How the mainstream abandoned universal economic principles

(but forgot to mention it)

My recent Substack on Donald Trump’s election and his assumption of presidential powers has attracted quite a lot of attention as well as critique among people who misinterpreted the article to be a paean in favor of Donald Trump. I am very gratified that the article attracted the attention of Martin Wolf from the Financial Times who is one of the most respected analysts of domestic and international economic policies. You can find both his critique and my very short reply on the bottom (in the comments section) of the original article here. My point in the reply was to argue that the main principles of neoliberal globalization have been abandoned by the mainstream economists much prior to January 20^th. The latter is only a symbolic event: on that day indeed will end the era of neoliberal globalization that has started (in this episode of globalization) with the fall of the Berlin Wall. Yet most of its elements have been dismantled much before and by the people who never openly acknowledged doing so.

I do know that many mainstream neoliberal economists like to treat the appearance of Donald Trump as an Act of God. They treat him as an earthquake or some sudden storm whose origin nobody can fathom. It has been argued however (and I think that it is obvious) that the seeds of his ascent were actually sowed by neoliberal policies which have gradually lost popular support. It is not by accident that 77 million people voted for Trump nor is it accidental that similar movements are currently taking place and politically destabilizing large Western countries like Germany and France. This internal aspect and the role of neoliberalism in increasing inequality, reducing social mobility, increasing morbidity and mortality among the middle classes in the US, dissociating interests of the rich from the rest of the society, have been extensively documented in both economic and political science literature. I do not want to expand on that.

I would like, on the contrary, to focus on the abandonment of neoliberal principles in the international arena. This is a particular relevance for the Financial Times which is considered by the so called international development community as the newspaper of record. The Financial Times has an international perspective which is, for example, lacking in the Wall Street Journal. But the Financial Times has been misleading its readers into believing, or not noticing, that most of the neoliberal establishment has actually abandoned the principles of globalization which the very same people have been defending before, for some 20 or more years. The Financial Times has, in my opinion, failed to do so because of its strident anti-China policy and obsession with China’s success. Now that obsession with China’s success or rather dislike of its success (or wish for its failure) makes sense only if one looks at China from a strictly political or a strategic angle. There China may be a great competitor, rival or even a foe of the West. But it makes no sense at all if one is looking at China’s success from an internationalist or cosmopolitan point of view which is, in principle, what development economists are supposed to do. From that particular point of view the success of any developing country whether it be China, Nigeria, Indonesia, Chad, Paraguay, or Mali should be applauded. So this is the first inconsistency.

There is also the inconsistency whereby Chinese success is in part interpreted to be due to the stealing of technology from the West. There I can vouch after having worked for more than 20 years in the World Bank that the permanent complaint that I’ve heard was that poor countries are “unfortunately” unable to successfully use the technology from the more developed nations because of their corruption or lack of education. Not that the West was not keen to share it with them. So when a country like China finally showed that indeed it can copy Western technology, use its size as a bargaining chip, and improve upon foreign technology, from a cosmopolitan perspective to which presumably the Financial Times is dedicated, that success should have been saluted and welcomed. On the contrary, it was derided and presented as a theft. The international organizations should, in fact, advise Ethiopia and Tanzania how to replicate China’s copying of Western technologies rather than treating it as act of illegality. This is the second inconsistency.

The third, in a way a multiple inconsistency, is that international aspects of neoliberal globalization have been abandoned by the people who used to defend it. I will discuss them one by one.

Tariffs. From the very establishment of the Bretton Woods system and from the basic tenets of globalization, tariffs are sometimes considered a necessary evil but in principle the instrument that should be discouraged and used as rarely as possible. This has been the policy consistently pursued by both developed and developing countries from the early 1980s. The recent increases in tariff rates in the United States and Europe thus mark a departure from one of the main principles of globalization. Increased tariffs against Chinese imports started under the first administration of Donald Trump but very quickly were taken over by Joe Biden and by his administration. It moreover expanded the policy of tariff protection against Chinese goods and even in some cases threatened to ban the imports of some goods like electrical vehicles altogether.

Trade blocs. It has also been a consistent approach of globalizers to argue against trade blocs. One need not go back to Hayek’s Road to Serfdom to find out that trade blocs are generally associated with militaristic or autarkic regimes that try to create zones of economic influence. But most recently that particular policy has found favor among the neoliberal establishment including Financial Times’ own associate editor and columnist Rana Faroohar who published an influential, and extensively reviewed, book based on a number of her earlier writings and speeches. In it she argues in favor of returning the jobs that were apparently lost to China to the United States and in favor of so-called friend-shoring (see my views here). Friend-shoring is simply a different word for the creation of politically motivated trade blocs. It is a policy which in reality does not dare say its real name because it is the same policy like the ones followed in the 1930s by the UK with Commonwealth Preferences, Nazi Germany with Grosse Deutschland’s Central European area, or Japan with Co-prosperity zone. They are antithetical to any normal idea of what globalization should mean.

Industrial policies, like tariffs, are considered acceptable only in extreme circumstances. Never applauded by the proponents of globalization because they lead to unfair subsidization of domestic production and skew the incentives away from what they would have been in a competitive world. But that policy too has recently found favor with the mainstream neoliberal economists and even with the Financial Times. The discussion is now centered on how such a policy should be pursued and there is seemingly a general acclaim that Biden has made a big step forward in institutionalizing it by the Anti-Inflation Act. The problem again with this policy is that it is incompatible with the idea of globalization and depolitization of economic decision-making. As I will mention in the concluding part it leaves the development community in disarray because if the industrial policy is good for the United States or for Europe the question is why should such policy be advised against in Egypt or Nigeria?

Economic coercion is likewise not accepted by liberal economists. However it has been used increasingly by the United States and Europe. Trump employed it quite a lot and increased the number of sanctions on political regimes that he did not like such as Cuba and Venezuela. These sanction regimes continued under Biden: the US currently has 38 different sanctions regimes that in one or another way affect more than fifty countries. It was much expanded with the wars in Ukraine and Palestine, and the seizure of Russian assets, and rather incomprehensibly, by the punishment meted out to Russian oligarchs for not being sufficiently politically powerful to stop Putin’s war. In any case the use of economic coercion is also antithetical to the idea of neoliberal globalization.

Free movement of labor is in principle an objective of globalization. It has never been achieved for political reasons but at least it has remained on the agenda and it has been an aspirational objective. From a purely global point of view there is no reason why the market for labor should not be internationalized and should not embrace the entire globe in the same manner that the market for capital does. But I am aware that political reasons dictate things to be otherwise. However most recently even the aspirational objective of free movement of labor has been jettisoned. This is not only Trump who has built the fence against Mexico. The fence continued being built under Biden. Likewise deportations on undocumented aliens continued under Biden as indeed they have been present under Obama. This is not something that Trump had invented on his own: the anti-immigration policy in the US has gradually sharpened over the past 10 to 15 years. The same is true and even more dramatically so in the European Union. It theoretically prides itself on multiculturalism and multiethnicity whereas at the same time it is erecting physical borders in the limitrophe regions and has increased the anti-migrant patrols in the Mediterranean. It is in its own interest that the number of deaths due to such fencing and patrols is never revealed and can only be guessed. But it runs into several thousand per year.

So what can we think when we attempt to look at the overall picture? We conclude that all essential ingredients of the neoliberal globalization have been abandoned by the mainstream economists and by Democratic administration in the US as they will be further abandoned by Trump. It is in that sense that Trump’s assumption of power on the 20^th of January represents a symbolic date for the final rejection of these principles. The goals are no longer free movement of goods because tariffs stop them; movement of technology is limited because of the so-called security concerns; movement of capital is reduced because the Chinese (and most recently Japanese as In the case of US Steel) are often not allowed to buy American companies; movement of labor has been severely curtailed. So what essential ingredients of neoliberal globalization have been left intact?

My point here is not to argue whether the abandonment of these principles is good for the United States or Europe or China or the world, or not. It is rather simply to show that it was not Trump who is the only agent of change, but that these principles have been in abeyance for at least a decade or perhaps a decade and a half. The Financial Times has misled its readers by not clearly stating that its promotion of trade blocs and revision of other key principles means in reality the abandonment of neoliberal globalization as a project. This is happening because of (1) geostrategic competition with China and because (2) such neoliberal policies have domestically been harmful for Western middle classes.

An important problem which is seldom noticed (and the Financial Times should have noticed it) is that giving up on these principles leaves the Bretton Woods system in disarray. As I mentioned in one of my earlier pieces there were two essential framings of the international system: in 1944 and then, although not as formally as in 1944, in the early 1980s with the introduction of the Washington Consensus on the global scale in the formally communist countries as well as in India, Africa and Latin America. But while the Washington Consensus was, and can legitimately be, criticized it had at least certain consistency. The current abandonment of the principles of neoliberal globalization leaves the entire field of international development in chaos because it is not at all clear what types of policies should be suggested to, or imposed on, the rest of the world. One cannot imagine how a World Bank mission to Egypt could argue for reduced tariff rates or lower subsidies while at the same time the most important country, not only economically but in terms of suggested or enforced economic ideology, the United States, is raising its tariffs and subsidies. The entire ideology which underpins international economic relations has to be rethought. Perhaps we have to create a new system which would allow for trade blocs and tariff rates, no labor migration, and no transfer of technology but it has to be codified and explained to the rest of the world. Yet nobody has so far as much as mentioned that we (the world) need to create such a new system. This is why we are currently in the situation where the rules do not exist anymore. They are being treated in an entirely ad hoc manner: a certain set of rules are being used in one country or in one set of countries and other rules are being used in another set of countries. All of this is justified on the grounds of national interest. This is not an illegitimate position to take but one has to be clear about what it implies. It implies the return to mercantilistic policies where the interests of individual countries are paramount. It also means the abandonment of any cosmopolitan and internationalist perspective where the rules are at least in principle universal. We no longer have universal rules and the main culprit for not having universal rules is not Trump, but the view of the world where domestic political interest and the so-called security concerns are above everything else. This is not a world of globalization, but of parceled regionalisms and even nationalism.