The End of Neoliberalism?

There has been an ongoing debate during the Trump and Covid eras as to whether globalization was in retreat, either as a matter of policy (from the Trump administration) or due to external events (the Covid-19 pandemic). I have maintained throughout that, although we may be in the second part of a “two steps forward, one step back” scenario, the fundamental enabling tools for globalization—enormous decreases in the price of communications and transportation and technological advances in both—are still here and are not going away. Neither is globalization.

Lately, the debate has begun to focus more on government policy than on economics, as the Biden administration is accused of abandoning traditional “neoliberal” trade policy in favor of a more protectionist and domestic-oriented approach. Even after reading a definition of it, I am still not sure what neoliberalism is, but it appears to refer in this context to policies that promote market economics, including by lowering trade barriers; avoiding price controls; reducing regulation, particularly in capital markets; and generally reducing government involvement in the economy. Note that this applies to two areas: domestic economic policy and trade policy.

The critics’ assumption seems to be that we have been pursuing those policies for a long time and have now tossed them into the trash can. That leads to two questions: (1) Is that true? And (2) is such a policy change wise? The answer to the first question is yes and no, though more yes than no. On the domestic side, industrial policy, or running faster, meaning government intervention in the economy, is not new. Elements of it have characterized government policy going back to at least the Lincoln administration. It has waxed and waned according to the administration of the time, but the United States has for a long time been willing to devote government resources and direction in the interest of achieving national policy goals, particularly when they are linked to U.S. national security, which is the case today. Thanks to the CHIPS and Science Act and the Inflation Reduction Act , government intervention in the economy is more extensive than in the recent past, but it is hardly new.

On the international side, the answer seems to be clearly yes, particularly after the Office of the U.S. Trade Representative’s (USTR) recent rejection of two World Trade Organization decisions that the United States lost. The Biden administration has turned its back on traditional trade agreements that provide for more market access, is pursuing domestic industrial policy focused on reshoring production at the expense of foreign partners, and is blatantly rejecting the rules-based multilateral trading system that it has spent the last 75 years defending. Most peculiar, the administration seems to have little or no interest in promoting exports, which have long been the least controversial part of trade policy.

The answer to the second question—is this change wise policy?—is again yes and no, but this time mostly no. I have long argued for industrial policy as an effective way to achieve policy objectives, including those related to national security. If done properly, it fills gaps and overcomes rigidities in the market without interfering with economic fundamentals. That generally means using carrots rather than sticks—incentives to invest in government priorities rather than requirements that distort the market’s function of allocating credit.

Unfortunately, the Biden administration is not pursuing industrial policy entirely properly. Not only do restrictions on trade and foreign procurement lead to more expensive and less economically optimal outcomes, they also can slow down attainment of the desired policy goal. The Inflation Reduction Act is a good example. The extensive content requirements for eligibility for the electric vehicle tax credit will make the cars more expensive, and because no company can currently meet the requirements, they will delay the transition to electric vehicles. Building desired domestic industries can be good policy but doing it in a way that makes those industries less efficient and less globally competitive in the long run is not the path to success.

Worse than that, however, is a trade policy that ignores fundamental economic realities. More than 95 percent of the world’s consumers are outside the United States. The United States is a mature, slow growth economy with low to zero population growth. If we want to grow and create more lasting jobs, then doing business with the rest of the world through exporting is essential, and it inevitably requires investments overseas that enable more exports.

Unfortunately, instead of seeing trade as a half-full glass that needs more water, the administration seems determined to view it as a half-empty glass that needs to be drained. It is certainly true that trade has not always benefited all Americans, but focusing solely on how the benefits of trade are distributed means missing the opportunity to create more benefits. A good example is the Indo-Pacific Economic Framework for Prosperity (IPEF). We may well get better labor standards, more decarbonization, and greater supply chain cooperation out of the agreement, which are good things, but we are passing up the chance to get more trade out of it, which is what produces economic growth.

Saving the worst for last, the new trade policy is also becoming an abandonment of the rules-based system that previous generations worked so hard to build. As bad as that is, what is worse is that we are doing it with the tired old sovereignty argument—that the United States cannot allow its hands to be tied by international institutions. Conservatives have used this argument to object to virtually every treaty and international agreement the United States has joined. Now, with the left wing adopting the same argument, we face the possibility of a critical mass of stupidity determining U.S. policy. International agreements are the grease that keeps the system’s wheels turning. If the system grinds to a halt, we go back to the law of the jungle, and we are not going to like it, despite our size. We are voluntarily sacrificing the United States’ global leadership position and influence, making it hypocritical in the extreme for us to call out other nations’ violations when we refuse to acknowledge our own. We will end up the loser in this game far more often than we will be winners, and future administrations will come to regret what this administration has done.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.      

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