Play by the Rules
No longer the sole hegemon, the United States faces global issues that require global cooperation.
What would you want to tell the next U.S. president? FP asked nine thinkers from around the world to write a letter with their advice for him or her.
Dear Madam or Mr. President,
The United States has in recent years made a major U-turn.
After decades of telling other countries that they should not undertake industrial policies, our country under President Joe Biden enacted two massive bills: the Chips and Science Act, to promote U.S. production of a crucial component of any 21st-century economy; and the Inflation Reduction Act (IRA), which, in spite of its name, was really about the country beginning its green transition and capturing, for itself, more green jobs. The scale of the acts is enormous—for Chips and Science, some quarter of a trillion dollars, and the IRA, originally estimated at one-third of a trillion dollars, is now thought to be in the order of $1 trillion to $1.5 trillion. The acts are having one desired effect: The called-for investments seem to be occurring, in some cases on a very large scale.
This article is from the cover package in the Fall 2024 print issue, featuring letters from thinkers around the world. Read all nine letters here.
Of course, Washington has always pursued industrial policies, but they were typically hidden, often in the Defense Department. What is really new is that the United States has brought them out into the open.
Critics may carp that the bang for the buck was low (that is, the amount of additional investment elicited for each dollar of public spending was far smaller than one would have hoped), but with so many dollars being spent, the bang is significant.
Some critics may also complain that the government shouldn’t be in the business of picking winners, that we should leave it to the market. But the market has demonstrably shown its weaknesses: The COVID-19 pandemic, for instance, revealed a lack of resilience, with thin supply chains easily broken, inducing massive shortages and high and disruptive inflation. The market, with its massive pollution, has been central in bringing on climate change; it cannot be relied on to fix it. We understand, too, why the market has performed so, so badly: It never pays adequate attention to environmental externalities, and it is systematically shortsighted—something that we saw dramatically in the 2008 financial crisis.
The two acts may not have been ideal from the perspective of Washington and academic policy wonks, but both are far better than nothing—and given political gridlock, nothing was what many of us had expected.
Some viewed the U.S. policy of telling others not to engage in industrial policy while it did so itself as part of a strategy to ensure its technological competitive advantage. But new U.S. industrial policies are having another unintended side effect. They may represent the final nail in the coffin of the World Trade Organization (WTO). The WTO was supposed to create a rules-based system that provided a level playing field in trade. In the decades after World War II, the United States championed the system and played a central role in writing the rules. But in recent years, Washington has found the rules inconvenient—too often, they don’t serve its purposes well. So first, the United States debilitated the WTO Appellate Body, refusing to allow the appointment of new judges until certain reforms were made. It seemed almost as if the country wanted to make sure that the judges always ruled in its favor; ruling against it was seemingly defined as “overreach.”
Now that it has defenestrated the Appellate Body, it has gone one step further, in an exercise of raw economic and political power: In those two acts, it blatantly violated rules, knowing that no one can or is likely to respond.
But this raises a deeper, and in some sense philosophical, question: Is there really an international rule of law when the large countries—the hegemons—obey the rules only when it suits them and when there is no enforcement mechanism or punishment for such rogue behavior, other than that arising from reputation loss (a loss that the United States clearly has decided is second order relative to the benefits of acting as it pleases)?
Making matters even worse is that during the pandemic, the WTO enforced its intellectual property rules in the interests of the profits of the pharmaceutical companies but to the detriment of the health, even lives, of those in the emerging markets and developing countries. Biden even called for a vaccine waiver, but the WTO remained adamant. “Profits over lives” seemed to be its motto. And this even though the principle that in the event of a pandemic, drugs should be made available to all, through compulsory licenses, was an essential part of the original WTO IP agreement. The drug companies had made the whole process so litigious and complicated that the pandemic would be over (and the profits pocketed) before poor countries could get access.
Thus, we have an international trade order that enforces rules against the poor and weak, even when it is a matter of lives, but in which the United States can do as it will.
You might say that’s the way the world works, a world in which power matters. But here’s why you, as president, need to care. The United States is no longer the hegemon. We are engaged in a new cold war, to win the hearts and minds of those in the global south. And entering this office, you face global issues that require global cooperation: preventing climate change, addressing pandemics, maintaining fisheries, preventing sea pollution and space debris. The list is long.
The problem is that this is not the only instance of big-power selfishness. The United States has pushed investment agreements so that its companies can engage with impunity in actions from pollution to selling unhealthy products—threatening that any new regulation to curb such anti-social activities will be met with a lawsuit, resolved through corporate-friendly arbitration, forcing poor countries to compensate the companies to the tune of hundreds of millions of dollars, if not billions, for not polluting, for not poisoning their citizens, or for not engaging in some other nefarious activity. It was only when the United States itself started to be sued under these investment agreements that it changed its tune. A major change as we went from the North American Free Trade Agreement to the new agreement between the United States, Mexico, and Canada was actually dropping most of the investment agreement provisions.
The United States also blocked the creation of a better mechanism to resolve sovereign debt, an issue of particular concern now with so many countries vulnerable to debt crises. In the absence of such a court-based system, power dominates, and power resides with the big private creditors, such as BlackRock; private creditors have exercised that power to squeeze poor countries.
A final example: The United States told countries all over the world to open their doors to foreign investment. This would create jobs, and those countries thought it would generate tax revenue from the profits associated with production. Little did they understand that the system of globalization that the United States had played such an important role in constructing was one designed for tax avoidance. Corporations had ample opportunities to shift profits to low-taxed jurisdictions, including tax and secrecy havens. The U.S. tech giants, so adept at producing goods and services that people loved, were even more adept at tax avoidance.
After the 2008 financial crisis, when everyone was in desperate need for money, even developed countries began an effort to reduce this tax avoidance (in strategies collectively called BEPS, or base erosion and profit shifting). But this effort was aimed at increasing taxes for those developed countries, not at creating a fair global tax system. It has largely failed. There has been an agreement on a minimum corporate tax—15 percent—but even that has been eviscerated by exemptions and carve-outs. Globally, there is pressure on countries to reduce their rates to the global minimum. What might have been an effort to raise tax revenues fairly has a good chance of actually reducing revenues in developing countries.
The abject failure of this effort, centered in the Organization for Economic Cooperation and Development (the think tank of the developed world), has resulted in a move to have new global discussions about taxation at the United Nations. The initiative, led by the African Union, received overwhelming support from the world last November, in spite of arm-twisting opposition by Washington. And now there are concerns, as the negotiations begin, that the United States is engaged in foot-dragging. So far, fortunately, those efforts have proved futile; on Aug. 16, the U.N. General Assembly voted to adopt a road map to a future tax convention—the United States was one of the few recalcitrant countries to vote against it.Pencil drawn portraits of Kamala Harris and Donald Trump are overlapped, one in blue and one in red.
I want to make this very clear: It is in the interest of the United States as a whole, of the American people, that there be a fair and effective global tax system; an IP system that ensures that poor people have access to drugs, especially during pandemics; and that all countries have the freedom to pass regulations to protect their citizens and the environment without shilling out large amounts to polluters and exploiters. In each of these areas, U.S. policy has been dictated, to too large an extent, by special corporate interests. If the United States is to win the new cold war, this must stop.
All of these illustrate how globalization under neoliberalism has gone awry. The economic foundations of neoliberalism—the notion that free markets lead to economic efficiency and shared prosperity—had been questioned even before the theory become fashionable. Now we see the failures of neoliberalism in all its dimensions: slower, and more unstable and unequal, growth and social and environmental problems aplenty.
To return to where I began this letter, modern economic theory has explained why, when technology is endogenous (that is, a result of research and development or of what we learn in the process of producing and investing), markets are not in general efficient; some government interventions may be desirable. Industrial policy makes sense. It makes sense for developing countries to try to close the gap in knowledge that separates them from developed countries—this gap is even more important than the gap in resources. These efforts were proscribed by the WTO—it’s as if the WTO was designed to maintain the competitive technological advantage of the developed countries.
But the law of the jungle may be even worse than the flawed WTO rules and especially so for poor countries. It is in the interests of the United States to create a world order based on cooperation and respect—including respect for the United States and its values, not fear of the United States as it abuses its economic, political, and military power. And that means that as Washington devotes funds to develop new industries and, particularly, to make the green transition, it must make funds and technology available to developing countries and emerging markets. If U.S. industrial policy is seen as part of a new global green transition and a transition to a more resilient global economy, it can be part of a new era of global cooperation, and you, as president, will be at the helm of the world’s leading and richest democracy, paving the way to a new global shared prosperity.
Joseph E. Stiglitz is a Nobel laureate in economics and a professor at Columbia University. X: @JosephEStiglitz