The Post-Neoliberalism Moment

Back in the day, columnists for the Financial Times were of a type. They were predominantly pale, male, Oxbridge-educated world travelers. Their politics ranged from centrist to libertarian right. Most importantly, they were fans of neoliberalism.

The term neoliberal has been stigmatized far more successfully than it has been defined. For our purposes, it refers to a set of policy ideas that became strongly associated with the so-called Washington Consensus: a mix of deregulation, trade liberalization, and macroeconomic prudence that the United States encouraged countries across the globe to embrace. These policies contributed to the hyperglobalization that defined the post–Cold War era from the fall of the Berlin Wall to Brexit.

Neoliberalism was embraced by policy makers from both major parties. For free market Republicans, neoliberalism meant scaling back barriers that stunted market efficiency. For moderate Democrats, it was viewed as a set of policies that could lift the poorest of the poor out of poverty. What united those across the political spectrum was the belief that neoliberalism fostered greater economic interdependence, which could, in turn, generate global peace and prosperity. After all, why would China ever go to war with the West if it could get rich by trading with it instead?

In recent years, however, the Financial Times has hired some new voices who share a deep suspicion of neoliberalism. Last fall, economic historian Adam Tooze's inaugural Financial Times column pushed the idea of a "polycrisis"—a series of disparate shocks that threaten the world as we know it. The neoliberal failure to avert or alleviate the polycrisis has become a central theme in Tooze's recent work. Meanwhile, another recent Financial Times hire, Rana Foroohar, wrote multiple columns, a book, and a Foreign Affairs article exulting in the demise of neoliberalism as an economic model.

Foroohar's Foreign Affairs piece was frankly titled "After Neoliberalism." In it, she called China's entry into the World Trade Organization (WTO) "a seismic shift that removed the guardrails from the global economy." She predicted that politics "will have a greater impact on economic outcomes than it has for half a century." She concluded that countries will have to "rethink the balance between growth and security, efficiency and resilience." Foroohar might still be an outlier in the pages of the Financial Times, but her philosophy fits snugly with the prevailing sentiment in the world's major capitals. Anyone advocating neoliberal policies is now persona non grata in Washington, D.C.

Despite America's growing political polarization, Democrats and Republicans seem to agree the globalization of yesteryear should be put out of its misery. In his 2017 inaugural address, President Donald Trump declared: "We must protect our borders from the ravages of other countries making our products, stealing our companies and destroying our jobs. Protection will lead to great prosperity and strength." In this dimension, President Joe Biden has represented continuity rather than change. He kept Trump's steel and aluminum tariffs in place. His administration has continued to veto any appointments to the WTO's Appellate Body, thereby hindering the ability to settle trade disputes. The Washington Post recently concluded that he "is making it clear that the United States' rejection of full-throttle globalization during the Trump administration was no aberration." Biden's Office of the United States Trade Representative was so pleased with this assessment that it blasted the article out to trade reporters. In his 2023 State of the Union address, Biden declared, "On my watch, American roads, American bridges, and American highways will be made with American products." The line earned him his biggest applause of the evening.

In the 16 years since the 2008 financial crisis, neoliberalism has taken a rhetorical beating; New Yorker essayist Louis Menand characterized it as "a political swear word." Until recently, no coherent alternative set of ideas had been put forward in mainstream circles—but that has been changing. A welter of think tanks ranging from the Institute for New Economic Thinking to the Roosevelt Institute have sponsored new initiatives in heterodox economics. In 2020, the Hewlett Foundation announced a five-year, $50 million commitment to "help develop a new intellectual paradigm to replace neoliberalism." That funding has started to yield benefits to its proponents. Foroohar has described Hewlett's conferences as "a kind of Mont Pelerin Society for people who want to move beyond neoliberalism." After attending a Hewlett conference this past spring, The American Prospect's Robert Kuttner wrote, "We've just about won the battle of ideas. Reality has been a helpful ally. The core neoliberal claim that the economy would thrive if government just got out of the way has been demolished by the events of the past three decades."

These ideas are being shaped by powerful officials. The primary difference between Biden and Trump in this area is that Trump's opposition to globalization was based on gut instincts and implemented as such. The Biden administration has been more sophisticated. Policy principals ranging from U.S. Trade Representative Katherine Tai to National Security Adviser Jake Sullivan have been explicit in criticizing "oversimplified market efficiency" and proposing an alternative centered far more on resilience. This shift is evident in the administration's signature economic policy accomplishments to date: The Infrastructure Investment and Jobs Act, the CHIPS and Science Act, and the Inflation Reduction Act all represent a pivot to industrial policy—a focus on domestic production.

Given the various shocks hitting the global economy over the past decade, it seems intuitively obvious to focus more on resilience. But what if this intuition rests on a false premise? The claims of a "post-neoliberal" paradigm rest on the belief that there is a tradeoff between resilience and efficiency, between strategic autonomy and globalization. But it seems increasingly clear these values are not mutually inconsistent. The best hope for economic resilience might come not from post-neoliberal policies but from neoliberal ones.

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"If all politics is local, the same could soon be true for economics," Foroohar argued in her Foreign Affairs essay. She elaborated: "Nationalism isn't always a good thing, but questioning the conventional economic wisdom is. Rich countries such as the United States cannot outsource everything save finance and software development to emerging markets without making themselves—and the broader economic system—vulnerable to shocks."

Foroohar and others argue the "China shock"—the sustained negative economic effects felt in U.S. manufacturing regions in response to China's entry into the WTO—widened the divide between America's haves and have-nots. In an April 2023 speech, Sullivan declared that the new Chinese competition "hit pockets of our domestic manufacturing industry especially hard" and that this "wasn't adequately anticipated and wasn't adequately addressed as it unfolded." Other critics were even more outspoken. University of California, Berkeley, international relations and legal scholar David Singh Grewal has argued China's rise falsified David Ricardo's theory of comparative advantage in trade. "In a world of semiconductors, electronics, and pharmaceuticals—in addition to wine and wool—the old model of trade no longer applies," he wrote recently in American Affairs. "Comparative advantage is given not so much by nature but by industrial policy….This means it is possible for one country's gains to come at the expense of another country." Unsurprisingly, the Hewlett Foundation promoted and sponsored Grewal's work.

The pandemic and the economic chaos it unleashed convinced many that too much efficiency led to too little resiliency. Shortages of everything from cars to toilet paper seemed to show problems with relying on other countries when an infectious disease is running amok. In one interview, Katherine Tai explicitly referenced COVID-19 to illustrate the flaws of neoliberal globalization: "Whether it was personal protective equipment, masks, gloves, or ventilators early in the pandemic or the semiconductor chip shortage that impacted all of us, we see global supply chains that were designed for efficiency, chasing the lowest cost, without recognition that concentrations of supply and production create significant risks and vulnerabilities."

For post-neoliberals, the final nail in the neoliberal coffin was Russia's invasion of Ukraine and the knock-on effects it had on the global economy. Food prices spiked as Ukraine became unable to supply grain. Europe became acutely aware its dependence on Russia for cheap energy had increased its strategic vulnerability. Russia's invasion suggested the benefits of global trade were insufficient to tame revanchist claims on territory. Given China's aspirations to reunify with Taiwan, any lessening of the power of economic interdependence to function as an adequate constraint is a wake-up call for America's grand strategists.

The proponents of post-neoliberal ideas can now cite respected peer-reviewed scholarship to buttress their claims and can count powerful politicians in their corner. On the China shock, they can reference David H. Autor, David Dorn, and Gordon H. Hanson's work demonstrating that U.S. labor markets failed to adjust properly to Chinese imports. On the risks created by the pandemic and great power competition, they can reference Henry Farrell and Abraham L. Newman's work on weaponized interdependence, demonstrating how Chinese control of rare earths or Russia's control over energy can threaten the U.S. and its allies. One Trump official told historian Chris Miller, "Weaponized interdependence…it's a beautiful thing." As for the Biden administration, Kuttner happily concluded that it "has explicitly disavowed all aspects of neoliberalism, including the assumptions about free trade."

Post-neoliberals have been positively giddy about their newfound status in the past year. The Roosevelt Institute recently published a retrospective by some Biden alumni on the policy revolution they have wrought. In the foreword, Todd N. Tucker enthused that today's debates "are taking place within a new, exciting, and suddenly broadly shared paradigm that offers a sharp break from neoliberal 'free-market' ideology." The combination of real-world events, academic analyses, and policy relevance has infused post-neoliberal ideas with energy.

But are these ideas actually correct?

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The China shock was undeniably real. Some American communities struggled mightily from the loss of manufacturing. But there are two problems with the way post-neoliberals frame what happened.

First, it is presented as an ongoing and persistent problem. Yet economists agree the shock began fading more than a decade ago and has completely dissipated in recent years. Arguing for more protectionism now over the China shock is like arguing for closing the barn door long after the animals have left.

Second, the costs of the China shock had less to do with trade policy and more to do with federal, state, and local authorities failing to respond to it. Writing in 2020, the Cato Institute's Scott Lincicome observed a vast gulf between affected regions: Some American towns thrived with new investments, while others were "still reeling from a trade shock that ended a decade ago." This suggests the problems from the China shock had less to do with import competition and more to do with variations in community response.

This is not just the conclusion of the free traders at the Cato Institute; it is the conclusion of the authors of the original China shock paper. In a follow-up paper published by the National Bureau of Economic Research in 2021, they rejected the idea that admitting China into the WTO was a mistake: "We are aware of no research that would justify ex-post protectionist trade measures as a means of helping workers hurt by past import competition." Their point was not that admitting China into the WTO was a net negative for the U.S.; it was that the failure to adjust the domestic social safety net prevented China's entry from being a win-win outcome. "Few economists would interpret our empirical results as justifying greater trade protection," they explained. In fact, "quantitative models indicate that U.S. aggregate gains from trade with China are positive."

Even with these caveats, post-neoliberals would argue this simply reinforces the importance of location in economic production. Both the pandemic and the Ukraine war have shown the fragility of the global supply chain, they'd argue. Europeans as well as Americans have articulated such fears. During the early stages of the pandemic, European Commission Vice President Věra Jourová concluded that COVID "revealed our morbid dependency on China and India as regards pharmaceuticals." NATO Secretary General Jens Stoltenberg stated in 2022 that the Ukraine war "demonstrated our dangerous dependency on Russian gas. This should lead us to assess our dependencies on other authoritarian states, not least China."

Yet the more economists study the effects of the pandemic, the less evidence they find for the argument that globalization reduces resilience. Almost all of the shortages that occurred during the pandemic had little to do with globalized supply chains. Rather, they sprang from two causes. First: In many instances, producers and suppliers were caught short by radical shifts in the composition of demand. Semiconductor shortages were not due to a reduction in production but a shift from using them in automobiles to using them in video games. By the time auto manufacturers realized they had overestimated the falloff in demand, the semiconductors they needed were being used to power Xboxes. Second, and relatedly: Some firms relied so heavily on lean manufacturing techniques that they lacked the inventory to cope with even a mild perturbation in their supply chains.

Meanwhile, the more globalized supply chains were, the more resilient they were in the face of the pandemic. One study of Indian producers found that in the areas hardest hit by the pandemic, it was the producers who relied on more complex supply chains that were more able to weather the storm. Apparently, such firms tended to be more conscious of the risks from disruption and thus better prepared to cope with shocks.

This phenomenon was not limited to the subcontinent. Economists Pinelopi K. Goldberg and Tristan Reed recently looked at whether the global economy suffered from shortages due to disruptions in the global supply chain. They found the exact opposite. That's because an economy with thoroughly nationalized supply chains increases its vulnerability to localized shocks. Even in instances like personal protective equipment (PPE), the evidence strongly suggests economies more reliant on imports were able to recover their stocks far more quickly than those that tried to produce more PPE indigenously.

"In sum," they write, "despite the prominence of resilience concerns in the public debate in the past three years, the evidence to date provides no support either for the view that global supply chains were not resilient during the pandemic or that the world economy would have been more resilient if there had been less dependence on foreign inputs and trade…unless a sector is highly dependent on a single import source (as is the case with the dependence of the energy sector in Europe on Russia), international trade seems to contribute to resilience, not compromise it." They conclude "it is unlikely that trade restrictions will improve countries' resilience." In other words, a more globalized economy might prove to be a more resilient economy. The post-neoliberal emphasis on the location of production is largely misplaced.

The big lesson to draw from the pandemic is that globalization weakened robustness—i.e., the ability to maintain the status quo in the face of shocks. While resilient structures can bend without breaking, robust structures have the resources to withstand sustained shocks, so it would be wise for companies to hold greater inventories. Adam Posen, president of the Peterson Institute for International Economics, recently offered a simple diagnosis for this problem: "Stockpile strategic reserves and turn to trade with other places."

European dependence on Russian energy does highlight the potential problem of weaponized interdependence. Farrell and Newman stress this point in their new book, Underground Empire: How America Weaponized the World Economy. As their book's subtitle suggests, the primary weaponizer of interdependence is neither Russia nor China but the United States. Indeed, Farrell and Newman have repeatedly warned about the dangers of relying too much on weaponized interdependence as an instrument of foreign policy. As they note, Chinese efforts to bolster its capacity for economic coercion were constrained by the ill will they had sowed over the past decade. They also warned that "American officials, like their Chinese equivalents, had difficulty understanding how their own actions helped feed the widening gyre."

Meanwhile, weaponized interdependence seems no more effective than more conventional economic sanctions. After the United States coerced Iran into signing a nuclear deal in 2015, one would be hard pressed to find another successful example. U.S. sanctions against Russia failed to coerce Moscow out of Ukraine; Russian efforts to coerce Europe to stop supporting Ukraine failed as well. The Trump administration's efforts to pressure Iran show weaponized interdependence can wreak havoc on a middle power but cannot necessarily compel it into acquiescence.

Make too many efforts to weaponize interdependence, and you can erode the mutual benefits of interdependence. U.S. and European officials like to claim they are not interested in decoupling from China but in derisking. Ask anyone who knows anything about economic sanctions—including the U.S. Treasury—and they'll tell you that "derisking" is when coercive measures force out more legitimate economic exchange than originally intended. Aim for derisking, and you may come closer to decoupling instead.

As China is forced to be less dependent on developed economies, the constraints of complex interdependence also fall by the wayside. Eurasia Group's Ali Wyne warns we may soon have "weaponized detachment," the condition "in which greater economic independence emboldens states to act more aggressively." This is why Farrell and Newman do not want the United States to retreat from globalization: "Instead of withdrawing from global networks, the United States must learn to live with them. Doing so will give the United States new powers and generate enormous vulnerabilities, and policymakers will need to carefully manage both."

Post-neoliberals believe that after decades of dealing with derision from economists, they finally have social science research on their side. But the very experts they cite most have made it clear that while neoliberalism has its problems, post-neoliberal policies would lead, on net, to economic and strategic losses.

A key assumption behind post-neoliberalism is that policy makers can implement the right policies in the right way to nudge markets in the right direction. Talk to Biden administration policy makers, however, and one senses a bit more uncertainty about the whole process. Phrases like, "we're all trying to figure this out in real time" and "we're building the plane as we're flying it" abound. Congress has forced additional changes to some of their trade ideas. The closer one gets to Washington, D.C., the more skeptical one becomes of the government's ability to implement the best version of post-neoliberalism.

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Many critiques of neoliberalism are grounded in reality. Even some libertarians have acknowledged that economists underestimated the effects of the China shock. The pandemic and the Ukraine war have raised valid questions about when and how globalization actually works. Climate change is beyond the scope of this essay, but there is no denying that globalization has been part of the problem as well as part of the possible solution. And as China turns more autocratic and nationalist, the case for export controls will get stronger.

But while the post-neoliberal critique is worth considering, it is flawed in multiple ways. The China shock has been over for quite some time. The alleged tradeoff between resilience and efficiency might not be a tradeoff after all. Weaponized interdependence is a thing—but its impact on international politics is far from widespread, and the biggest weaponizer has been the United States. There are costs to globalization, but the benefits are still greater. Post-neoliberal policies could produce a Western economy that is both less efficient and less resilient. The International Monetary Fund has estimated the costs of continued geoeconomic fragmentation could exceed 7 percent of global economic output. Some of that is due to strained Sino-American tensions, but not all of it.

Post-neoliberals are having a moment. If it continues for too long, the result could be a less productive, less resilient, more warlike economy.