The global trade system is broken because the global exchange rate mechanism is broken.

Background: I posted the following on the current debate being sponsored by The Economist. The topic:  Is the Global Trade System Broken. I would encourage you to follow this interesting discussion.
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Is the Global Trade System Broken?

The global trade system is broken because its very foundation -- the  global exchange rate mechanism -- is  broken. It no longer sets relative prices for domestic and foreign goods at levels consistent with balanced trade.

As Autry rightly notes, in the days of Ricardo, Hume, and other fathers of classical free-trade economics, an automatic mechanism assured that exchange rates were consistent with balanced trade.

Especially for countries like the United States with widely-used currencies, exchange rates today float in a manner determined largely by  international capital flows, flows that now vastly outweigh cross-border flows of real goods and services. Exchange rates set in this manner often bear little or no relationship to the rates that would balance trade.

For example, compared to the exchange rate that would fully balance US trade, the dollar is now overvalued by 20-25 percent. The failed global exchange rate system, which no longer provides the basis for balanced global trade, has led to the massive trade deficits that have been undermining the US economy for forty years - and have been generating lots of business for the WTO!

To fix today's broken trading system, the world must first create a new exchange rate determination system. This could be based, for example, on the Market Access Charge that is currently under consideration in the United States. Whenever a country like the United States suffers persistent trade deficits, the MAC would moderate capital inflows to levels consistent with a trade-balancing equilibrium exchange rate for the dollar. Applied globally, this approach would fix the world's broken exchange-rate system, thereby fixing the imbalances that plague today's global trade system.

Yes, the WTO is imperfect, but no bureaucratic mechanism can fix a trade system that is broken because there is no link between currency values and balanced trade!

John

America Needs a Competitive Dollar - Now!