The Economic Government of the World — an end to globalisation?

Before our eyes the shifting political balance in the US is changing the agenda of global economic policy. Following in the footsteps of Donald Trump, the Biden administration is unpicking globalisation as we have known it. We live, we are told, in the era of a new Washington consensus in which nation-centred industrial policy plays an unabashed role.

This is sometimes seen as the betrayal of an earlier American vision of a rules-based multilateral order. But, as Martin Daunton’s capacious and timely history of The Economic Government of the World shows us, this sense of rupture and reversal is misleading. As he explains, “shifts in the distribution of economic power within the US” have always been “crucial” to the way in which Washington superintends “international economic order”.

In a detailed narrative, which takes us through labyrinthine multilateral negotiations over currencies and trade, Daunton shows how the process of opening the door to the free movement of goods and capital was always messy and uncertain and dependent on domestic circumstances in America, the world’s leading economy.

Though the statistics of foreign trade appear to show a steady rise in global integration — merchandise exports as a share of global gross domestic product rose from a high of 14 per cent just before the first world war to 25 per cent by 2008 — building the institutional frame of globalisation was a precarious business. It depended on fragile bargains between various interest groups to satisfy cotton farmers and textile producers, tactical decisions to separate contentious issues such as currencies and trade, and ensuring the maximum discretion for expert technocrats rather than congressional logrolling.

Through to the early 20th century, the US was strongly protectionist. Efforts by the Democratic party, which represented the farm exporters of the South, to reduce tariffs were stymied by the Republicans, who spoke for northern industry. Even in the first 12 months of Franklin D Roosevelt’s presidency, the direction of policy was undecided, an indecision that contributed to the failure of the World Economic Conference in London in 1933.

It was not until FDR threw his weight behind the progressive project of the Second New Deal in the mid-1930s that the balance shifted decisively towards a more internationalist stance. Cordell Hull, secretary of state, bounced the Reciprocal Free Trade Act through Congress, which began to reverse the protectionist drift of the Great Depression. Meanwhile, Treasury secretary Henry Morgenthau brokered the Tripartite Currency Pact in 1936, which, after the collapse of the gold standard, stabilised sterling and the dollar against the French franc.

To build a new economic order, Washington needed partners. London, still at the head of its empire, was desperate to be involved in shaping the world economy, and in John Maynard Keynes, the economist, it had the visionary for the job. But, after the second world war, Britain was too weak to actually implement the Bretton Woods vision for full exchange convertibility as agreed in the summer of 1944. It took billions in bilateral loans from the US, the Marshall Plan of 1947 and the European Payments Union of the 1950s before Britain and the rest of Europe were ready for convertibility of their currencies in 1958.

Lacking a constituency in America, the ambitious vision for the International Trade Organization, which would have promoted a fully multilateral trading system, was abandoned in 1949. Instead, trade liberalisation was driven forward in a more focused way by successive rounds of tariff cuts negotiated within the General Agreement on Tariffs and Trade.

By the 1960s, recovery in east Asia and Europe was in full swing. But that posed its own challenges. Under the inspiration of Charles de Gaulle, the European Economic Community looked more and more like a closed economic bloc. To ensure that Europe remained firmly within America’s orbit, the Kennedy administration launched a new round of Gatt talks. In Daunton’s telling, the Gatt round between 1964 and 1967, named in honour of President Kennedy, was the closest thing to a true victory for globalisation in the postwar era. It brought industrial tariffs down to new lows. But it was a Pyrrhic victory. It added to America’s trade deficit. It caused resentment among American business and labour interests and it alienated the developing world.

By the 1970s, amid the wreckage of the Bretton Woods system, the protectionist current was running strong in the US. President Richard Nixon took the dollar off gold and announced a new era of nationalism in economic policy. Though presidents Jimmy Carter and Ronald Reagan initiated the era of neoliberalism at home through domestic deregulation and tax cuts, they flanked their domestic policies with slogans not of “free” but of “fair” trade. Market expansion was driven forward through regional deals such as the North American Free Trade Agreement. The Uruguay round of Gatt (1986-94) — dubbed “Gattastrophe” by its critics — took an agonising seven and a half years to deliver modest reductions in industrial and agricultural tariffs.

The World Trade Organization that would replace Gatt after 1995 was first taken up, Daunton argues, by Europeans keen to constrain America’s unilateral tendencies. In the US, it always rested on a wafer-thin political majority. It was not by accident that the WTO meeting in Seattle in 1999 was met by dramatic protests.

In response to its critics, in the new millennium the leadership of WTO placed global development at the top of its agenda. But in doing so, it over-reached. The wide-ranging negotiations of the WTO’s Doha round, involving 144 national delegations organised into 19 separate coalitions, have been shambolic. Meanwhile, China’s inclusion in the WTO delivered a fatal blow to political support for globalisation in the US.

By 2005 there was a substantial bipartisan caucus in Congress calling for the US to leave the WTO. Well before the Trump administration set about sabotaging the WTO’s dispute adjudication procedure, the organisation was paralysed. Nor should it be a surprise that the Biden administration has shown no real interest in reviving it. The prevalent diagnosis in Washington today is that the China-centric globalisation of the 1990s and 2000s was a historic mistake.

This clearly marks a new phase in the story of the world economy. But, rather than seeing this as a sudden or unprecedented rupture, if we follow Daunton’s narrative, it is merely the latest expression of a deep uncertainty and ambivalence in US politics towards the world economy.

America’s current crop of geoeconomic strategists, led by Jake Sullivan, President Joe Biden’s national security adviser, insist they are not decoupling. America’s economic leadership will remain intact. But, not for the first time, Washington is changing the terms. In a mass of technical negotiations, anchored in political and interest-group coalitions in the US, it will seek deals with partners in Europe, Asia and in the rest of the world. Offering us a realistic assessment of what American-led governance of the world economy actually entails, Daunton’s account is essential reading. Postheroic and disillusioned, this is a history for our times.

The Economic Government of the World, 1933-2023 by Martin Daunton, Allen Lane £45, 1,024 pages

Adam Tooze is an FT contributing editor and writes the Chartbook newsletter

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