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US-China trade

Did too much faith in free markets undo globalization?

Published 03 October 2023

China's model of state-led capitalism has resurrected a mercantilist challenge to the laissez-faire approach to globalization which emphasized the net benefits of market-driven outcomes over the last seven decades. As liberal democracies respond by embarking on a similarly statist approach to industrial policy and retaliatory trade weaponization at a time when the shortcomings of China’s economic model are becoming more apparent, policymakers must ask: Is there a better way?

Globalization of the late 20th and early 21st century was facilitated by a convergence of policy consensus on the benefits of neoliberalism, where economic welfare is maximized through the efficient use of scarce resources. The sustainability and equity of such an undertaking depend over the longer term on all significant participants adopting the same approach, but not all did. Furthermore, the World Trade Organization, the governing body of the global trading system, hasn't been able to enforce deep economic regulatory alignment behind national borders.

As states that eschew market forces rise to prominence, such as China, many of the theoretical mechanisms that should have ensured the delivery of net benefits under the market system have broken down. In response, erstwhile proponents of a laissez-faire approach to trade are now adopting more mercantilist policies all over the world. Amid this change, Research Fellow Stewart Paterson sets out to answer some key questions in this paper: How has the rise of China challenged the major tenets and theoretical underpinnings of orthodox trade theory? Does the migration to a multipolar world and the resumption of great power rivalry inevitably entail a move toward a more mercantilist approach to global trade?

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Stewart Paterson

Stewart Paterson is a Research Fellow at the Hinrich Foundation who spent 25 years in capital markets as an equity researcher, strategist and fund manager, working for Credit Suisse, CLSA and most recently, as a Partner and Portfolio Manager of Tiburon Partners LLP.

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