Post-globalization, what’s next for world trade?

Two decades ago, a British prime minister surveyed a world jolted into questioning its old assumptions, institutions, and alliances, and summoned up a powerful metaphor.

“The kaleidoscope has been shaken,” he declared. “The pieces are in flux. Soon they will settle again. Before they do, let us reorder this world around us.”

Tony Blair was speaking after the 9/11 attacks on America. But his words capture an equally daunting challenge now facing the United States and other world economic powers: how to reorder new trade rules and relationships from the shards of the old – and out-of-favor – orthodoxy of globalization.

A kind of “Globalization 2.0.”

That is a particularly difficult task. The heyday of globalization – the China-powered 1990s and early 2000s growth spurt – is in the rearview mirror. Today, the assumption underlying the U.S.-led economic order since the fall of the Soviet Union, that free trade is sacrosanct, is crumbling before a wave of protectionism.

The U.S. is very much part of that wave, swollen in Washington by a bipartisan consensus that America must avoid ceding supremacy to China. That means securing U.S. independence and shoring up its strength in strategic areas of the 21st-century economy, such as top-end microchips and green manufacturing.

Here’s the conundrum, however. What has underpinned the world economy, and powered growth, for decades? Increasingly unfettered trade.

A wholesale unraveling would risk a serious global economic slowdown. Yes, China would take a major hit. But so would America.

And U.S. allies in Europe and Asia are already airing their displeasure at President Joe Biden’s protectionist Inflation Reduction Act, which offers generous government subsidies to encourage green industries.

Thus the search for a workable new framework for international trade.

It’s a tall order, given the overriding weight of the adversarial relationship between the United States and China, the world’s two biggest economies.

It’s also clear that Globalization 2.0 would look very different from the original model.

That’s because the old order has come tumbling down not from a single, horrifying blow like 9/11, but from a serial battering.

It started after Beijing’s 2001 entry into the World Trade Organization, with signs that China’s trading relationship with the United States and the developed economies of Europe was decidedly unequal. It shifted a million jobs to lower-wage factories in China. Western companies hopeful of tapping into China’s domestic market found it skewed in favor of state-subsidized local competitors, and they were also pressured to part with their intellectual property.

Then came the 2008 financial crash: Globalization delivered global contagion.

And finally, a new series of jolts: a pandemic that wrought havoc on world supply chains; China’s lockdowns at home and its truculence toward Western trading partners critical of its policies; and the economic fallout from Russia’s invasion of Ukraine, such as rising energy and food costs.

It’s little wonder that many national governments, not just America’s, have been concentrating on protecting their own citizens’ and companies’ economic health.

There are also powerful economic, political and national security motives behind two of Washington’s most assertive new trade policies – its ban on sales to China of the means to produce the latest generation of microchips, and the package of nearly half-a-trillion dollars to subsidize U.S. domestic production of microchips, electric cars, and low-carbon energy.

The Biden administration has shown no signs of changing course on either policy, so European allies fearful that their own green-economy companies will chase U.S. subsidies may end up launching a subsidy package of their own to keep them at home.

Still, Washington has a longer-term interest in not seeing global commerce collapse altogether. Trade, as much as military issues, has been the glue holding U.S. alliances together worldwide. And Beijing knows full well that its prosperity depends on trade.

At last week’s annual World Economic Forum in the Swiss resort of Davos, China’s vice premier, Liu He, dialed back Beijing’s traditional anti-Western rhetoric and reaffirmed his country’s determination to “open up the world.”

Mr. Biden could well run into domestic headwinds on the two most obvious ways of using trade to cement America’s alliances – a comprehensive trade agreement with the European Union and rejoining the Trans-Pacific Partnership, the trade grouping it helped set up in Asia as a counterweight to Chinese influence.

Former President Donald Trump pulled America out of TPP. Many of his supporters in the Republican Party reject not only the U.S.-China embrace at the heart of the old globalization, but liberalized world trade in general.

Still, reinforcing trade ties with friends could become a compelling U.S. national security interest. Washington will need their buy-in if its more muscular approach to China is going to succeed over time.

And there may be a cautionary lesson in Prime Minister Blair’s appeal after 9/11.

With the kaleidoscope shaken, he felt the window for a coherent international response would not stay open for long. “This is a moment to seize,” he said. He set out an agenda that went beyond merely “punishing the guilty” and emphasizing causes such as social justice and economic advancement.

Yet that lofty vision was swallowed up by conflict on the battlefields of Afghanistan and Iraq – a stark reminder of the challenges facing would-be architects of Globalization 2.0.