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The new Washington consensus

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If you like time warps, read Bill Clinton’s 2000 speech urging Congress to admit China into the World Trade Organization. China’s entry would enrich Americans and help convert China to freedom, he said. “There’s no question China has been trying to crack down on the internet,” Clinton conceded to laughter. “Good luck! That’s sort of like trying to nail jello to the wall.” 

Less than a quarter of a century later, China lives behind a Great Firewall and the Washington consensus has long since been declared dead. That term, which was coined by a British economist in 1989, consisted of free market maxims. Its guarantor was the US and its crack troops were the World Bank and the IMF. The ten-point list was exclusively economic. Geopolitics had lost its relevance since the end of the Cold War.

The past is another world. The goal of integrating China has been replaced with a debate about how to dis-integrate China. Contrast Clinton’s speech — the high noon of the Washington consensus — with this week’s G7 foreign minister’s meeting, which was focused on disengaging from China. Compare the marginalised status of the IMF and World Bank in today’s global economy with the hegemonic Bretton Woods bodies of the 1990s. 

The new Washington consensus is different to the old in three key respects. First, Washington is no longer the uncontested Rome of today’s world. It has competition from Beijing. The new consensus is thus largely confined to Washington itself rather than the swaggering US that set the global standards after the end of the Cold War. It is an American political consensus with Donald Trump its harshest exponent. He talks of how trade with China has created “American carnage” and led to the “rape” of America. Joe Biden’s language is far gentler but his enforcement is more rigorous. Biden’s policy is Trumpism with a human face.

Second, the new consensus is geopolitical. It does have economic tools, such as reshoring supply chains, prioritising resilience over efficiency, and industrial policy. But these are largely means to a national security end, which is to contain China. The old consensus was a positive sum game; if one country got richer others did too. The new one is zero sum; one country’s growth comes at the expense of another’s.

The third difference is that the new consensus is as pessimistic as the old one was optimistic. In that sense it is less intuitively American than what it replaced. The spirit of can-do has given way to a roster of can’t-dos. Today’s US cannot make trade deals, cannot negotiate global digital rules, cannot abide by WTO rulings and cannot support Bretton Woods reforms. Washington has lost faith in economic multilateralism.

Will the new consensus be effective? The ultimate test is whether China can variously be contained, engaged, competed and cajoled into accepting the US-led order. Today’s Washington subscribes to all of these approaches, some of which are more sophisticated than others. Biden himself focuses more on competition than cajoling. His aim is not to decouple from China but to create what Jake Sullivan, the US national security adviser, calls a “small yard” with a “high fence”. 

That means America will continue to trade with China except in goods that can be used to upgrade China’s military, which means high-end semiconductors and anything that boosts China’s AI ambitions. It is not obvious where you can safely draw that line, which suggests Sullivan’s small yard will expand over time. Compared to the China hawks outside the Biden administration, however, Sullivan’s approach is nuanced and flexible. Yet it still begs the question: how can China be squeezed into a US-led order in which America itself has stopped believing?

Biden has not yet given a clear answer to that question because it is so hard. He wants to deprive China of the means to reach military parity with America without provoking a US-China conflict or global economic retrenchment. A full-scale decoupling would make everyone poorer and create an Orwellian world of hostile blocs. A return to the status quo ante — what Clinton was extolling — would accelerate China’s rise.

The middle way between the old Washington consensus and the new is to preserve what was good about the old, rather than to throw out the baby with the bathwater. Of course history did not end. By the same token, however, the future has yet to be written. No power will be its sole author. But America still has an outsized say on whether the script will be dark or light.

edward.luce@ft.com