The International Monetary System
Question 1: Discuss the Bretton Woods agreement.
Answer 1: The Bretton Woods agreement was in effect from 1944 to 1971. It stipulated that the United States must maintain a fixed price of gold relative to the dollar. Other countries could then peg their exchange rates to the dollar, which would be relatively stable. This agreement motivated the creation of the World Bank and the International Monetary Fund. There was occasionally concern about devaluation of the dollar, which created some problems for international central banks. Additional concern existed regarding the ability of the United States to protect the dollar. The Bretton Woods agreement was abandoned in 1973, when the United States ended the fixed rate system and stopped converting dollars to gold. At this point, the United States converted to flexible exchange rates.
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Question 2: Describe the General Agreement on Tariffs and Trade (GATT).
Answer 2: In 1947, twenty two nations established the General Agreement on Tariffs and Trade (GATT), and it continued to influence international trade until 1995. The GATT was one of the byproducts of the creation of the United Nations. The intention of the agreement was to minimize tariffs and prevent weaker nations from unfair treatment in international trade. The GATT also sought to eliminate import quotas as a means of protecting domestic industry. When import quotas were unavoidable, the GATT preferred that this be accomplished through tariffs. Countries were forced to agree to a tariff schedule limiting the duties that could be levied on particular goods. The GATT also introduced most favored nation policies, through which tariffs could be reduced. Ultimately, the 1995 development of the World Trade Organization rendered the GATT obsolete.
Question 3: Discuss most favored nation status.
Answer 3: One of the byproducts of the General Agreement on Tariffs and Trade (GATT) was most favored nation (MFN) status, used to restrict tariffs. The granting of MFN status to another country is a positive way of improving trade relations. For instance, the United States has designated China as a most favored nation in order to maintain excellent trade relations, even though the United States disapproves of some Chinese policies. Once a country receives MFN status, it must receive the same trade advantages as any other nation. This policy results in quick extension of bilateral trade agreements to many different countries. Third world and developing countries typically receive MFN status more easily than established countries, since it is believed to be in the interests of the developed world to help these fledgling economies grow.
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