Globalization, tariffs and democracy: economist Dani Rodrik on why isolationism isn’t the answer

“Self-sufficiency is a path to economic decline. No country, even if you’re the United States or China, can prosper without the world markets getting inputs from the rest of the world.”

So says Dani Rodrik, Ford Foundation Professor of International Political Economy at Harvard’s John F. Kennedy School of Government, who has long argued against unfettered globalization and backed the use of industrial policy for economic development.

2025 started amid fears of a global trade war sparked by US President Donald Trump’s imposition of tariffs on US imports. At this year's World Economic Forum's Annual Meeting, Rodrik spoke to Radio Davos about the failures of "hyper globalization"; the benefits, as well as dangers, of economic nationalism; and why having a thriving middle class is vital to maintain democracy.

Here are the key points of what he had to say.

A major cause of the political polarization seen in most developed countries is the “mindless prioritization” of globalization in the early 1990s, Rodrik says. During that time domestic economic, social and environmental objectives fell by the wayside and policymakers focused on how to integrate into the world economy, rather than asking how the world economy could help them achieve their own goals.

“As economies became more integrated with each other, they became more disintegrated within themselves – with inequalities in income, in social and cultural perceptions, in a sense of disconnect between the ordinary people and the political elites,” Rodrik says.

A key player to benefit from this era was China, he adds, although notably much of its success was due to taking a very controlled approach, rather than playing by the usual hyper-globalization rules of simply opening up to the global economy.

As highlighted by China’s success, industrial policy is an important lever that governments can use to structure and diversify their economies to become more productive, lay the stage for future economic growth, and create opportunity.

Even in the US at the height of industrial policy being seen as “intellectually unfashionable”, there were various ongoing under-the-radar policies of support for small businesses, research and innovation – measures which became even more important when it came to competing with China and in enabling the green transition.

One such industrial policy that Rodrik supports is the Biden administration’s 2022 Inflation Reduction Act (IRA), the US federal subsidy programme aimed at spurring investment in green technology and decarbonization.

Amid a significant reduction in the cost of renewables – thanks, in large part, to China’s subsidizing of green technologies, incidentally – and a backlash against carbon pricing, what was key to the IRA’s success is that it sought to emulate Chinese industrial policy to achieve technological progress in new green and renewable industries in such a way that generates political support.

“And the further you go down this path, the more you strengthen green industries or renewable energy and the regions in the country that benefit from that…that creates a political momentum that enables you to embark on the decarbonization path through the carrots rather than the sticks,” Rodrik says.

Indeed, it is for this reason that Rodrik expects Trump – a critic of the IRA – will not row back on it to the degree he threatened during the presidential election campaign.

“I think for political reasons, many of these policies will remain in place because there are a lot of companies, a lot of sectors, a lot of regions that are benefiting from these incentives. So they will not want these incentives curtailed,” Rodrik says.

As for "economic nationalism":

"Economic nationalism is one of these scare words," Rodrik says.

"But there are different varieties of economic nationalism. One variety actually can be quite helpful, not just to an economy, but also to the world at large. I call that variety, for lack of a better word, developmentalism, which is countries trying to pursue their own developmental agenda."

However, he warns that other varieties of economic nationalism – such as mercantilism or, at its most extreme, economic imperialism – can be very damaging.

“Self-sufficiency is a path to economic decline,” Rodrik warns. “No country, even if you’re the United States or China, can prosper without the world markets getting inputs from the rest of the world, getting technology where you’re not at the forefront, accessing markets for your exports and so forth.

“To the extent that economic nationalism is putting your own national economic interests first, there’s no way you can do that without using world markets. So I don't think isolationism is what smart economic nationalists would choose to do.”

So where does this leave Trump’s tariffs and his threat of a global trade war? Within days of his inauguration, the US president announced tariffs on Canada, Mexico and China, with more expected. China has since imposed retaliatory tariffs.

"I think tariffs have their uses," Rodrik says.

"Tariffs can be a shield to protect your domestic economic policies or your economic social arrangements. So occasionally you may use it in order to protect what you're doing domestically.

"But it's not a Swiss Army knife in the sense that on its own it's going to fix a lot of problems."

He adds: “I think Trump’s approach to tariffs is that he’s basically viewing tariffs as a kind of all-purpose policy that’s going to fix America’s competitiveness problem, restore the middle class, create lots of jobs. It’s going to fix the trade balance. It’s going to reassert the US dollar as a kind of reserve currency.

“Tariffs on their own cannot do that. Tariffs can be at best, a complement, can play a support role for a domestic economic strategy."

Accordingly, he also urges other countries to stay calm and not retaliate as “ultimately, the costs are born mostly at home”.

Hyper globalization has had significant ramifications beyond the economy too which, Rodrik believes, threaten the fabric of democracy.

“The erosion and increasing economic insecurity of the middle class is a significant underpinning of what’s happening in our democracies,” Rodrik says. Indeed, he blames the erosion of the middle class as a leading cause of the significant gains made by authoritarian forces, the far right and right-wing populism across the world – particularly in advanced economies.

To protect democratic values, it is therefore vital to make efforts to restore the middle class by creating “good jobs” – jobs which have become scarce as a consequence of globalization and a wider move to service-based industries in an increasingly deindustrialized world. And collaboration between governments, businesses and workers themselves will be key.

“A sustainable, healthy democracy relies on a broad middle class. And I think we need a very serious think on how we do that. Trying to bring back manufacturing is not going to do it. Fighting geopolitical wars with China isn’t going to do it,” warns Rodrik.

“Even the green transition, as important as it is, it’s not going to do it. So we need an entirely new strategy that’s based on the creation of good jobs in services to rebuild a middle class.”

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