The neo-liberal consensus is coming apart

I reached out to Chinese ambassador Cui Tiankai and proposed that the two leaders talk. Cui was keen on the idea, and we made it happen. When they spoke, Xi was quick to describe the steps China had taken to mitigate the virus. Then he expressed concern over Trump referring to COVID-19 as the 'China Virus.' Trump agreed to refrain from calling it that for the time being if Xi would give the United States priority over others to ship supplies out of China. Xi promised to cooperate. From that point forward, whenever I called Ambassador Cui with a problem, he sorted it out immediately.

What was the result? Trade with China soared. Within a matter of weeks, Americans were wearing Chinese-made synthetic coverings on their faces, having their noses stuck with Chinese-made swabs, and being tended to by nurses and doctors wearing Chinese-made scrubs.

The chart on China's trade volume looks like this. You can observe the long rise, the dramatic fall from 2018, and the reversal in the volume of PPE purchases following the lockdowns and Kushner's interventions. The reversal did not last long as trade relations broke down and new trade blocs were born.

The irony, then, is a salient one: the aborted attempt to restart the neo-liberal order, if that is what it was, occurred in the midst of a global bout of totalitarian controls and restrictions. To what extent were the Covid lockdowns deployed in service of resisting Trump's decoupling agenda? We have no answers to that question but observing the pattern does leave room for speculation.

Regardless, the trends of 70 years came to be reversed, landing the US in new times, described by the Wall Street Journal in the event of a Trump victory in 2024:

If it turns out that the tariff on China is 60% and the rest of the world is 10%, the U.S.' average tariff, weighted by the value of imports, would leap to 17% from 2.3% in 2023, and 1.5% in 2016, according to Evercore ISI, an investment bank. That would be the highest since the Great Depression, after Congress passed the Smoot-Hawley Tariff Act (1932), which triggered a global surge in trade barriers. U.S. tariffs would go from among the lowest to highest among major economies. If other countries retaliated, the rise in global trade barriers would have no modern precedent.

Talk of the Smoot-Hawley tariff really does plunge us into the wayback machine. Back in those days, trade policy in the US followed the US Constitution (Article I, Section 8). The original system granted Congress the power to regulate commerce with foreign nations, among other powers. This was intended to keep trade policy within the legislative branch to ensure democratic accountability. As a result, Congress responded to the economic/financial crisis by imposing huge barriers against imports. The Depression worsened.

It was a widely accepted belief among many in elite circles that the 1932 tariffs were a factor in the deepening of the economic downturn. Two years later, efforts began to transfer trade authority to the executive so that the legislature would never do something so stupid again. The theory was that the president would be more likely to pursue a free-trade, low-tariff policy. That generation never imagined that the US would elect a president who would use his power to do the opposite.

In the waning days of the Second World War, a group of extremely smart and well-intended diplomats, statesmen, and intellectuals worked to secure the peace in the aftermath of the wreckage in Europe and around the world. They all agreed that a priority in the postwar world was to institutionalize economic cooperation as broadly as possible, under the theory that nations that are dependent on each other for their material well-being were less likely to go to war against each other.

Thus was born what came to be called the neo-liberal order. It consisted of democratic nations with limited welfare states cooperating in trading relationships with ever-lower barriers between states. In particular, the tariff was deprecated as a means of fiscal support and industrial protection. New agreements and institutions were founded to be the administrators of the new system: GATT, IMF, World Bank, and the UN.

The neo-liberal order was never liberal in the traditional sense. It was managed from the outset by states under US dominance. The architecture was always more fragile than it appeared to be. The Bretton Woods agreement of 1944, tightened through the decades, involved nascent institutions of global banking and included a US-managed monetary system that broke down in 1971 and was replaced by a fiat-dollar system. The flaw in both systems had a similar root. They established global money but retained national fiscal and regulatory systems, which thereby disabled the specie-flow mechanisms that smoothed and balanced trade in the 19th century.

One of the consequences was the manufacturing losses mentioned above, which coincided with a growing public perception that the institutions of government and finance were operating without transparency and citizen participation. The ballooning of the security state after 9-11 and the stunning bailouts of Wall Street after 2008 reinforced the point and set the stage for a populist revolt. The lockdowns – disproportionately benefitting elites – plus the burning of cities with the riots of the summer of 2020, the vaccine mandates, and combined with the onset of a migrant crisis, reinforced the point.