The collapse of the neo-liberal consensus
Nations are preparing for a global economy characterised by gated globalisation, plurilateral or regional blocs, and competing industrial policies
The Asia-Pacific Economic Cooperation (APEC) summit in San Francisco was, as expected, overshadowed by a bilateral summit between the US President, Joe Biden and general secretary of the Chinese Communist Party, Xi Jinping. It is somewhat ironic that their meeting should have occurred at an occasion intended to promote international economic cooperation, just when the post-Cold War international economic consensus appears to have crumbled.
For at least three decades, some basic assumptions informed major decisions pertaining to the global economy: Essentially, the liberalisation of international trade and economic activity would benefit everyone, making all countries and peoples richer; global growth, while initially uneven, would be staggered, with industry and manufacturing jobs moving to lower wage countries as others grew richer and transitioned into service-oriented and consumer economies; such interdependence would also mitigate international conflict, at least among the world’s major economies, and would contribute to civic empowerment, democratisation, and cosmopolitanism.
By this logic, there was no problem then with natural resources in, say, Australia being processed in Southeast Asia for goods that were manufactured in China, marketed in the US, and sold in Europe. Or, for that matter, China producing pharmaceutical ingredients for drugs developed in Europe, made in India, and supplied to North America. Or the US and Russian scientists collaborating on various civilian technologies with potential military applications.
The Covid-19 pandemic in 2020 and the Russia-Ukraine war in 2022 proved major shocks to this system. In a world confronted with closures and shortages, the necessity of domestic production for essential goods became apparent. Russia’s energy exports and financial links to Europe did not prevent it from initiating a major conflict. But while these events proved a rude awakening, the causes of the collapse of the neo-liberal consensus lay deeper and further back.
There were several reasons why the positive vision of an integrated international economy did not come to pass. One was that China not only positioned itself as central to manufacturing supply chains as the world’s factory but created considerable oversupply through a wide range of distortionary practices ranging from subsidies and non-tariff barriers to corporate espionage. This, coupled with various technological advances, inhibited manufacturing in other parts of the developing world. The virtual monopolisation of many value chains by a single country, not one ruled by a single party with political disputes involving many of its neighbours, proved short-sighted.
The major powers also began to weaponise economic interdependence for political purposes. China attempted to use restrictions on bananas from the Philippines, salmon from Norway, mining products from Mongolia, and beef, barley, and wine from Australia, as well as the export of rare earth minerals to Japan, in a punitive manner. The US did its part by leveraging the international financial system and employing embargos for political objectives. Naturally, leaderships in various countries began to think twice about creating further economic dependencies on geopolitical competitors.
Finally, within various economies, inequality increased. Skilled labour in developed economies may have grown immensely wealthy in research, design, finance, and marketing, but unskilled labour found itself left behind, without the opportunity to compete in the global marketplace. The proliferation of tax havens further complicated redistribution schemes, reducing fiscal manoeuvrability in seemingly wealthy societies.
Today, policymakers in the US, Japan, and India, among other places, are making concerted efforts to prepare for a very different global economy, one characterised by gated globalisation, plurilateral or regional blocs, and competing industrial policies. The objective is now de-risking, ensuring that the manufacturing of critical goods is brought home for economic, technological, and security reasons, or that value chains are integrated with friendly partner countries or at least more diversified to ensure their resilience.
In the US, there is now a consensus against entering into open-ended free trade agreements that widen the current account deficit. The CHIPS and Science Act and the Inflation Reduction Act, which authorise massive subsidies for semiconductor and clean energy manufacturing, are the most prominent examples of America’s rediscovery of industrial policy. Meanwhile, Japan is changing its approach in terms of economic security. In India, the government is simultaneously entering into preferential trade agreements with complementary economies, while raising barriers to dumping and incentivising manufacturing at home through production-linked incentives. Even the European Union is becoming seized with new realities, opting to use the power of its market and regulatory capabilities to prevent dumping.
There is, as can be expected, considerable dissatisfaction with these developments, particularly in parts of the corporate and financial world. There is also considerable denial, particularly from those countries that have been among the prime beneficiaries of the neo-liberal order, such as Southeast Asia and Europe. But equally, this shift may spell opportunity for many in the developing world — in India, in Africa, and perhaps elsewhere — who have yet to benefit fully from industrialisation. The old neo-liberal paradigm that once promised a compelling solution for development challenges has reached its apparent limitations. Competition in this new, post-liberal international economy, if played right, might offer some a better path.
Dhruva Jaishankar is executive director, ORF America. The views expressed are personal