ABSTRACT
This chapter explains how policies on trade are placed in a wider context of exchange rates, capital controls, and domestic policies. The trade-off in the policy choices shifted over time and varied between countries. The 'inconsistent quartet' adds a fourth variable, trade policy, which is of particular significance for this volume. Regardless of the choice made in the 'trilemma', a country could opt for either protection or free trade. Trade policy may vary independently of the trade-offs within the 'trilemma', with differing relationships. In the 1930s, many countries adopted protectionism with floating exchanges; at present, floating exchanges are complemented by trade liberalization. These relationships are historically contingent, depending on the interplay between domestic and international politics. These trade-offs had considerable influence on the way in which balance of payments were brought into equilibrium, and hence on trade policy, which affects the work of the World Trade Organization (WTO).
