It’s time for a new Bretton Woods

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Janet Yellen, the US Treasury secretary, did something important and, for the most part, underreported last week. She relinked trade to values.

In an address at the Atlantic Council in Washington, the secretary called for a new Bretton Woods framework and a revamp of the IMF and World Bank institutions, both of which are holding their annual meetings this week.

She also made clear that Vladimir Putin’s war in Ukraine and China’s failure to join the US and more than 30 other nations in sanctions on Russia was a pivot point for the global economy.

In the future, US trade policy would no longer involve merely leaving markets to their own devices, but rather would uphold certain principles — from national sovereignty and a rules-based order to security and labour rights. As she put it, America’s objective should be not just “free but secure trade”.

Countries shouldn’t be allowed to use their “market position in key raw materials, technologies or products to have the power to disrupt our economy or exercise unwanted geopolitical leverage”. That was clearly a nod to Russian petropolitics but could just as easily cover Taiwanese chip manufacturing or China’s hoarding of rare earth minerals or, during the pandemic, personal protection equipment.

Yellen coined a new word for this post-neoliberal era: “friend-shoring”. The US would now favour “the friend-shoring of supply chains to a large number of trusted countries” that share “a set of norms and values about how to operate in the global economy”. It would also seek to create principles-based alliances in areas like digital services and technology regulation, similar to last year’s global tax deal (which she spearheaded).

This isn’t America Alone or even America First. But it does acknowledge the existence of a political economy in which free trade can only really be free if countries are operating with shared values, and an even playing field.

That’s both different — and, in some crucial ways, not — from the neoliberal era that is passing. The term “neoliberalism” was first used in 1938, at the Walter Lippmann Colloquium in Paris, a gathering of economists, sociologists, journalists and businesspeople who wanted to find a way to protect global capitalism from fascism and socialism.

It was a moment that chimed with our own in many ways. Europe had been pulled apart by the first world war. A decade of easy monetary policy up to 1929 had been unable to paper over major political and economic changes that had created huge rifts in societies. Labour markets and family structures were changing. A pandemic, inflation, then economic depression, deflation and trade wars had left the continent economically wrecked.

Neoliberals wanted to fix these issues by connecting global markets. They believed that if capital and trade were connected via a series of institutions that could float over individual nation states, the world would be less likely to descend into anarchy.

For a long time, this idea worked, in part because the balance between national interests and the global economy didn’t get too far out of whack. Even during the Reagan-Thatcher era in the 1980s, there was still a sense that global trade in particular needed to serve the national interest. As US president, Ronald Reagan may have been a free-trader but he used tariffs against Japan and also supported industrial policy (as did, and do, most other Asian and many European nations). 

In the US, that began to shift during the Clinton administration, which orchestrated a series of free-trade deals culminating in the entry of China into the World Trade Organization in 2001, in the hope that the country would become freer as it got richer. That, of course, didn’t happen. And now, finally, leaders everywhere are acknowledging the reality of the “one world, two systems” problem.

Yellen says she hopes that “we don’t end up with a bipolar system”, particularly given how much China itself has benefited from the neoliberal system. “But real problems have emerged,” she acknowledges. “China relies in many ways on state-owned enterprises and engages in practices that I think unfairly damage our national security interests.” Multinational supply chains, “while having become very efficient and excellent at reducing business costs, have not been resilient”. Both issues, she says, must be addressed.

Today’s crossroads is not unlike the one that faced the neoliberal thinkers who crafted the original Bretton Woods system. They started not with an idea of laissez-faire markets operating for their own sake, but rather with a very human problem — how to patch together a war-torn world to make a safer, more cohesive society, one in which freedom, liberty and prosperity would be guaranteed. Markets couldn’t do it alone. New rules were needed.

That’s just where we are now. One may argue, as I would, that a pendulum shift is overdue. Global capitalism has, over the past 20 years in particular, simply run a bit too far ahead of the domestic concerns in some individual nation states. Countries with wildly different political, economic and even moral frameworks have not all played by the same global rules. Under those circumstances, fair and free markets begin to break down.

The process of crafting a new Bretton Woods has only just begun. But starting with the values that liberal democracies want to uphold is a good place.

rana.foroohar@ft.com

Letters in response to this column:

What Keynes said at first IMF-World Bank meeting / From Giovanni Farese, Professor of Economic History, European University of Rome, Italy

Africa wants more of a voice in decisions shaping world finance / From Vera Songwe Addis Ababa, Ethiopia

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