A Crack in the Neoliberal Front
On the margins of World Bank/IMF week earlier this month, Adam Posen of the Peterson Institute joined the Atlantic Council’s International Economics Chair, Josh Lipsky, to “survey the new economic geography.” During that conversation, Posen acknowledged the existence of neoliberalism and went on to say that it had failed to identify the risk of supply chain concentration. This represents a significant shift in the trade conversation.
Post-Neoliberalism Gets a Centrist Boost
Posen gave credit to the Trump and Biden Administrations for recognizing what neoliberals had missed. In fairness, the credit should go to Barry Lynn of the Open Markets Institute, who flagged this issue two decades ago. But it is significant that Posen recognized: (1) neoliberals exist, (2) they made a mistake, and (3) the mistake led to supply chain concentration.
To get a feel for how significant a shift this is, take a look at this session Posen moderated two years ago with former Bush USTR Bob Zoellick and former Clinton Treasury Secretary Larry Summers. That discussion was not too long after then-USTR Katherine Tai delivered this speech addressing the systemic drivers of supply chain concentration (at an event hosted by Lynn).
Posen’s conversation, though, was mostly one in which princes of neoliberalism devoted the better part of an hour to defending it. Zoellick expressed great alarm at what he called an “ideological assault” by the Biden Administration on Clinton/Obama trade policies. (Correct!) Summers defended the last 50 years of trade policy as “good mercantilism.” Très neoliberal!
As is often the case, an idea that seems heretical in the moment can become conventional wisdom over time. See: Galileo. And so if, just two years after that session in which the ancien regime was defended rather than challenged, Posen is acknowledging that neoliberalism messed up supply chains, then the transition from heresy to wisdom is near complete. Neoliberalism is on its way to becoming a reactionary ideology.
As debates rage over election strategy and whether Democrats need to tack to the center or move left, it’s important to remember that “centrism” isn’t a fixed position. Claiming to be “centrist” is a handy rhetorical proxy for saying “I’m a reasonable person” without having to dig into any particular policy issue. But what constitutes the center shifts over time. Which is why a lot of centrist Democrats are, perhaps unwittingly, way to the right of Dwight Eisenhower on economic issues. And then they scratch their heads and wonder why so many members of the working class have jumped ship, concluding - smugly - that people don’t vote in their own interest. If you don’t want to take responsibility for having betrayed those interests, that’s one way to do it, though not likely to bring anyone back into the fold.
Embedded Neoliberalism
That said, it’s important to recognize that the transition away from neoliberal trade policy is a process. Like many who come to appreciate the supply chain concentration problem, Posen goes on to argue that TPP is part of the solution. But once you recognize that supply chain concentration risk is something we missed during the neoliberal era, intellectual honesty will require you to trace that realization through all the related policies.
“Owning the “oopsie” on supply chain concentration means not pushing the kinds of rules that got us there. Otherwise, when the next pandemic hits, we’ll have the same lethal result — a result that was also inflationary.”
A creature of neoliberalism, TPP embeds the very problem Posen now acknowledges. It’s why the pandemic, which highlighted the lethal risks of supply chain concentration, can be considered a line of demarcation between the neoliberal and post-neoliberal eras. In the Biden Administration, we knew that pre-pandemic supply chain rules led to pandemic-era results. We did not pursue FTAs because we felt there was analytic work to be done to avoid repeating past mistakes.
It’s understandable, if unfortunate, that so many continue to reach for agreements that perpetuate the very flaws they think they’re solving for. It’s not just Posen - it’s most of the foreign policy/econ/trade blob. Almost no one has read all 6,000 pages of TPP, especially not the very opaque supply chain rules. And that’s ok. But owning the oopsie on supply chain concentration means not pushing the kinds of rules that got us there. Otherwise, when the next pandemic hits, we’ll have the same lethal result - a result that was also inflationary.
If you want the public to really quit listening to the “expert” class, then failing to correct for a massive public policy failure is a good way to go about it.
“Efficiency” & Short-Termism
“Just-in-time practices were exposed as delivering nothing like an economist’s idea of efficiency, which contemplates terrible as well as good states of the world.”
The ideology Zoellick mourned was rooted in the belief that multinational corporations would make good decisions and deliver “efficiency.” But that’s precisely the thinking that led to these supply chain chokepoints. When MNCs prioritize short-term profits in pursuit of share price, they often do so at the expense of longer-term, tail risk considerations — like concentration risk. The most important thing I learned from working on the Senate London Whale investigation was that the profit motive corrupts judgment. The pressure to make money and avoid losses leads to poor decision-making.
As we speak, we can’t even count on MNCs to care about forced labor in their supply chains. They only respond to the incentives we impose on them, a circuit breaker to override the instinct to prioritize short-term profit. Highlighting the flaws of relying on these companies to deliver “efficiency,” former UK central banker Paul Tucker writes in his excellent book Global Discord that “just-in-time practices were exposed as delivering nothing like an economist’s idea of efficiency, which contemplates terrible as well as good states of the world.” Indeed!
“We’ve created permanent rules that won’t accommodate a fundamental change in how companies source. So you end up with a mismatch between what we want to companies to do, and what the rules incentivize them to do.”
When I was on Capitol Hill fighting with USTR over the leaky supply chain rules of TPP, the defense offered was “these rules reflect just-in-time manufacturing.” I said “what happens if just-in-time manufacturing stops being the business model? We’ll have locked in rules based on an outdated approach.” Things change!’ So it is that we end up with a mismatch between what we want to companies to do, and what the rules incentivize them to do.
I have sympathy for the superficial allure of TPP among those who are put off by current U.S. trade policy. The United States is learning in real time what it means to have a supply chain dependency on a geopolitical rival while having antagonized friends and allies who could work with us to solve the problem. On Liberation Day, we hit not just foes, but friends and allies because our corporate masters don’t like their regulatory policies. As a result, those friends and allies are running for the TPP hills. And not just the TPP hills, but the pre-pandemic FTA hills more generally. They think it’ll help them diversify away from the PRC and the United States.
It’ll do neither.
Recent FTAs: Pre-Pandemic Rules in a Post-Pandemic Era
The UK has a trade deal with India, and the EU is finally trying to get its agreement with Mercosur across the finish line. Let’s look under the hood at the supply chain rules in those agreements to get a better understanding of how they relate to the supply chain concentration problem.
TPP: A decade ago we put out this paper on the auto supply chain rules in TPP. It holds up today – when the pressure on non-Chinese automotive industries is even greater. (Page 17 references the discussion around “just in time” manufacturing.)
EU/Mercosur: A skim of the EU/Mercosur rules suggests they are, unsurprisingly, not much better. As much as 45% of the content of a car can come from outside of the EU/Mercosur region? It looks to be 40% for aircraft (or less - if I’m reading the rule correctly, it provides an option to source all the parts from outside the region).
This is a trade agreement involving 40 countries! They can’t supply half the content of goods core to their collective industrial base? And if they can’t today, don’t they want to incentivize it over time, by progressively ramping up the percentage?
What we saw during the pandemic was PRC dominance not just of finished goods, but of inputs. If you allow so much content to come from outside the trade agreement region, have you really diversified? Ask an EU official and you’re likely to hear “That’s what industry wants, though.”
If I’m France or Germany, those aircraft/auto rules make me want to take a second look.
To boot, the agreement does not have the enforceable labor and environmental rules that even libertarian Republicans in the United States have supported since 2007. Before anyone says “but enforceable labor standards are neocolonial,” let’s recall that it was Latin American countries who requested enforceable labor standards during the ITO Charter negotiations in the late 1940s. They understood the risks of worker exploitation in a globalizing economy.
Coat of Arms of the British East India Company
UK-India: They have different methods for calculating content, but the rules for cars and aircraft are roughly the same. The UK does seem to export cars and turbo-jets. How much of the content of these goods will come from outside the UK/India region? Notwithstanding their tense relationship, will India end up becoming a pass-through for Chinese parts? And on the labor and environmental rules, same as the EU. From the UK Labour Party!
It’s a particularly salient opportunity to highlight why calling enforceable labor rules “neocolonial” is counterhistorical. When we think of the British East India Company, do we also think “yes, that was really good for workers in India”? No. It was fundamentally exploitative. Latin American countries got their ask for enforceable labor rules in the ITO Charter — and both the UK and India signed up. In 1948. How can we be so unenlightened eight decades later?
In the meantime, Canada has signed a trade agreement with Indonesia. The text isn’t public yet, but odds are it suffers from similar challenges. Canada is also floating the idea of a trade deal with ASEAN more broadly, as well as a rapprochement with the PRC. I have my doubts about whether any of that is in Canadians’ interest, though as noted above, the superficial allure of it is understandable. But whether it’s good for Canadians or not, it’s definitely not good for the United States — and might partly explain the trade push from our friends to the North. Not unlike going on a date to annoy your ex.
Legitimacy
“Those agreements were designed by and for modern-day British East India Companies, whose allegiance is ultimately to themselves.”
East Wing, Christmas 2022
In Global Discord, Tucker emphasizes the importance of legitimacy. We have to recognize that the backlash against the old version of globalization involves just that — legitimacy. Those agreements were designed by and for modern-day British East India Companies, whose allegiance is ultimately to themselves. That is on display every day as American tech titans leverage the power of the U.S. government to try to compel trading partners to change their laws and regulations (while those companies are also footing the bill for the demolition of the White House’s East Wing). The dynamic of corporations exerting influence over elected officials to boost their monopolies is one of the central concerns of Wealth of Nations.
Tucker isn’t the only former banker to express dismay over where we’ve landed. I was in a discussion with an ex-finance minister. By the end of it, the conversation had zeroed in on who in the United States benefited from the last 40 years of globalization. I pointed out that under the neoliberal version of “free trade,” it was MNCs and financiers. He came to the same conclusion albeit through a different mechanism — MNC tax-dodging and the demise of the OECD tax deal are what got his goat. He reflected a bit and said: “I’ve never thought of myself as a neoliberal.” And then added: “At this point, I say — burn the whole thing down.”
When you’re outflanked on the left by a free-trading former finance minister, you know the times they are indeed a-changin’.