Why geopolitics, not protectionism, is the global economy’s true enemy

What some decry as protectionism and mercantilism ruining the global economy is really a rebalancing towards addressing important national issues
The biggest risk is not this broader reorientation – which should be welcomed – but US-China rivalry that threatens to hurt everyone

Dani Rodrik

Published: 3:30pm, 7 Sep, 2023

Why you can trust SCMP

“The era of free trade seems to be over. How will the world economy fare under protectionism?” This is one of the most common questions I hear nowadays.

But the distinction between free trade and protectionism – like the one between markets and the state, or mercantilism and liberalism – is not especially helpful for understanding the global economy. Not only does it misrepresent recent history, it misconstrues today’s policy transitions and the conditions needed for a healthy global economy.

“Free trade” conjures an image of governments stepping back to allow markets to determine economic outcomes on their own. But any market economy requires rules and regulations – product standards, controls on anticompetitive business conduct, consumer, labour and environmental safeguards, lender-of-last-resort and financial-stability functions – which are typically promulgated and enforced by governments.

Moreover, when national jurisdictions are linked through international trade and finance, additional questions arise. Which countries’ rules and regulations should take precedence when businesses compete in global markets? Should the rules be designed anew through international treaties and regional or global organisations?

Viewed in this light, it becomes clear that hyper-globalisation – which lasted roughly from the early 1990s until the onset of the Covid-19 pandemic – was not a period of free trade in the traditional sense.

The trade agreements signed in the past 30 years were not so much about removing cross-border restrictions on trade and investment as about regulatory standards, health and safety rules, investment, banking and finance, intellectual property (IP), labour, the environment and many other issues that previously lay in the domain of domestic policy.

How to avoid a world where geopolitics trumps all else

Neither were these rules neutral. They tended to prioritise the interests of politically connected big businesses.

Similarly, tighter IP rules – which allow pharmaceutical and tech companies to abuse their monopoly positions – were smuggled in under the guise of freer trade. Governments were pushed to free up capital flows while labour remained trapped behind borders. Climate change and public health were neglected, partly because the hyper-globalisation agenda crowded them out, but also because the creation of public goods in either domain would have undercut business interests.

We have witnessed a recent backlash against these policies, as well as a broad reconsideration of economic priorities. What some decry as protectionism and mercantilism is really a rebalancing towards addressing important national issues such as labour displacement, left-behind regions, the climate transition and public health.

This process is necessary both to heal the social and environmental damage done and to establish a healthier form of globalisation for the future.

US President Joe Biden’s industrial policies, green subsidies and “made in America” provisions are the clearest examples of this reorientation. These policies are a source of irritation in Europe, Asia and the developing world, where they are seen as antithetical to established free-trade rules. But they are also models for those seeking alternatives to hyper-globalisation and neoliberalism.

02:42

Biden tours new Taiwanese chip-making plant in Arizona, fans US-China semiconductor rivalry

We don’t have to go far back in history to find an analogue to the system that could emerge from these new policies. During the post-1945 Bretton Woods regime, which prevailed in spirit through to the early 1980s, governments retained significant autonomy over industrial, regulatory and financial policies, with many prioritising the health of their domestic economies over global integration.

Trade agreements were narrow and weak, placing few constraints on advanced economies but even fewer on developing countries. Domestic control over short-term capital flows was the norm rather than the exception.

Despite this more closed global economy, the Bretton Woods era proved conducive to significant economic and social progress. Advanced economies experienced decades of rapid growth and relative socioeconomic equality until the second half of the 1970s.

Among low-income countries, those that adopted effective development strategies – such as the East Asian Tigers – grew by leaps and bounds, even though their exports faced much higher barriers than do developing countries today. When China joined the world economy with great success after the 1980s, it did so on its own terms, maintaining subsidies, state ownership, currency management, capital controls and other policies more reminiscent of Bretton Woods than of hyper-globalisation.

The legacy of Bretton Woods should give pause to those who believe permitting countries greater leeway to pursue their own policies is detrimental to the global economy. Ensuring one’s own domestic economic health is the most important thing a country can do for others.

Of course, historical precedent does not guarantee the new policy agendas will give rise to a benign global economic order. The Bretton Woods regime operated in the context of the Cold War, when the West’s economic relations with the Soviet Union were minimal and the Soviet bloc had only a small foothold in the global economy.

The situation today is entirely different. America’s main rival now is China, which occupies a large position in the world economy. A true decoupling between the West and China would have major repercussions. One can therefore can find plenty of good reasons to worry about the future health of the world economy.

But if the global economy does become inhospitable, it will be because of American and Chinese mismanagement of their geopolitical competition, not any supposed betrayal of free trade. Policymakers and commentators must remain focused on the risk that really matters.

Dani Rodrik, professor of international political economy at Harvard Kennedy School, is president of the International Economic Association and the author of Straight Talk on Trade: Ideas for a Sane World Economy. Copyright: Project Syndicate