Neoliberalism and Pax Americana: Beginning of the end?

The populist rhetoric of making America great again is the consequence of political and economic disorders generated by neoliberalism. Photo: Bloomberg

Since the 1980s, the term neoliberalism has become popular in academic discourse. Two major pedestals of neoliberalism are the free market and democracy. Other associated features of neoliberalism are individualism, free trade, and globalisation. In an influential article titled  "The End of History?" in National Interest, Francis Fukuyama proclaimed in the aftermath of the collapse of the former Soviet Union that Western liberalism had triumphed over other alternative systems, notably fascism and communism. 

During the post-World War II period, the international political and economic order was largely shaped by the United States, the foremost hegemonic power, through international organisations such as the IMF, the World Bank, and the World Trade Organisation. This period witnessed increased liberalisation of trade and foreign investment, as well as globalisation of financial markets. Furthermore, this period also witnessed massive movements of legal and illegal migrants from developing countries to developed countries. 

During the recent decades, however, new discontents have emerged in many western countries toward democracy, free trade, and globalisation. Free trade, globalisation and various forms of economic integration began to be perceived as the drivers of income inequality across individuals and regions. Specifically, the emergence of China as an economic superpower  was blamed for the destruction of the manufacturing base of developed countries, especially in the United States. Furthermore, the presence of legal and illegal migrant workers is being perceived as a threat to the national identity and culture of the core groups.

The rise of Donald Trump, his ideology and policies reflect new discontents against free trade, democracy, and globalisation. Economic nationalism, tinged with racism, authoritarianism, and animus toward immigrants, has taken over the driver's seat. The United States, once the framer of international and regional rules concerning international trade and investment, now directly flouts those rules. To invoke a sports analogy, the US wants to be the framer of rules, the referee, and the player concurrently. Today, the US blames the rest of the world for many of its socio-economic ailments: trade deficits, the drug epidemic, budget deficits, high rates of violence, and crime.

However, the American "tragedy" or crisis, like the Greek tragedy, owes its origin largely to internal factors. America's huge trade deficits reflect the fact that the US has lost comparative advantages in the production of many products for mass consumption, including apparel, motor vehicles, and household appliances. 

Some statistics reveal the magnitude of US trade deficits. According to the US Census Bureau in 2024, the US trade deficit in goods amounted to $1.2 trillion. The top three countries with which the US has trade deficits are China ($295 billion), Mexico ($172 billion), and Vietnam ($123 billion); with Canada, the US has a trade deficit of $63 billion. The US exports and imports with Bangladesh in 2024 were $2.2 billion and $8.4 billion, with a trade deficit of $6.2 billion. Furthermore, the US had a trade deficit of $298 billion in advanced technology products with the rest of the world. 

The US trade deficit is also affected by foreign investment by American multinational companies. For example, the United States has trade deficits overall with Mexico, including a trade deficit in automobiles. This is because US automobile companies have invested heavily in Mexico, the base from which they export automobiles back to the United States.

This does not imply that the United States has lost comparative advantages in all products. It has comparative advantages in products such as aerospace, military goods and services.

The US trade deficit is also driven by internal factors such as savings and investment. For the United States, national savings are less than investment, largely because of government budget deficits. The negative balance in national savings and investment is reflected in current account deficits. High budget deficits often lead to high interest rates and appreciation of the US dollar, which decreases exports and increases imports.

Accordingly, neo-mercantilist trade policies in the form of high tariffs and reciprocal tariff policies that are being imposed by the Trump administration are not likely to reduce trade deficits for the US economy. Furthermore, tariff wars are likely to hurt all trading nations by disrupting the supply chains in many globalised industries.

Another factor that drives US trade deficits is the status of the US dollar as the international reserve currency, which enables the United States to exploit its hegemonic position and borrow at lower rates. However, the system keeps the US dollar overvalued, perpetuating the trade deficits for the United States.

Two factors need to be emphasised. First, the United States or any other country, does not need to maintain bilateral trade balances. Second, trade deficits are not necessarily bad for an economy. Trade deficits may reflect the fact that the economy is growing faster with increased investment surpassing national savings. However, trade deficits may be bad if these are associated with wasteful government spending and other factors that hurt the competitive advantage in certain sectors. 

In my opinion, the rise of Trumpism in the form of disengagements from multilateral institutions and rules, cutting back US spending on foreign aid, aggressive anti-migrant policies, downsizing the role of US government in the economy, and the populist rhetoric of making America great again is the consequence of political and economic disorders generated by neoliberalism in the past four decades. This period witnessed growing income and wealth inequality, erosion of social capital, declining intergenerational mobility, degradation of communities, and rising opioid and fentanyl crisis concentrated in low-income groups. 

The emergence of BRICS countries, especially China, has generated new anxiety disorders for the United States. Trumpism will try to recalibrate the international political and economic order based on coercive bilateral negotiations rather than rules-based multilateral institutions. It is unlikely however, that the new US postures will prevent a trend toward a more robust multipolar world. This is reflected in growing trade arrangements in Asia, Europe and Africa with less dependence on American markets.

As a developing country, Bangladesh should be prepared to cope with the new international order by diversifying its trade relationships, especially involving China and East Asian countries.

Sketch: TBS

Dr Sadequl Islam is professor & chair of economics, Laurentian University, Ontario, Canada

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.