Who Unraveled the New World Order?

It wasn’t Trump. The global economic consensus began falling apart years before he entered politics.


Who Unraveled the New World Order?
Photo: Getty Images/iStockphoto

European Council President Donald Tusk recently said that Donald Trump’s approach to trade, climate change and the Iran nuclear deal is undermining “the rules-based international order.” This is absurd. The global order began unraveling long before Mr. Trump’s debut on the world stage.

Start in 1989. That remarkable year saw the fall of the Berlin Wall, the collapse of the socialist model, and the rise of globalization. By the early 1990s, China, India, Eastern Europe and a host of commodity-producing countries had joined the global capitalist club.

That was the beginning of the so-called Washington Consensus—a new global order based on deregulating market access, liberalizing capital and trade flows, encouraging domestic competition, fortifying the rule of law, and reducing taxes, debt and market subsidies. By 1995, the leaders of this new world order established the World Trade Organization, which China joined six years later.

Much of the world initially embraced the Washington Consensus. Countries became more productive, which lowered real wage costs globally. Global trade grew at more than twice the rate of global economic output. Soon an ocean of excess savings began to swirl around a newly liberalized international financial system, a lot of it directed to U.S. assets. Long-term U.S. interest rates dropped to abnormal lows. Financial risk became underpriced. Equity markets boomed.


Even the Asian crisis of the late 1990s failed to end the party. Indeed, many countries learned and grew from it. They tied their currencies to the U.S. dollar, eschewed consumption and refashioned their economies as large export platforms. The global ocean of excess savings grew larger.

But the story went downhill from there. Many members of this new order, including China, failed to deliver on their promises. They created obstacles, invented hardship scenarios and developed loopholes to avoid their commitments. In some cases, they engaged in outright intellectual-property theft, currency manipulation and cyberwarfare. The great vision suddenly blurred.

By 2007 the world-wide underpricing of financial risk, combined with reckless bank leveraging, helped set the stage for the financial crisis. In 2009 British Prime Minister Gordon Brown declared, “The old Washington Consensus is over.”

This global order still had created unprecedented wealth, helping to raise a billion people out of poverty. But it also had led to wealth inequality, flat real wages, and an international financial system hugely out of balance. Central banks injected tens of trillions of dollars of liquidity, trying to protect asset prices based on an order that no longer existed.

It eventually became clear that the original vision of a new global economic order was only a romanticized dream. Many nations took part in the global system—but not to liberalize their economies or make them more transparent and accessible. They came to game the system.

In response, the Trump administration has offered some one-off tariffs. But this is like a doctor writing out a prescription for an aggressive drug, with potentially negative side effects, without a long-term plan for the patient’s health.

The U.S. economy—the patient—has an amazing ability to innovate and reinvent. A long-term plan is necessary to preserve and protect these unique strengths in today’s increasingly lawless world. Especially since the values of free and open economies, fair play and the rule of law are increasingly out of fashion.

Tariffs are a poor substitute for strategic planning about the future of the global economy. Instead of tariffs, the U.S. should form a “values coalition of the willing.” This group of nations would agree to a tougher order that demands more transparency, accountability and fair play, along with fewer tariffs and other barriers to economic entry. This would be backed by the rule of law.

Not all economies would make the cut. Europe is a mixed bag. After the Brexit vote, German policy makers immediately feared that with Britain out of the European Union, Berlin would be isolated. It would have to fight off Brussels’ mercantilist, anti-free-market technocrats without another large country as an ally.


In China and other mercantilist economies, production bears no relation to market demand, the definition of the word “contract” is the beginning of negotiations, and cyberwarfare is simply part of business. Those countries should be treated separately as such.

The world has changed since 1989. The global order is gone. It is time to build a new one.

Mr. Smick is founder, chairman and CEO of the Washington global macroeconomic market advisory firm Johnson Smick International Inc.

Appeared in the June 13, 2018, print edition.

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