Recent developments indicate that America’s approach to international economic policy is undergoing a dramatic change. The pressing need for decarbonisation, creating high value manufacturing jobs and intense geopolitical confrontation has led to the reemergence of industrial policy in the US. The Inflation reduction Act is the largest ever federal investment made towards combating climate change that will help the country reduce its carbon emissions by 2030. By providing subsidies and tax credits to clean energy and green technology firms, it also seeks to boost American manufacturing – these measures have drawn the ire of American allies in Europe and Asia. Biden has also continued with many of Trump’s punitive trade policies and the US has begun to disavow WTO rulings that go against it, thereby undermining the trade regime that it largely authored. The future effectiveness of WTO is unclear as the US joins China in disregarding its rules. The “tech war” against China also shows no sign of abating. The Biden administration has said in no uncertain terms that it seeks to be the leader in computing-related technologies, biotech, and clean tech as it considers it a national security imperative. Seen together, the protectionist turn in US policy and the turning away from the free trade regime has naturally upset economically libertarian voices.
The Economist cautions that the adoption of muscular industrial policy by countries will lead to economic inefficiency and zero sum thinking; and those who refuse to learn from history will once again imperil the cause of liberal democracy and market capitalism. The fears regarding the rise of economic nationalism are legitimate. The use of sanctions, tariffs and export control, can trigger greater geo-economic friction and escalate into armed conflict. These trepidations have led to a raging debate: What is the future of globalization? Is the era of greater economic integration coming to a close? And if so, what are the implications for international peace and security?
Before addressing these issues, it is important to mention briefly why the mood against globalization soured in many western counties including the U.S. The neoliberal avatar of globalization led to vast inequalities and the loss of well paying industrial jobs in the west. The benefits of globalization eluded the western middle classes. While risky financial speculations proliferated, the real economy was starved of investments. The era of “hyperglobalization”, as its critics argued, had reduced the sovereignty of countries to govern itself and privileged the MNCs to set the rules for the economy. The aim of the neoliberal globalists was to insulate the global economy from the hustle and bustle of national democratic politics. Little surprise then that taking back control has became a popular refrain. As the new era of industrial policy got popular across the aisle, free market fundamentalism has been politically orphaned.
International security concerns have added to the domestic backlash against unrestrained globalization. The pandemic and the war in Ukraine have led to a realization that supply chains to the extent possible must be shifted away from adversaries. The US also wishes to maintain its hegemony on advanced technology – as with the semiconductor export ban it seeks to keep them away from geopolitical rivals like China. U.S. industrial policy in the future is likely to continue to be couched in anti-China terms in order to assemble the necessary domestic coalitions required to pass legislations in a gridlocked Congress.
While globalization lifted hundreds of millions of people from poverty (albeit policy choices in countries like China were often more unconventional than neoliberals propose) it is not accurate to paint the passing age of globalization without throwing light on its blemishes. Nations in reality competed economically by offering low labor costs and tax cuts. Countries sought to improve their international competitiveness by directly or indirectly reducing wages and curtailing domestic demand. Economic globalization in the manufacturing world pitted workers of the developed and developing world in a race to the bottom. As Michael Pettis wrote in his response to the Economist: “The global trade and capital system of the past four to five decades is among the most unbalanced, distorted, and protectionist in history.”
It is a false choice therefore to presume that countries have no option but to fall back upon neoliberal globalization or adopt mercantilist policies. Open trade can be compatible with redistributive policies domestically as northern European social democracies have shown. Going ahead, countries with persistent trade surplus must improve the consumption power of their economically weaker groups. If new trade blocks between like-minded nations come into being, it must pursue trade liberalization while also factoring in greater protection for workers.
Globalization today doesn’t carry the triumphal undertone of the 1990’s. Stripped off its progressive teleology, the future of globalization is more open ended. Nonetheless as the world economy is splintering – the IMF calls it policy driven geo-economic fragmentation – few crucial points can be made about the future of globalization.
Firstly, unlike past iteration of globalization, which was formulated under the aegis of a hegemon, trading arrangements are now not going to operate under a single umbrella. While recent data on trade fragmentation isn’t available, protectionist measures have grown worldwide. And so even if the volume of trade doesn’t reduce drastically (ever since the global financial crises of 2008, international trade as share of the world economy has remained mostly stagnant; globalization plateaued but didn’t reverse course), the pattern of globalized trade is likely to be different. Unlike the hyper-globalization era, countries will now pursue different roads in charting their political and economic systems. If the U.S. is undermining the Bretton Woods system, it is not fair to expect compliance from other countries. International institutions like the International Monetary Fund and the World Trade Organization will have to accord greater flexibility to reflect the changing circumstances.
Second, the new cocktail of globalization will increasingly be vetoed by the national security state. Katherine Tai, the U.S. trade representative, for example, defended the U.S. against WTO ruling by stating that, among other things, it was aimed at safeguarding national security. Greater level of engagement will go hand in hand while striving for greater relative power and by states looking to “weaponize interdependence”.
Third, the material logic of economic globalization shall no longer stream roll all great power differences as was presumed and hoped. Neoliberal globalization was indifferent to regime type. It was expected that countries with vastly different political dispensations could still abide by a single trade regime. This view is changing. Strategic competition between the US and China have made policymakers and commentators in Washington talk about “reshoring” or “friend-shoring” – an attempt to reconfigure supply chains towards favorable countries. The creation of a new geo-economic order will however be a challenge as most countries are not in favor of being exclusively in one camp. While there has been a reduction in investment by US firms in China, Beijing continues to draw high FDI from other countries. Notwithstanding heightened rhetoric from some quarters, a total US-China economic decoupling isn’t immediately on the cards. It is hard to swallow both the prudence and practicality of a strategy that strives to economically isolate China. Nonetheless, companies will look to ensure that their supply chains are not limited to one country and try to keep supplies more local and regional. One can also expect greater synergy between government and business.
Fourth, the state will play a visibly greater role in economic affairs. Neoliberalism on its part didn’t seek to depoliticize the economy by doing away with an overbearing state – rather it utilized state power to maintain the sanctity of the market unencumbered by democratic politics. Aligning a county’s policies with international economic agreements after all required the deployment of the heavy hand of the state and not a deregulatory one as is often presumed. Economics and politics can never be entirely separated from each other and we are entering a world where the entanglement of the two will be made more apparent.
Fifth, the coming years are likely to once again blot the doux commerce vision of international cooperation and amity. The idea that liberalized trade is an engine for international peace can be traced back centuries. The belief also animated institutions of the modern world. Cordell Hull, F.D.R.’s secretary of state, a key architect of the post war trading system believed greater trade leads to lasting peace. Robert Schuman’s famous rationale for closer European economic union aspired to make war “not merely unthinkable but materially impossible”. Trade can no longer be presumed as the driver of global peace and unity. The logic seems to run in reverse: peace is the precondition for commerce.
After the end of the cold war, America along with its allies, spread neoliberal globalization as an active tool of foreign policy. The gamble was that integration of countries like China and Russia into the global economy would not just increase global prosperity but also make the world a safer place. Seen in this light, neoliberal globalization was never just an economic recipe – its advocates have always emphasized the salutary political and geostrategic benefits. Chinese and Russian aggression and revisionism has certainly belied those panglossian assumptions. Neither hopes about domestic political reforms to make these states less authoritarian nor a quest to reduce great power competition have materialized. The strategic thinking in U.S. has now changed: if harnessing interdependence didn’t create conditions for lasting peace then a combination of decoupling, export control and sanctions will stunt the growth of rival economies like China; if dangling the carrot didn’t yield expected result then the stick must be suitably wielded to maintain hegemony. Justified as they are, the critics of the neoliberal world must not presume that the alternative route now being charted will lead to a more benign world. America was justified to pull back from the hyper-globalised economy to correct its domestic structural imbalances but now at the hands of an emboldened national security establishment, it is veering towards the other extreme – exploiting a fractured world to outbid China in a war for economic supremacy. The escalatory risks between the two biggest economies are now high and the rest of the world will live under the shadow of that uncertainty.
