The Collapse of Global Trade: What a Tangled Web We Weave

A unique feature of the financial crisis is the unprecedented collapse in global world trade. The objective of this paper is to explain some of that collapse as a move toward protectionism triggered not by nationalistic interests but by ‘competing’ objectives among trading partners from the Mundell-Fleming Trilemma. Even with the best of intentions, efforts toward internal re-balancing necessarily implies harming your trading partner unintentionally if they should be using conflicting policy objectives of the Trilemma. National interests are at odds between two such countries and their policy prescriptions counteract, and paralyze re balancing and coordination efforts between nations. Policymakers may be forced into protectionists’ stances in an effort to counteract the internal re-balancing efforts of their neighbors.