The Washington Consensus Could Not Hold

Gabrielle SIERRA: So Shannon, friend of the pod, welcome back to Why It Matters. Before you came on, we were talking about how Washington Consensus sounds like a cocktail. So if it was a cocktail, what would it be for you?

Shannon K. O'NEIL: Ooh, if the Washington Consensus was a cocktail, it would be like a negroni.

SIERRA: Ooh. Okay. Because you love negronis or because you feel like it's a perfect analogy?

O'NEIL: Because I don't mind negronis, but it's a little bit bitter, but it gives you a little bit of a kick too.

SIERRA: Love it, great.

The Washington Consensus is actually a list of ten commandments - ten widely agreed-upon U.S. policy standards crafted in 1989 to guide the improvement of economic performance. That really does feel like another era, in which the prosperous United States was at the helm of global economic and political affairs and one of the lead champions of trade. But at the start of 2025, trade is sizing up to be an arena of confrontation and anything but consensus, and is even raising concerns that a new protectionist era could spur a recession.

I’m Gabrielle Sierra and this is Why It Matters. Today, how can we agree on the rules of trade when the rules no longer apply?

SIERRA: So last episode, we talked to your colleague and mine, Ted Alden, about the history of our trade policy, the 101 for this season about trade, but now we need your help to bridge us to today. How much of our trade history or former trade policy is still relevant today? 

O'NEIL: Both much of it and none of it. 

This is Shannon O’Neil. She is the director of studies for CFR and a leading authority on global trade and supply chains.

O’NEIL: We have seen a huge shift in just a couple of months in the way the U.S. government thinks about trade. That said, lots of the tools that are being used today have been around for decades, if not centuries. Things like tariffs, things like what wonky trade people call non-tariff barriers, so subsidies or other kinds of rules and regulations that make it harder to trade between countries, those things have been around forever. But how they're being used is really different than it was over the last several decades, probably since World War II.

SIERRA: When you Google Washington Consensus, if you ever have, but if you do, countless economic institutions and think tanks have articles analyzing it, and it actually has its own Wikipedia page. So clearly it seems more complicated than I thought. So let's start with the basics then. What the heck is it?

O'NEIL: Well, you found so many articles about the Washington Consensus because people don't actually agree. There's really no consensus about the Washington Consensus. The story is that it came out of this article that a guy named John Williamson wrote.

John Williamson was an economist and he served in many high-level positions including as chief economist for South Asia at the World Bank from 1996 to 1999 and he was project director for the UN panel on Financing for Development in 2001. 

In 1989, he coined the term "Washington Consensus" to refer to the policy reforms promoted by the International Monetary Fund, World Bank, and U.S. Treasury for emerging-market economies.

O’NEIL: And it was this idea that to have a functioning economy in the world and be part of the global economy, you needed to do certain things. You needed to open up your economy to trading goods and services. You needed to potentially open up your economy to the movement, the flow of capital, so allowing money to come back and forth, making your exchange rate easier to exchange and the like. And you needed to reform your government so it wasn't so big, it wasn't such a big part of the economy. So that might've been privatizing all kinds of companies, like privatizing the airline or privatizing your energy...

https://youtu.be/CeeYhhMXHJE?feature=shared&t=1335 

One of the first was Omig, a maker of electronic components... As a private company Omig could operate more efficiently.

https://youtu.be/CeeYhhMXHJE?feature=shared&t=535 

The government also privatized hundreds of other companies from sugar mills to steel mills to the telephone company.

O’NEIL: It then got taken and it became sort of a mantra for lots of policies that were beginning to be pushed by places like the IMF, the International Monetary Fund, or the World Bank, when they would give loans, particularly to emerging economies. And it was a lot of the changes that they wanted in economies in order to give money to those various places. So starting in the 1990s, the 2000s and on. The Washington Consensus was sort of a shorthand for lots of the opening up and reform that was being asked of countries around the world from international financial institutions.

This new approach flipped the old one on its head, saying economic growth was too important to leave in the hands of bureaucrats—and that the only way to thrive was by letting the free markets do their thing.

But even from the jump these ten points were reinterpreted and perhaps misinterpreted. What went on to be known as the Washington Consensus was not Williamson’s idea. He may have coined the term, yes, but the Washington Consensus he wrote was actually a baseline for Latin American reform - a set of ten economic policies that he felt most officials in Washington already agreed upon.

Unfortunately for Williamson, once the term made the rounds it was too late and the Washington Consensus stuck in its reinterpreted form—a rigid set of policy prescriptions seized on by everyone from free-market advocates to anti-globalists.

SIERRA: Why was it so important for us to sort of be at the helm, the top dog economy in the world? Why did these economic ideas come in large part from Washington?

O'NEIL: So it got associated with the United States because in the 1990s, when these ideas came out and were being put in place around the world, the United States was really the sole superpower.

https://www.youtube.com/watch?v=MDDuMUgt-og 

Bill CLINTON: We gathered to celebrate a great victory, a moment when our country has chosen to take the lead in shaping a new world of expanded trade and expanded opportunity...

The 90’s - the era of President Bill Clinton, the collapse of the Soviet Union and the rise of the personal computer. During this time the U.S. was a global powerhouse, heading up the World Bank and holding a very influential position at the IMF. And what began as Washington’s advice for Latin America’s development, had become a worldwide consensus by the mid-1990s. 

O’NEIL: And the United States was, at the time, asking countries to open up their economies, to trade more, to lower those trade barriers and tariffs. So we saw that with what had been, it was called the GATT, which was a bunch of countries together that had trade arrangements. That became the WTO, the World Trade Organization during the 1990s, led by the United States and many other nations. And it had more powers, it could punish people who didn't behave in terms of tariffs as well, which was something that the previous organization had not been able to do. There was no other major power, other country out there that could rival the United States, whether militarily or economically or diplomatically, the changes of the 1990s were really associated with the United States, even if it wasn't just the United States pushing for these sorts of things.

SIERRA: All right, so then the question, does the Washington Consensus from the turn of the century, as you describe it, still stand today at all?

O'NEIL: It no longer has the aura of success that it had.

Takeaway 1: The Washington consensus of the past no longer exists. 

Many of the policies supported by international development organizations, like open trade and free markets, have lost their credibility. And today, there is no baseline consensus among our elected officials on what economic reforms are needed to protect American workers and maintain U.S. leadership in the global economy.

O’NEIL: For advanced manufacturing economies like the United States or like Europe the ideas of the Washington Consensus, the privatization, the opening of the economy, it didn't deal with some of the problems that public and politics cares about today. It didn't deal with inequalities within countries. It didn't deal with jobs lost when trade or technology came to various communities. It didn't deal with the kinds of stuff that people care about and that people vote on, sort of pocketbook issues in lots and lots of communities. So for the United States, for Europe, the Washington Consensus didn't answer the questions that politicians really need to answer today if they want to get reelected. 

https://www.youtube.com/watch?v=YNSUO0vkrzg&t=63s 

It’s bad out here, dude. Rent is really bad.

$300 electric bill? This is what has been going on in America.

O’NEIL: For emerging economies, for countries that are beginning to develop or sort of ascending that scale and trying to become high income countries, the Washington Consensus didn't always help them. So countries that went by the Washington Consensus, countries that really did open up their economies, they did become free trading nations, some of them benefited, but they didn't grow as quickly or become as wealthy as countries that protected their economies, countries like China or countries even like Korea and places like that, that put in what people call industrial policy. They spent lots of government money to make sure they could build ships or they could have other big industries and increasingly things like semiconductors and the like. Some of the most successful stories of economic growth and success, Taiwan or South Korea or China, they didn't follow the Washington Consensus. So that's another reason why it hasn't been as popular, is countries that have grown more didn't follow the mandates of it.

China, now a manufacturing powerhouse and the world’s second-largest economy, thrived by ignoring many Washington Consensus principles in the 90s and early 2000s. It was absent from international institutions supporting those ideas, rejected market reforms, and increased state control over its economy. China focused on domestic development, infrastructure, and poverty reduction. And guess what? Its economy continues to grow rapidly today.

China’s success story challenges longstanding assumptions about free-market economies and proved that developing countries could get ahead without following the advice of the Washington Consensus.

O'NEIL: So I think where we went wrong a bit was the other countries that don't play by the rules, they can get advantage, and that's what happened to some of those places.

SIERRA: So the promises of growth and wealth didn't really pan out for everyone. And others who might've seen growth and wealth didn't necessarily follow this model. 

O'NEIL: Exactly. Sort of those who thought about the Washington Consensus or those who believed and followed the words of the Washington Consensus weren't the biggest performers in terms of economics over the recent years, and so there's real questions about it.

In countries that hopped on the Washington Consensus bandwagon, economic growth was a bit of a rollercoaster.

Take Latin America. After seven years of solid growth in the early '90s, things came to a screeching halt with seven years of stagnation and recession. In the end, growth under the Washington Consensus was half of what it had been in the 1950s to 1970s, and even in places where it looked like the Washington Consensus was sparking growth, poverty didn’t really diminish.

SIERRA: Is this a hot take? Is this sort of like a really edgy thing to acknowledge that it's not working and we need something brand new? 

O'NEIL: I think the challenge here is that many of the ideas in the Washington Consensus are actually very sound ideas. The idea that countries can trade with each other, they can get cheaper consumer goods on one side, that they can join the global economy and make things for places beyond just their local village, brings incredible productivity, brings knowledge transfers, brings their ability to climb technological skills. This has changed the world fundamentally for the better.

SIERRA: So I'm a lawmaker in the U.S., you caught me in an elevator. Tell me what are the key takeaways when it comes to what Washington should change and what you think the new consensus should be? What are your recommendations for me?

O'NEIL: So a new Washington Consensus should start at home and it should provide supports for people who have to make job transitions. So that means healthcare, that means education, that means unemployment insurance and other things to make it easier for people to find new jobs and move to where those new jobs are. That's one side. The other side, since I have you in this elevator, the other side is that you should help Americans and American-based businesses sell to the rest of the world. So that means helping support exporters. It also means tying U.S. production to production in other countries so that the United States can benefit from and prosper from being part of global supply chains, which is really where the global action is today. The way we make things today, the way trade really occurs today is in what economists call intermediate goods. So the pieces and parts that come together to make your iPhone, to make your car, to make your blender, to make your, since we're doing a podcast, your microphone, those come from lots of different countries. And for the United States, it would be great to have our factories, our workers making some of those pieces and parts, not just buying that final product.

Takeaway 2: Creating a safety net at home to deal with changes in the global economy doesn’t mean that we have to pull out of our trade partnerships. Both can exist simultaneously and both should be invested in. 

SIERRA: So it doesn't necessarily mean moving away from globalization, it's just adjustments maybe to be made at home.

O'NEIL: That is a big part of it. The other part, I would say for the United States in particular, if we're searching for solutions, is that the United States is the largest consumer economy in the world, it's a huge percentage of global GDP, but we're only 4 percent of the globe's population. So if we want to grow our economy, we should try to target those other 96 percent of the global population that's out there, the billions and billions of people that aren't within our shores. The next billion middle-class people, coming to the middle-class, are going to be in Asia, they're not going to be in the United States.

In the 2010s, East Asia, particularly China, helped grow the number of people in the middle class around the world to almost 4 billion. This meant more people were able to spend money buying things, which boosted international markets. Now, it's South Asia’s turn. 

Over the next decade, countries like India, Pakistan, and Bangladesh will see a major middle-class boom, contributing 40 percent of the new global consumer class by 2030. With 1 billion new consumers entering the market, the U.S. needs to tap into this rapidly growing base to stay competitive—especially as these regions are projected to drive a huge chunk of global demand in the coming years.

O’NEIL: So as we think about it, yes, we need to provide greater protections here at home for people, give them healthcare, give them childcare, give them a social safety net, unemployment insurance and education, and ways to make a transition. But two, we should also set up policies and economies that allow us to sell products globally into lots of other places because that too is a way of creating prosperity and wealth.

SIERRA: You've convinced me. That's it, that's all I took. Let's get up and we're going to do it. We're going to change everything done.

O'NEIL: We're done here.

SIERRA: Together!

O'NEIL: Okay, you go to Congress and you figure it out.

SIERRA: So who are the big players involved in forming a new Washington Consensus that we should be following? Who are the decision makers here?

O'NEIL: So in the United States, the president is a really big decision maker, and we've seen that over just the last number of weeks, because the president has a lot of powers to set the rules of global trade, or at least trade with the United States. We have seen in the last several weeks lots of tariffs. That has been the biggest tool that the Trump administration has been using.

https://youtu.be/N7eEVC_wY5o?feature=shared&t=78 

Donald TRUMP: I say the most beautiful word in the entire dictionary of words is the word tariff, I love tariff.

O’NEIL: And that is resetting relationships with other countries. It's making it harder for other countries to import things to the United States, making it more expensive for them to bring products here. It is also, especially when there's retaliatory tariffs, so other countries put tariffs on us because we put tariffs on them. It's U.S. products that we want to sell to their consumers in other countries, it's making those products more expensive. There are other decision makers, and I would say there Congress is a big part of this and there where Congress really has influence. Congress too can set tariffs if they want to, or sanctions or other kinds of punitive measures, sticks to hit others who are trading with us. Congress also has the carrot of creating free trade agreements. The president negotiates them, but Congress has to approve them. The question here is really who's guiding the trade policy? And here, so far it has been President Trump. He's really setting the tone and he's asking the trade representative and others within his administration to implement that. 

https://youtu.be/wh8Jry3hUAA?si=wPjmY0SZMdXnUiZy&t=51 

Donald TRUMP: This is the beginning of liberation day in America. We're going to charge countries for doing business in our country and taking our jobs, taking our wealth...

ONEIL: So, so far, that has been putting tariffs on or getting ready to put tariffs on lots of countries and lots of different sectors. It may also be putting other kinds of sanctions or limits or quotas or negotiating agreements around currencies and their levels, vis-a-vis the dollar. All of those things are really in the purview of those working around Trump, and so the trade representative is a big part of that whole process.

Trump isn’t the first president to enact trade policy without consulting Congress. Jimmy Carter imposed sanctions on Iran in 1979 during the hostage crisis. George W. Bush and later Barack Obama imposed unilateral sanctions on North Korea in response to its nuclear weapons program.

But under Trump, a lot remains unprecedented, especially when punitive measures are directed at U.S. allies. And this makes it really confusing to know how much leverage Congress even has, and who’s actually steering the ship when it comes to making these big economic decisions.

To find out more we turned back to Ted Alden, the CFR trade expert you heard in our first episode. 

Edward ALDEN: I mean, it's quite interesting. Trump wrote in a book 25 years ago now, that if he was ever elected, he was going to name himself as his own U.S. trade representative. The USTR is the official who's supposed to be responsible for things like putting tariffs in place. Trump said, "I'll be my own USTR." He said, "I've looked at it, my lawyers have looked at it, and I can do that." Well, that's effectively what he's done. He's in his first 30 days or whatever in office, he basically remade American trade rules.

SIERRA: But he didn’t actually literally take the job, right. There is a U.S. trade rep right. What’s his deal?

ALDEN: So Jamieson Greer, who's the new trade representative, was a protege of Robert Lighthizer, who was Trump's first term USTR. Bob Lighthizer himself was a big departure. All of the trade representatives going back a long time, basically believed in the WTO, believed in NAFTA, believed in the rules-based system. It's not that they didn't have conflicts with other countries, they certainly did, but by and large, they believed in the system. Lighthizer from day one hated the idea of the WTO. He was very much in line with Trump in thinking the United States was being screwed by these arrangements. 

https://youtu.be/XqsRUM-pRa8?si=vpM6kCBjSnyOpcuA&t=7 

Robert LIGHTHIZER: There is nothing conservative about free trade. What exactly are these people conserving?...No country ever became great by consuming. They became great by producing. 

ALDEN: But he's also a trade professional, he's worked his whole life as a trade lawyer, and everything he did in the first term was by the book. He was much more aggressive than previous U.S. trade representatives had been. Everybody, me included, I wrote as much, thought he was coming back in this term, probably as Commerce Secretary, maybe as Treasury Secretary. Trump didn't invite him back. And the only little bit of reporting we got on it is that Trump didn't think he was tough enough, didn't think he was willing to do the things they were called for. So even though Lighthizer was by far the most aggressive U.S. trade representative of the last 75 years, Trump didn't think he was tough enough and left him on the side. So Jamieson Greer worked for Trump in the first term, but you have to think he's basically there to carry out the wishes of the President. That will be his role.

Takeaway 3: When it comes to the future of U.S. trade and consensus in Washington, Trump has set himself up to call all the shots.

With a rookie as the new U.S. trade representative and a mix of trade hawks and old-school Republicans in senior economic positions, Trump has the unwavering support, and leverage, to be more unpredictable than his first term in office. He’s hitting our allies Mexico and Canada with tariffs on steel, aluminum, and automobiles and has planned reciprocal tariffs on dozens of other nations including China. But the end goal of these actions...still remains unclear.

SIERRA: Okay so Trump doesn’t think his former Trade Rep was tough enough and brought in a new guy but is also simultaneously sort of doing it all himself. What does he ultimately want this term?

ALDEN: What does he want? I mean, he'll tell you that he thinks the United States has been taken advantage of, that other countries have gotten the better of this rules-based system that was built by his predecessors, and he's going to turn it on his head. And he has one big piece of leverage, he actually probably has more. But the biggest piece of leverage he has is the U.S.'s huge market. And every country in the world wants to sell to us because we're a rich country and we buy lots of stuff. So by threatening to cut that off, by threatening to say, "I'm going to put a 25 or a 50 or 100 percent tax on your exports, you're going to have a really hard time selling in the United States." That gives him huge leverage. The question is, what does he want to use it for? And we don't exactly know yet. I mean, he talks about other countries may be lowering their tariffs. Here in North America, he's using it to try to deal with drug smuggling across the border and illegal migration. From there, it gets even more confusing. He's talked a lot about revenue.

Fun fact, the first form of revenue the U.S. ever had was a tariff. In 1789, the Hamilton Tariff put a 5 percent tax on imported goods to offset a young America’s trade imbalance with England.

ALDEN: The tariff was an important source of revenue for American governments after the revolution into the 19th century. Hasn't been for more than a century. He's talking about raising revenue from these tariffs that maybe offset the tax cuts he wants to do. So that's in there somewhere as well. And there's something of a national security dimension. Here, he's kind of consistent with President Biden and even going back to President Obama, that there's certain things, particularly we don't want to sell to the Chinese, trade with the Chinese because we see them as a strategic adversary, and we're worried about that dimension. So some combination of those three things. But your listeners all know the way our current president operates. He says a whole bunch of stuff, and then all of us sit here on the podcast trying to make sense of it. And it's not clear to me that he has a thought through strategy. He's got a lot of impulses that go in a lot of different directions, and we're going to have to see where it all lands.

SIERRA: If President Trump is sort of deciding and leading all things trade, what role does that leave for congress?

O'NEIL: I would go back to history, and you don't have to go back to far history, you just go back to the history of 2019 and 2020 when the previous Trump administration renegotiated the USMCA, so the relationship with Canada and Mexico. And what we saw there is this was a Trump-led initiative. He had very strong feelings about the previous agreement, NAFTA, and wanted a change. So he and his administration negotiated, but then Congress got involved. And that was an example when a bipartisan group, and dare I say, consensus, came together to pass a new free trade agreement with the United States' two neighbors. And here, Congress plays an important role, one, because they, in the Constitution, have the power of the purse. They have the power over tariffs and free trade agreements. They have to sign on for these things, so that's important. But two is Congress is made up of members from all over the United States. And particularly with Mexico and Canada, these two countries, lots of districts, many states have really deep trading relationships with these two countries. In fact, the majority of states have really deep relationships. So it's members of Congress and senators who see in their districts the big exporters. They see the factories, they see the service providers, they see the logistics companies, they see the truck drivers, they see the people who benefit from trade with our neighbors and trade more broadly. So what are the role here? What's the solution? I think the solution here is actually to get Congress involved because they'll hear from their constituencies, from their business leaders, from their workers in their states, in their districts, in their cities, in their towns, what they need and where they see the ability to be profitable and to grow. And for many of them, it's going to be international trade.

SIERRA: Ultimately, your solutions of course make sense - it’s just logical. Provide a social safety net at home through reform by helping people who lost their jobs find new ones, lowering the barrier for selling abroad, and looping in Congress as representatives of the people. All things that make sense. But we also know that in our current political climate things, even if they make sense, do not always come true. They are very polarized. So how do we get leaders to take this advice? 

O'NEIL: This has always been a really hard issue here in the United States is putting this forward, and we have a system that is very different. We have seen advances. Under the Obama administration, we did see some advances in healthcare for those people who didn't have healthcare with their jobs or didn't have a job. So we can get there in different places. And we see examples of healthcare in other countries where they're able to do this. So is it hard to do? Of course it's hard to do. Lots of things are really hard to do. But if we want to get past a place where America first means closing off America to the rest of the world, which will be costly for lots of those people that we're worried about, who are worried about their jobs, these are some of the elements that we're going to have to deal with.

In order to come to new consensus, we have to involve the people that these policies directly affect. And how do that? Well, we ask them of course. That’s why next time on Why It Matters, we’re talking to local business owners and manufacturers around the country and diving into tariffs with CFR’s senior fellow Matt Goodman.

Matt GOODMAN: There's a lot of uncertainty that's been created here that is making it hard for business owners all across the country. If you can't know whether these tariffs are going to stay in place or not, it's very hard to make business plans that you can confidently rely on. So, whether it's American importers and consumers who are paying these higher prices or not able to enjoy the benefits of those products from abroad, or U.S. business owners who may suffer under those tariffs and now has this uncertainty about what's coming next.

Who pays in a trade war? And how are Americans reacting to Trump’s tariffs? More on that in two weeks.

For resources used in this episode and more information, visit CFR.org/whyitmatters and take a look at the show notes. If you ever have any questions or suggestions or just want to chat with us, seriously, email at [email protected] or you can hit us up on X at @CFR_org.

Why It Matters is a production of the Council on Foreign Relations. The opinions expressed on the show are solely that of the guests, not of CFR, which takes no institutional positions on matters of policy.

This episode was produced by Molly McAnany, and me, Gabrielle Sierra. Our sound designer is Markus Zakaria. Our interns this semester are Isabella Hussar and Jo Strogatz. Robert McMahon is our Managing Editor. Our theme music is composed by Ceiri Torjussen.

For Why It Matters this is Gabrielle Sierra signing off. See you soon!