deals, such as the North American Free Globalization’s Trade Agreement, took o around the same time. Wrong Turn In Ãnance, the change was marked by a fundamental shift in governments’ attitudes away from managing capital And How It Hurt America Áows and toward liberalization. Pushed by the United States and global organi- Dani Rodrik zations such as the International Mon- etary Fund and the Organization for Economic Cooperation and Develop- lobalization is in trouble. A ment, countries freed up vast quantities populist backlash, personiÃed o” short-term Ãnance to slosh across Gby U.S. President Donald borders in search oÊ higher returns. Trump, is in full swing. A simmering At the time, these changes seemed to trade war between China and the United be based on sound economics. Openness States could easily boil over. Countries to trade would lead economies to allocate across Europe are shutting their borders their resources to where they would be to immigrants. Even globalization’s the most productive. Capital would Áow biggest boosters now concede that it from the countries where it was plentiful has produced lopsided beneÃts and that to the countries where it was needed. something will have to change. More trade and freer Ãnance would Today’s woes have their roots in the unleash private investment and fuel global

WHAT HAPPENED TO THE AMERICAN CENTURY? 1990s, when policymakers set the world economic growth. But these new on its current, hyperglobalist path, arrangements came with risks that the requiring domestic economies to be put hyperglobalists did not foresee, al- in the service o” the world economy though economic theory could have instead o” the other way around. In predicted the downside to globalization trade, the transformation was signaled just as well as it did the upside. by the creation o” the World Trade Increased trade with China and other Organization, in 1995. The ´¢£ not only low-wage countries accelerated the made it harder for countries to shield decline in manufacturing employment themselves from international competi- in the developed world, leaving many tion but also reached into policy areas distressed communities behind. The that international trade rules had not Ãnancialization o” the global economy previously touched: agriculture, services, produced the worst Ãnancial crisis since intellectual property, industrial policy, the Great Depression. And after the and health and sanitary regulations. crash, international institutions promoted Even more ambitious regional trade policies o” austerity that made the damage even worse. More and more o” DANI RODRIK is Ford Foundation Professor of what happened to ordinary people International Political Economy at the John F. seemed the result o” anonymous market Kennedy School of Government at Harvard University and President-Elect of the Interna- forces or caused by distant decision- tional Economic Association. makers in foreign countries.

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Trading up? Shipping containers in Shanghai, China, May 2012 Politicians and policymakers down- Yet there was nothing inevitable about played these problems, denying that the the path the world followed beginning new terms o” the global economy en- in the 1990s. International institutions tailed sacriÃcing sovereignty. Yet they played their part, but hyperglobalization seemed immobilized by these same was more a state o” mind than a genu- forces. The center-right and the center- ine, immutable constraint on domestic left disagreed not over the rules o” the policy. Before it came along, countries new world economy but over how they had experimented with two very dier- should accommodate their national ent models o” globalization: the gold economies to them. The right wanted standard and the Bretton Woods system. to cut taxes and slash regulations; the The new hyperglobalization was closer left asked for more spending on in spirit to the historically more distant education and public infrastructure. and more intrusive gold standard. That Both sides agreed that economies is the source o” many o” today’s problems. needed to be refashioned in the name It is to the more Áexible principles o” o” global competitiveness. Globaliza- Bretton Woods that today’s policymakers tion, exclaimed U.S. President Bill should look i” they are to craft a fairer Clinton, “is the economic equivalent o” and more sustainable global economy. ALY a force o” nature, like wind or water.” SONG British Prime Minister Tony Blair THE GOLDEN STRAITJACKET mocked those who wanted to “debate For roughly 50 years before World War I, / REUTERS globalization,” saying, “you might as plus a brie” revival during the interwar well debate whether autumn should period, the gold standard set the rules o” follow summer.” economic management. A government

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on the gold standard had to Ãx the value the United Kingdom returned to it in o” its national currency to the price o” 1925 at its pre-war rate. But the British gold, maintain open borders to Ãnance, economy was only a shadow o” its and repay its external debts under all pre-war self, and four years later, the circumstances. I” those rules meant the crash o” 1929 pushed the country over the government had to impose what econo- edge. Business and labor demanded mists would today call austerity, so be it, lower interest rates, which, under the however great the damage to domestic gold standard, would have sent capital incomes and employment. Áeeing abroad. This time, however, the That willingness to impose economic British government chose the domestic pain meant it was no coincidence that economy over the global rules and the Ãrst self-consciously populist abandoned the gold standard in 1931. movement arose under the gold stan- Two years later, Franklin Roosevelt, the dard. At the tail end o” the nineteenth newly elected U.S. president, wisely century, the People’s Party gave voice to followed suit. As economists now know, distressed American farmers, who were the sooner a country left the gold suering from high interest rates on standard, the sooner it came out o” the their debt and declining prices for their Great Depression. crops. The solution was clear: easier The experience o” the gold standard credit, enabled by making the currency taught the architects o” the postwar redeemable in silver as well as gold. I” international economic system, chie” the government allowed anyone with among them the economist John May- silver bullion to convert it into currency nard Keynes, that keeping domestic at a set rate, the supply o” money would economies on a tight leash to promote increase, driving up prices and easing international trade and investment the burden o” the farmers’ debts. But made the system more, not less, fragile. the northeastern establishment and its Accordingly, the international regime backing for the gold standard stood in that the Allied countries crafted at the the way. Frustrations grew, and at the Bretton Woods conference, in 1944, 1896 Democratic National Convention, gave governments plenty o” room to set William Jennings Bryan, a candidate for monetary and Ãscal policy. Central to the presidential nomination, famously this system were the controls it put on declared, “You shall not crucify man- international capital mobility. As kind upon a cross o” gold.” Keynes emphasized, capital controls The gold standard survived the were not merely a temporary expedient populist assault in the United States until Ãnancial markets stabilized after thanks in part to fortuitous discoveries o” the war; they were a “permanent gold ore that eased credit conditions arrangement.” Each government Ãxed after the 1890s. Nearly four decades later, the value o” its currency, but it could the gold standard would be brought adjust that value when the economy ran down for good, this time by the United up against the constraint o” international Kingdom, under the pressure o” similar Ãnance. The Bretton Woods system grievances. After eectively suspending was predicated on the belie” that the the gold standard during World War I, best way to encourage international trade

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and long-term investment was to enable recipe for less globalization. But during national governments to manage their the Bretton Woods era, the global economies. economy was on a tear. Developed and Bretton Woods covered only inter- developing economies alike grew at national monetary and Ãnancial ar- unprecedented rates. Trade and foreign rangements. Rules for trade developed direct investment expanded even faster, in a more ad hoc manner, under the outpacing the growth o” world ³²¡. The auspices o” the General Agreement on share o” exports in global output more Taris and Trade (³¬¢¢). But the same than tripled, from less than Ãve percent philosophy applied. Countries were to in 1945 to 16 percent in 1981. This success open up their economies only to the was a remarkable validation o• Keynes’ extent that this did not upset domestic idea that the global economy functions social and political bargains. Trade best when each government takes liberalization remained limited to care o” its own economy and society. lowering border restrictions— import quotas and taris—on manufactured BACK TO THE SPIRIT OF THE GOLD goods and applied only to developed STANDARD countries. Developing countries were Ironically, the hyperglobalists used the essentially free to do what they very success o” the Bretton Woods wanted. And even developed countries system to legitimize their own project had plenty o• Áexibility to protect to displace it. I” the shallow Bretton sensitive sectors. When, in the early 1970s, Woods arrangements had done so much a rapid rise in garment imports from to lift world trade, investment, and developing countries threatened living standards, they argued, imagine employment in the developed world, what deeper integration could achieve. developed and developing nations But in the process o” constructing negotiated a special regime that allowed the new regime, the central lesson o” the former to reimpose import quotas. the old one was forgotten. Globalization Compared with both the gold became the end, national economies the standard and the subsequent hyper- means. Economists and policymakers globalization, the Bretton Woods and came to view every conceivable feature ³¬¢¢ rules gave countries great free- o” domestic economies through the lens dom to choose the terms on which they o” global markets. Domestic regulations would participate in the world econ- were either hidden trade barriers, to be omy. Advanced economies used that negotiated away through trade agree- freedom to regulate and tax their ments, or potential sources o” trade economies as they wished and to build competitiveness. The conÃdence o” generous welfare states, unhindered by Ãnancial markets became the para- worries o” global competitiveness or mount measure o” the success or failure capital Áight. Developing nations o” monetary and Ãscal policy. diversiÃed their economies through The premise o” the Bretton Woods trade restrictions and industrial policies. regime had been that the ³¬¢¢ and Domestic autonomy from global other international agreements would economic pressures might sound like a act as a counterweight to powerful

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protectionists at home—labor unions was to encourage exports and attract and Ãrms serving mainly the domestic foreign investment. Do that, and the market. By the 1990s, however, the gains would prove so large that everyone balance o” political power in rich would eventually win. This technocratic countries had swung away from the consensus served to legitimize and protectionists toward exporter and further reinforce the power o” globalizing investor lobbies. corporate and Ãnancial special interests. The trade deals that emerged in the An important element oÊ hyper- 1990s reÁected the strength o” those globalist triumphalism was the belie” lobbies. The clearest illustration o” that that countries with dierent economic power came when international trade and social models would ultimately agreements incorporated domestic converge, i” not on identical models, at protections for intellectual property least on su–ciently similar market rights, the result o” aggressive lobbying economy models. China’s admission to by pharmaceutical Ãrms eager to cap- the ´¢£, in particular, was predicated ture proÃts by extending their monop- on the expectation in the West that the oly power to foreign markets. To this state would give up directing economic day, Big Pharma is the single largest activity. The Chinese government, lobby behind trade deals. International however, had dierent ideas. It saw investors also won special privileges in little reason to move away from the kind trade agreements, allowing them (and o” managed economy that had pro- only them) to directly sue governments duced such miraculous results over the in international tribunals for alleged previous 40 years. Western investors’ violations o” their property rights. Big complaints that China was violating its banks, with the power o” the U.S. ´¢£ commitments and engaging in Treasury behind them, pushed countries unfair economic practices fell on dea” to open up to international Ãnance. ears. Regardless o” the legal merits o” Those who lost out from hyper- each side’s case, the deeper problem globalization received little support. lay elsewhere: the new trade regime Many manufacturing-dependent could not accommodate the full range communities in the United States saw o” institutional diversity among the their jobs shipped o to China and world’s largest economies. Mexico and suered serious economic and social consequences, ranging from A SANER GLOBALIZATION joblessness to epidemics o” drug addic- Policymakers can no longer resuscitate tion. In principle, workers hurt by trade the Bretton Woods system in all its should have been compensated through details; the world can’t (and shouldn’t) the federal Trade Adjustment Assis- go back to Ãxed exchange rates, perva- tance program, but politicians had no sive capital controls, and high levels o” incentives to fund it adequately or to trade protection. But policymakers can make sure it was working well. draw on its lessons to craft a new, Economists were brimming with healthier globalization. conÃdence in the 1990s about globaliza- Trump’s in-your-face unilateralism is tion as an engine o” growth. The game the wrong way forward. Politicians

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FA.indb 30 5/17/19 6:40 PM should work to revive the multilateral trade regime’s legitimacy rather than squelching it. The way to achieve that, however, is not to further open markets and tighten global rules on trade and investment. Barriers to trade in goods and many services are already quite low. The task is to ensure greater popular support for a world economy that is open in essential respects, even i it falls short o the hyperglobalist ideal. Building that support will require new international norms that expand the space for governments to pursue domestic objectives. For rich countries, this will mean a system that allows them to reconstitute their domestic social contracts. The set o rules that permit countries to temporarily protect sensitive sectors from competition badly needs reform. For example, the  allows countries to impose tempo- rary tari s, known as antidumping duties, on imports being sold by a foreign company below cost that threaten to harm a domestic industry. The  should also let governments respond to so-called social dumping, the practice o countries violating workers’ rights in order to keep wages low and attract production. An anti-social- dumping regime would permit coun- tries to protect not merely industry pro€ts but labor standards, too. For developing countries, the international rules should accommodate governments’ need to restructure their economies to accelerate growth. The  should also loosen the rules on subsidies, invest- ment, and intellectual property rights that constrain developing countries’ ability to boost particular industries. I China and the United States are to resolve their trade con†ict, they need to

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acknowledge that the dierences tercyclical capital regulation,” that is, between their economies are not going restricting capital inÁows when the away. The Chinese economic miracle economy is running hot and taxing was built on industrial and Ãnancial outÁows during a downturn. Govern- policies that violated key tenets o” the ments should also crack down on tax new hyperglobalist regime: subsidies for evasion by the wealthy by establishing a preferred industries, requirements that global Ãnancial registry that would foreign companies transfer technology record the residence and nationality o” to domestic Ãrms i” they wanted to shareholders and the actual owners o” operate in China, pervasive state Ãnancial assets. ownership, and currency controls. The Left to its own devices, globalization Chinese government is not going to always creates winners and losers. A key abandon such policies now. What U.S. principle for a new globalization should companies see as the theft o” intellec- be that changes in its rules must pro- tual property is a time-honored prac- duce beneÃts for all rather than the few. tice, in which a young United States Economic theory contributes an impor- itsel” engaged back when it was playing tant idea here. It suggests that the scope catch-up with industrializing England for compensating the losers is much in the nineteenth century. For its part, greater when the barrier being reduced China must realize that the United is high to begin with. From this per- States and European countries have spective, whittling away at the remain- legitimate reasons to protect their social ing, mostly minor restrictions on trade contracts and homegrown technologies in goods or Ãnancial assets does not from Chinese practices. Taking a page make much sense. Countries should from the U.S.-Soviet relationship focus instead on freeing up cross-border during the Cold War, China and the labor mobility, where the barriers are United States should aim for peaceful far greater. Indeed, labor markets are coexistence rather than convergence. the area that oers the strongest eco- In international Ãnance, countries nomic case for deepening globalization. should reinstate the norm that domestic Expanding temporary work visa pro- governments get to control the cross- grams, especially for low-skilled work- border mobility o” capital, especially o” ers, in advanced economies would be the short-term kind. The rules should one way to go. prioritize the integrity o” domestic Proposing greater globalization o” macroeconomic policies, tax systems, labor markets might seem to Áy in the and Ãnancial regulations over free face o” the usual concern that increased capital Áows. The International Mon- competition from foreign workers will etary Fund has already reversed its harm low-skilled workers in advanced categorical opposition to capital con- economies. And it may well be a politi- trols, but governments and interna- cal nonstarter in the United States and tional institutions should do more to western Europe right now. I” govern- legitimize their use. For example, ments aren’t proposing to compensate governments can make their domestic those who lose out, they should take this economies more stable by using “coun- concern seriously. But the potential

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economic gains are huge: even a small other countries, but the domestic increase in cross-border labor mobility economy in question will pay the bulk would produce global economic gains o” the economic cost. Governments that would dwar” those from the com- adopt such policies presumably because pletion o” the entire current, long-stalled they think the social and political round o” multilateral trade negotiations. beneÃts are worth the price tag. In any That means there’s plenty o” scope for individual case, a government might compensating the losers—for example, well be wrong. But international institu- by taxing increased cross-border labor tions aren’t likely to be better judges o” Áows and spending the proceeds directly the tradeos—and even when they’re on labor-market assistance programs. right, their decisions will lack demo- In general, global governance should cratic legitimacy. be light and Áexible, allowing govern- The push into hyperglobalization ments to choose their own methods o” since the 1990s has led to much greater regulation. Countries trade not to levels o” international economic inte- confer beneÃts on others but because gration. At the same time, it has pro- trade creates gains at home. When duced domestic disintegration. As those gains are distributed fairly professional, corporate, and Ãnancial throughout the domestic economy, elites have connected with their peers countries don’t need external rules to all over the globe, they have grown enforce openness; they’ll choose it o” more distant from their compatriots at their own accord. home. Today’s populist backlash is a A lighter touch may even help symptom o” that fragmentation. globalization. After all, trade expanded The bulk o” the work needed to faster relative to global output during mend domestic economic and political the three and a hal” decades o” the systems has to be done at home. Clos- Bretton Woods regime than it has since ing the economic and social gaps 1990, even excluding the slowdown widened by hyperglobalization will following the 2008 global Ãnancial require restoring primacy to the domes- crisis. Countries should pursue interna- tic sphere in the policy hierarchy and tional agreements to constrain domestic demoting the international. The great- policy only when they’re needed to est contribution the world economy can tackle genuine beggar-thy-neighbor make to this project is to enable, rather problems, such as corporate tax havens, than encumber, that correction.∂ economic cartels, and policies that keep one’s currency artiÃcially cheap. The current system o” international rules tries to rein in many economic policies that don’t represent true beggar- thy-neighbor problems. Consider bans on genetically modiÃed organisms, agricultural subsidies, industrial poli- cies, and overly lax Ãnancial regulation. Each o” these policies could well harm

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