FMM Working Paper

: Conflict and cooperation in international trade: post-Keynesian perspectives

The revival of economic nationalism poses a challenge to neoclassical orthodoxy, which claims that liberalized international trade is (subject to a few recognized exceptions) inherently cooperative and mutually beneficial. Post-Keynesian open economy models demonstrate that international trade relations can be conflictive under certain conditions. In the short run, changes in either cost or quality competitiveness can shift output, growth, and employment from some countries to others. In the medium run, positive feedbacks from growth of exports to growth of labor productivity create self-reinforcing gains in external competitiveness for some countries that may come at the expense of losses for others. In the long run, changes in the real exchange rate or terms of trade can favor some countries' growth at the expense of others'. The post-Keynesian approach also implies that coordinated fiscal expansions can mitigate these conflicts and foster more cooperative outcomes, while industrial policies are generally superior to protectionism.

Keywords: Economic nationalism, export-led cumulative causation, international conflict, real exchange rate, trade balance