, IT
agreement, environment and labour standards.
● Developing countries opposed the inclusion of labour standards for which the ILO standard is adequate.
● Developing countries viewed it as an attempt to impose non tariff barriers.
● At Bali ministerial conference, countries agreed for trade facilitation.
4th ministerial 2001 at Doha
● At Doha, developing countries presented a strong solidarity, forced developed countries to adopt ‘Doha
development agenda’.Adoption of Doha development agenda was a big victory for developing countries
and since then US had lost interest in WTO.
Doha Development Agenda,2001
● Agriculture: The special and differential treatment for developing [Link] Safeguard
Mechanism was allowed for developing countries in case of import surge.
● Services: The negotiations on trade in services shall be conducted with a view to promoting the
economic growth of all trading partners and the development of developing and least-developed
countries.
● Market access for non-agricultural products: The negotiations shall take fully into account the special
needs and interests of developing and least-developed country participants.
Why developed countries adopted/accepted the Doha agenda?
● 9/11 2001 terror attack, US wanted to communicated the non state actors that the entire international
Most major issue at WTO is related with Agreement on
Agriculture

Agreement On Agriculture (AoA)

● It is one of the foundational agreement of WTO.
● AoA is aimed to remove trade barriers and to promote
transparent market access and integration of global
markets. Agreement on agriculture stands on three pillars:
1. Market Access
● The market access requires that tariffs fixed (like custom
duties) by individual countries be cut progressively to
allow free trade.
2. Export Subsidy
● Subsidy on inputs of agriculture, making export cheaper or
other incentives for exports such as import duty remission
etc are included under export subsidies. These can result
in dumping of highly subsidized (and cheap) products in
other country and damage domestic agriculture sector of
other country.
3. Domestic Support/Subsidies
● It calls for reduction in domestic subsidies that distorts free
trade and fair price.
Agricultural Subsidies at WTO

They tend to limit the Examples - Environmental and

[Link] example conservation programs, research
subsidies linked with acreage funding [Link] these
or number of subsidies are not directed at
[Link] argue that specific products. Considered non
Blue box subsidies are crucial trade distorting. Allowed by WTO.
for ushering in agricultural
[Link] few countries
like Norway, Iceland ,
Slovenia etc use this kind of
[Link] by WTO. Input subsidies such as subsidy
on electricity, seeds , fertilizers ,
irrigation etc. Market support price
(MSP) subsidies. They are
considered trade distorting.
Limitations imposed by WTO.
Limitation on Amber Box subsidy
(De-minimis clause)
● For developed countries, it's 5%
of the value of agricultural
production.
● For developing countries, it's 10%
of the value of agricultural
production.
Peace clause

● The provisions of AMS are yet to be 11th MC, Buenos 11th MC, Buenos Aires
implemented. Aires This is cheating. you promised that
● The issue was raised in 9th MC held at Bali There cannot be an there will be no pressure on us to
2013(after India brought National Food open ended peace implement agreement on
clause. India and other agriculture until a permanent
Security Act 2013) developing countries solution is achieved.
● According to the peace clause negotiated must find a solution in a
by India at the Bali meet in December 2013, time bound manner
no action will be taken against India, or
other developing countries, in case the
subsidies on their food procurement
programmes breach the ceiling of 10 percent
of value of food production laid down by the
Agreement on Agriculture till 2017.
● In 2014, India pushed the WTO members
into making the peace clause perpetual till
a satisfactory permanent solution was in
place.
AMS-unfair to developing countries and may hamper food security of Developing countries
Study by India and China on AMS

● India, China and 50 other developing countries are working on

a proposal to be able to purchase, stockpile and distribute
food to ensure food security.
● As part of a lasting solution for their public stockholding
programmes, the developing countries want programmes such
as procurement of food products from farmers at minimum
support price and their distribution at subsidised rates to the poor
excluded from AMS(Amber Box).
● The proposal is based on a submission by the G33 made in
2017 that called for incorporating a new annex in the WTO’s
Agreement on Agriculture for exempting public stockholding
programmes from subsidy reduction-commitments.
G33

● The G33 is also known as the Friends of Special

Products in agriculture.
● The G33 is a coalition of developing countries,
established prior to the 2003 Cancun ministerial
conference, that have coordinated during the Doha
Round of World Trade Organization negotiations.
● The G33 group has advocated the creation of a
“special products” exemption, which would allow
developing countries to exempt certain products
from tariff reductions, and also a “special safeguard
mechanism.
● The aim of the G33 group is to limit the degree of
market opening required of developing countries.
● Despite the name, there are currently 48 member
nations. The group is dominated by India.
[Link] categorization of countries(**)
Points to be kept in mind for PT

WTO categorises countries in 3 groups-

1. LDC
● As designated by the United Nations
● Currently 45 least-developed countries.
● Dec 2023-Bhutan officially moved out of
LDC.
2. Developing country
● No criteria/based on self certifications.
● Other members can complaint against
Developing status.
● Recently India complained against
China(Why China is part of developing?).
3. Developed
● All others.
● Developing and LDC are given trade related
benefits
India’s expectations
1. Food security programs to be brought under green box.
2. End the boxes.
3. If present system is to be continued, the revise the
base prices taking into account, the inflation in food
items. But so far, there is no progress. USA has
threatened that they will come out of WTO.

India’s image
● At international level,especially at WTO, India’s image is
of a spoiler, tough negotiator but poor bargainer.
Current developments

1. Attempts to bring down US economic hegemony

● Alternative to SWIFT
● De-dollarisation
● Alternative to Bretton Woods Twins-At BRICS(NDB and CRA)/
By China-AIIB
● Alternative to Credit Rating Agencies/BRICS Rating
agencies-planned
2. The US looks forward to keep its grip tight
● Threat of 100% import duty on attempt of de dollarization.
● IPEF- reduce dependency on China
3. India
● RBI has established a goal to internationalise Rs in next 10
years.