At the dawn of the 21st century, countries in both the Global South and the former communist bloc were falling over each other to lower their trade barriers, liberalize their capital markets, and encourage their best and brightest to study in the West. Multinational firms were expanding their supply chains to bring workers from Mexico, China, Vietnam, India, and Russia into their fold. The internet had created entirely new ways for information to cross borders. Labor productivity was soaring and global poverty was falling.
U.S. politicians largely embraced this trend. Republicans and Democrats cooperated to negotiate trade agreements with both longtime friends and former foes. All this took place in a context of public optimism: In January 2000, 69 percent of Americans told Gallup they were satisfied with the country's direction.
Two decades later, things have not quite worked out the way many champions of free trade hoped at the end of President Bill Clinton's administration. Neither China nor Russia turned into liberal, free market democracies. Two decades of unending war have been peppered by financial crises, populist uprisings, and pandemics. Russia's invasion of Ukraine and the ensuing sanctions are merely the latest shock to the system.
Countries are now falling over each other to erect new barriers to trade, impose capital controls, and restrict migration flows. U.S. politicians have embraced this trend too: The strongest throughline between the Donald Trump and Joe Biden presidencies has been their hostility to economic openness. All this is taking place in a context of public pessimism: In March, just 22 percent of Americans told Gallup they were satisfied with the country's direction.
The souring of the 21st century has triggered accusations and recriminations about who bears responsibility for the end of "the end of history." Free trade advocates note the enormous benefits that economic liberalization has brought to the global economy and decry the rise of neo-mercantilism in the United States and elsewhere. But free trade's critics offer a challenging rebuttal: They argue the last two decades have exposed the internal contradictions of neoliberalism. As they see it, we're witnessing the natural response of societies buffeted by the vicissitudes of the free market; economic openness sowed the seeds of its own destruction.
There is a kernel of truth to this. But a kernel of truth is not the whole truth, and globalization's proponents do not need to completely rethink their priors. The benefits of trade and international engagement persist even in the current era.
Advocates of free markets still have a strong case to make, and they need to make it. This particular argument against an open global economy has been made before. When it triumphed, the result was world war.
Polanyi's Challenge
To understand the intellectual roots of today's resistance to free markets, the book to examine is Karl Polanyi's The Great Transformation.
Polanyi, writing in 1944, wanted to understand how the world had arrived at a low moment of depression, fascism, and war. Where writers like F.A. Hayek saw socialism's rise as a tragic result of state interference in free markets, Polanyi viewed it as the ineluctable backlash against those same markets' volatility.
There are three arguments in The Great Transformation that require recognition and response from free market enthusiasts. First, Polanyi pushed back vigorously against the assumption that unregulated markets were the "natural" state of the world. Governments take concerted action, Polanyi noted, to maintain the modern capitalist system.
One present-day example is intellectual property rights. To incentivize innovation and creativity, governments enforce laws that protect trademarks, patents, and copyrights. If the state did not do that, innovation would be lower but diffusion would be much more rapid, as films, software, and pharmaceuticals would be pirated almost immediately. The tradeoff of more innovation for less diffusion might be worth it, but getting there requires purposive government action.
Polanyi's second argument was that the ultimate result of laissez faire policies is "the demolition of society." According to The Great Transformation, human beings inevitably resist efforts to turn labor into a commodity. Market liberalization would produce rising inequality. And then, Polanyi's predictions turned rather gloomy: "Robbed of the protective covering of cultural institutions, human beings would perish from the effect of social exposure; they would die as the victims of acute social dislocation through vice, perversion, crime, and starvation. Nature would be reduced to its elements, neighborhoods and landscapes defiled, rivers polluted, military safety jeopardized, the power to produce food and raw materials destroyed."
Finally, Polanyi described what he called the "double movement." If the state consciously tried to create a marketplace disembedded from the rest of society, it would trigger blowback against markets. Exactly how that double movement manifested itself could vary. While socialists might call for expanded state support of the less fortunate, another possible response would be xenophobic nationalism. Polanyi drew a straight line from 19th century globalization to the horrors of the 1930s and '40s.
How accurate is all this in describing the current moment? If we look at the United States, we can see undeniable similarities. The hidden shocks from liberalizing trade with China and migration from Latin America, combined with the very prominent shock of the 2008 financial crisis, produced a lot of social disruption in the last 15 years. Throw in climate change, a pandemic, and great-power rivalries, and suddenly Polanyi's hyperbolic description of a society ravaged by the market starts to sound familiar.
Consciously or unconsciously, both left-wing and right-wing critics of the global economy rely on Polanyi's logic to connect the dots between neoliberalism and the current state of the world. In February, journalist Glenn Greenwald argued that Canadian trucker protests were "a long time in the making," saying the underlying discontent reflected "mass, widespread anger and even hatred toward the neoliberal ruling class throughout the West." That sentiment, he said, was bound to "find still-more extreme expressions."
Tucker Carlson's rants on Fox News are often premised on a similar logic. In April, for example, he claimed that "neoliberalism is looting with a smokescreen of race and gender politics so you won't notice that it happened." That ideology, he said, is "a cover for the distribution of wealth, a distribution that has become more lopsided in our age than at any age ever," representing "a shocking discredit to capitalism."
Testing the Bicycle Theory
The Great Transformation is an important critique, and it is unsurprising that people like Greenwald and Carlson have gravitated to some form of its arguments. Still, there are clear problems with applying it to the modern world.
To begin with, the countries that heeded Polanyi's warnings the most are facing the most severe populist blowback. The entire ethos of the European Union was to integrate the continent's economies while supplying an ample social safety net for those in need. Despite these efforts to cushion the market's effects, 21st century populism was percolating in Europe well before Trump won the American presidency, particularly in the countries with the strongest social safety nets. Hostility to economic migration has been a recurring theme of European politics for the last two decades, from fears of "Polish plumbers" inundating Western Europe to more recent backlashes against Syrian and Afghan refugees. Even Nordic states such as Sweden have turned far more nativist in the last decade. It seems implausible to blame laissez faire capitalism for this blowback.
Research on the rise of populism provides further reason to be skeptical of that thesis. Most analyses of support for Brexit and Trump—most prominently from political scientists Pippa Norris and Ronald Inglehart—have found that cultural backlash was the predominant factor. To put it crudely, working-class whites reacted to perceived losses in social and economic standing by embracing a reactionary brand of politics and blaming immigrants and minorities for their troubles. As Cas Mudde, one of the deans of populism research, wrote a few years ago, the debate between cultural backlash and economic anxiety was debated by populist scholars for decades, and settled in favor of the cultural backlash hypothesis.
Also contrary to Polanyi's thesis, most Americans have not turned against globalization. In the United States, there is a striking mismatch between the way politicians talk about how voters think about trade and immigration and the way voters actually think about these issues.
According to the politicians, Americans are fed up with the job-destroying impact of international trade and the wage-lowering impact of immigration. That take was apparent in Congress' response to Biden's first State of the Union address. The biggest applause line was the president's promise that "when we use taxpayer dollars to rebuild America, we are going to buy American: buy American products to support American jobs."
Polling data paint a different picture. In 2021, according to Gallup, 79 percent of Americans viewed trade positively—a record number. While that percentage dropped to 63 percent in 2022, it was still considerably higher than it was during the heyday of globalization in the late 1990s. Gallup's results on immigration are similar: From 2000 to 2022, the percentage of Americans who wanted more immigration more than tripled, while the percentage who wanted less immigration fell by nearly half.
But even if hostility to globalization does not appeal to the median American voter, it does have some appeal to the pivotal American voter. In the last few election cycles, the key to victory has been through the Rust Belt, and that meant demonstrating fealty to the idea that America used to be great before globalization. Furthermore, supporters of free trade and immigration do not place a high priority on those issues, while its salience for opponents is much higher. That explains why U.S. Trade Representative Katherine Tai is convinced that Hillary Clinton lost in 2016 in no small part due to the Trans-Pacific Partnership, a proposed trade pact among the United States and 11 other countries.
In response to this political reality, successive administrations have taken whacks at the open global economy. The Trump administration withdrew from the Trans-Pacific Partnership, sabotaged the World Trade Organization (WTO), raised tariffs across a wide variety of goods, launched a trade war with China, and expended significant effort to reduce migration to the United States. The Biden administration has continued most of these policies.
No progress has been made on reviving the WTO as a force for trade liberalization. There has been a moratorium on new trade deals. Tai has insisted despite all evidence to the contrary that the China tariffs provide bargaining leverage, so the trade war with China persists. The Biden administration has made scant effort to increase immigration flows.
The two administrations' signature foreign economic deals reflect their resistance to the open global economy. The Trump administration renegotiated the North American Free Trade Agreement, which became the more restrictive United States–Mexico–Canada Agreement (USMCA). The Biden administration launched the Indo-Pacific Economic Framework for Prosperity to entice partners away from excessive dependence on China. The most telling fact about this proposed agreement is that it does not include what trade negotiators call "market access"—i.e., reduced import barriers. This is a trade deal with no additional trade in it.
Although critics like Greenwald and Carlson attack the current administration as neoliberal, Biden's team is just as prone to repeating Polanyi's critique as they are. "To Biden's officials," Politico noted in May, "the last four decades of neoliberal economic policy—pursued through tax cuts, weaker regulations and pro-globalization trade deals—are largely to blame for today's spiraling inequality and economic nationalism."
The response to Russia's unprovoked invasion of Ukraine intensified the attack on global openness. The unprecedented sanctions imposed on Russia have segmented the global economy, increasing food and fuel prices. More than 700 multinational corporations pulled back from their operations in Russia, far exceeding what was legally required. The longer the war goes on, the more permanent the spike in geopolitical risk seems. Little wonder that a host of investment letters joined BlackRock's Larry Fink in warning that Russia's invasion "has put an end to the globalization we have experienced over the last three decades."
Once upon a time, when the United States was the international leader of trade liberalization, policy wonks talked about the "bicycle theory" of trade negotiations. The metaphor was simple: For all the benefits of freer trade, ideological and interest-group opposition to it was always strong. If trade negotiators continued to push for greater openness, the trade bicycle would maintain speed and be easy to ride. But if momentum stalled, the whole edifice would tip over like a bicycle that slows to a crawl. Protectionist forces would agitate for exceptions, carve-outs, and restrictions, making the global economy less and less free.
In the next few years, we will find out if the bicycle theory was right, because it is safe to say that U.S. economic liberalization has ground to a halt. Thanks to Polanyi's double movement, over the past five years the United States and the global economy have halted the push toward openness and are trending toward closure.
Making Economies Less Resilient
The Great Transformation posited that a shift toward unregulated markets would trigger a social backlash, leading to a re-regulated economy. But what happens when a more protectionist economy creates its own forms of economic malaise? Maybe the next double movement will force a return to a more open economy.
Inflation is the most obvious way that increased protectionism has been a drag on the U.S. economy. One underrated benefit of an open global economy is that trade increases productivity, which allows the economy to grow at a faster rate without triggering price hikes. This is particularly true of the United States. Greater demand for goods can be absorbed by greater imports; greater demand for labor can be met by a large influx of foreign workers.
During the pandemic years, the federal government sustained demand through fiscal and monetary stimulus. It paid considerably less attention to the supply side of the ledger, helping fuel a surge of inflation unseen since the 1970s.
Americans continued to buy imported goods at record levels, regardless of the tariffs, and that contributed to rising prices. The Peterson Institute for International Economics estimates that if the United States ended the trade war with China, eliminated steel and aluminum tariffs, and ended softwood lumber duties on Canada, the inflation rate would be cut by 1.3 percentage points. "Removing the China tariffs is the single-largest policy lever to bring down inflation that President Biden has," economist Jason Furman declared in April. Within the Biden administration, both Treasury Secretary Janet Yellen and (now-former) Deputy National Security Adviser Daleep Singh suggested lifting tariffs as one way of fighting short-term inflation.
By itself, trade liberalization will ameliorate inflation but not cure it. Indeed, many critics of globalization argue that the global supply chain stresses caused by the pandemic reinforced the case for insourcing. The Biden administration has echoed that argument, which overlooks something economists have been trying to explain for years: Countries that are more integrated into global value chains experience far fewer price shocks than less integrated countries.
The idea that globalization enhances economic resilience is counterintuitive, especially as China seems to shut down its port facilities on a regular basis. So, consider the baby formula crisis that emerged this spring.
This is a market where the United States is usually self-sufficient: 98 percent of infant formula consumed by Americans is manufactured in the United States. The market suffered a supply shock when the formula produced at one Michigan plant was recalled due to suspected bacterial contamination; the Food and Drug Administration (FDA) subsequently shut down the plant.
That is exactly the sort of situation in which imports can smooth out supply. But thanks to the Trump and Biden administrations, that did not happen. Infant formula is subject to tariff-rate quotas of 17.5 percent after certain quantities are imported. The USMCA sharply limited how much formula Canada could export to the United States. The FDA prevented imports from the European Union over picayune disputes about labeling.
The result: By May, more than 40 percent of stores were out of baby formula, and the military was airlifting emergency supplies from Europe. "We're seeing what happens when we reduce trade with other countries for an essential good," The Atlantic's Derek Thompson observed. "We're more vulnerable to emergencies like a bacteria-infested plant in Michigan." Protectionism and excessive regulation make an economy less resilient during such emergencies.
An immigration shortfall, created by the pandemic and increased restrictions, is also taking a toll. Economists estimate that 2 million fewer working-age immigrants entered the United States than would have been the case if pre-2020 migration patterns had persisted. Contrary to public perception, most of these missing immigrants would have been college-educated. The sectors of the economy that are most dependent on immigrants, including hospitality, food service, and STEM-related fields, have seen especially high rates of unfilled jobs. And that, in turn, has helped push prices higher.
The Trump and Biden administrations have either imposed or maintained a welter of policies designed to restrict and regulate the cross-border movement of goods, services, and people. That has made the United States not more resilient but less productive and more vulnerable to local shocks. As Edward Alden recently warned in Foreign Policy, "it is often a small step from prudent self-sufficiency to damaging attempts at autarky."
The Next Reagan
One could argue that there have been three double movements in the last 150 years. In response to the 19th century era of globalization, the major economies of Europe launched a series of trade wars against each other in a prelude to World War I. The global economy opened up again in the 1920s. But as the Great Depression worsened, the large economies ratcheted up tariffs, restricted immigration, or engaged in beggar-thy-neighbor policies in the run-up to World War II.
The last double movement came after the United States went off the gold standard in 1971. The result was a decade of inflation, a surge in commodity prices, and an explosion of protectionism. But unlike the previous two waves, the backlash of the 1970s was channeled into President Ronald Reagan's sunny optimism of the 1980s.
Reagan was not a consistent free trader. His administration pioneered the practice of voluntary export restraints—in which the exporting country voluntarily restricts its exports, a tactic that hurts consumers while benefiting domestic producers—that Trump's chief trade negotiator embraced as his preferred tactic. But Reagan negotiated trade deals, supported increases in immigration, and repeatedly argued that globalization would benefit the United States and the classical liberal values it held dear. When Reagan made Americans more optimistic about the future, he made them more enthusiastic about an open global economy.
Americans are anything but optimistic right now, and critics will continue to use Polanyi-like arguments to blame the excesses of neoliberalism. But protectionists have been in power for the last six years, and their policies are partially responsible for steep inflation, goods shortages, and a faltering service sector. Perhaps this next decade will produce a successor to Reagan, someone who can marry hard-headed economics with the optimism necessary to sell it.
The alternative is dire. "The true nature of the international system under which we were living was not realized until it failed," Polanyi wrote in The Great Transformation. "Hardly anyone understood the political function of the international monetary system; the awful suddenness of the transformation thus took the world completely by surprise….When it broke, the effect was bound to be instantaneous."
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