The Redundance of Neoliberal Economics and the Paradigm Shift in American Economics by LIU Guozhu

Despite neoliberal inertia, this paradigm shift is likely to have lasting effects on U.S. economic policy, regardless of which party is in power.

Welcome to the 36th edition of our weekly newsletter! I’m SUN Chenghao, a fellow with the Center for International Security and Strategy (CISS) at Tsinghua University, Council Member of The Chinese Association of American Studies and a visiting scholar at the Paul Tsai China Center of Yale Law School (fall 2024).

ChinAffairsplus is a newsletter that shares articles by Chinese academics on topics such as China’s foreign policy, China-U.S. relations, China-Europe relations, and more. This newsletter was co-founded by my research assistant, ZHANG Xueyu, and me.

Through carefully selected Chinese academic articles, we aim to provide you with key insights into the issues that China’s academic and strategic communities are focused on. We will highlight why each article matters and the most important takeaways. Questions and feedback can be addressed to sch0625@gmail.com

Today, we have selected an article written by Liu Guozhu, which focuses on Neoliberal Economics and the US Economy.

Edited by ChinAffairs+.

Summary

Since the late 1970s and early 1980s, neoliberal economics has dominated the U.S. However, in effectively addressing issues associated with the 2008 financial crisis, the COVID-19 pandemic, climate change, and emerging great-power competition, neoliberal economics has increasingly struggled, triggering a cascade of challenges in the United States: the offshoring of manufacturing the sector, declining employment rates, increasing wealth inequality, weakening technological innovation capabilities, widening trade deficits, and vulnerable supply chains.

From Obama to Biden, three administrations have crafted distinct advanced manufacturing strategies with varying emphases, aiming to rebuild a U.S. manufacturing system centered on cutting-edge industries through heightened federal intervention in the economy. This underscores a profound realignment of U.S. manufacturing strategy and policy amid the latest technological revolution and ongoing great-power competition, while signaling a paradigm shift in American economics. The emerging paradigm is poised to exert profound influence on U.S. economic policy and the global political-economic order over the long term.

Why It Matters

Since the 2008 financial crisis, the limitations of the United States’ neoliberal economic policies have become increasingly apparent. Issues closely tied to national security have gradually surfaced, such as the hollowing-out of the manufacturing sector and the intensification of social inequality. These challenges have been further exacerbated by the COVID-19 pandemic and the escalating strategic competition between China and the United States. The decline of American manufacturing has led to widespread job losses, undermining national economic security and social stability. This industrial downturn has deepened the sense of anxiety among lower socioeconomic groups and fueled growing public dissatisfaction with the federal government.

Against the backdrop of a restructuring global economic order and intensifying U.S. strategic competition towards China, Trump, upon his re-election, has implemented measures such as imposing tariffs and restricting imports and exports to promote the reshoring of American manufacturing. At the same time, he has vigorously advanced the localization of high-tech industries through federally coordinated initiatives aimed at developing large-scale domestic technology projects. Leading technology companies such as NVIDIA and Apple have announced plans to gradually relocate their production bases back to the United States.

This article reviews the historical trajectory and social drivers behind the shift in U.S. manufacturing policy, while also uncovering the underlying rationale of the Trump administration’s current “industrial reshoring” initiatives.

Key Points

1. The Impact of Neoliberal Economic Policies on the Economic Prosperity and National Security of the U.S.: Undermining Manufacturing, Supply Chains, and Technological Leadership

When Ronald Reagan became U.S. president in 1981, he introduced neoliberal economic policies—later termed “Reaganomics”—to address high taxes, inflation, and unemployment. Emphasizing deregulation, tax cuts, and free-market capitalism, neoliberalism favored limited government, global integration, financial capital, and consumer welfare. It became dominant across both Republican and Democratic administrations and underpinned the post–Cold War Washington Consensus. In industrial policy, neoliberal economists opposed government intervention, arguing that it hindered productivity. While globalization increased corporate profits and consumer access to cheap goods, it also accelerated U.S. manufacturing’s offshore shift, causing industrial decline and hollowing out, thus weakening domestic economic resilience and national security.

• The Decline of U.S. Manufacturing Has Led to Insufficient Job Creation and Growing Income Inequality

Between 2000 and 2011, U.S. manufacturing experienced a significant decline. Real growth averaged just 1.3% annually, and sectors like semiconductors and machine tools saw drastic output and company reductions. Iconic firms such as Lucent and Motorola lost global standing or collapsed. Employment in manufacturing fell by over 5 million jobs—a 31.4% drop—especially in the Rust Belt. Daily, the U.S. lost 15 manufacturing firms and 1,276 jobs. This decline worsened income inequality: while the top 1% saw incomes rise 450%, most households earned less in real terms in 2015 than in 1973, fueling social division and instability under neoliberal economic policies.

• The Decline of U.S. Manufacturing Has Led to a National Security Risk: Foreign Supply Chain Dependence

From 2000 to 2022, the U.S. faced a widening trade deficit in advanced manufacturing, especially in computers and electronics. By 2022, the deficit in high-tech goods hit a record $241.6 billion. As domestic manufacturing declined, the U.S. grew increasingly reliant on foreign supply chains, exposing vulnerabilities in critical infrastructure, healthcare, and defense. Events like the 2009 H1N1 outbreak, Hurricane Katrina, and COVID-19 revealed severe shortages and disruptions. Poor-quality imports compromised safety in major construction projects. These developments heightened bipartisan concerns over national resilience and the economic dangers of deindustrialization and external supply dependence.

• U.S. National Security at Risk Due to an Eroding Defense Manufacturing Base

The U.S. National Security Strategy emphasizes a strong domestic innovation base as essential for converting ideas into defense-ready technologies. However, decades of manufacturing decline have weakened the defense industrial foundation. The loss of advanced manufacturing—particularly in microelectronics and semiconductors—threatens U.S. military technological superiority. Additionally, key defense supply chains now rely on a shrinking pool of domestic suppliers, reducing resilience. The rise of counterfeit foreign components, especially from Asia, has further undermined trust in supply integrity. The Department of Defense declaimed that to ensure national security, the U.S. must rebuild its defense manufacturing and secure, resilient supply chains urgently.

• The Decline of U.S. Manufacturing Has Led to the Erosion of U.S. Innovation and R&D

The migration of manufacturing abroad has significantly undermined U.S. innovation and research capabilities. The loss of manufacturing capacity directly impacts research, development, and engineering expertise, creating a vicious cycle. Without advanced manufacturing and engineering capabilities, it becomes increasingly difficult for businesses to develop new products or technologies. This issue is exemplified in the telecom sector, where the U.S. has fallen behind competitors. Outsourcing has caused the U.S. to lose critical engineering skills and manufacturing infrastructure, weakening its ability to innovate. The U.S. government recognizes the connection between manufacturing and innovation and has fears that continued outsourcing will erode both manufacturing and R&D capabilities, ultimately threatening national security and economic stability. The U.S. must adopt a more proactive strategy to rebuild its advanced manufacturing base.

2. The Strategic Framework For Rebuilding U.S. Advanced Manufacturing

The U.S. attempt to rebuild advanced manufacturing began with the 2010 National Competitiveness Act, which established a committee under the National Science and Technology Council to coordinate federal R&D efforts. Both Democratic and Republican administrations have recognized the importance of leading in advanced manufacturing for economic prosperity, global competitiveness, and national security.

• Rebuilding Advanced Manufacturing through Key and Emerging Technologies and Related Manufacturing Innovations

Both Democratic and Republican administrations in the U.S. have emphasized breakthroughs in key and emerging technologies as essential for maintaining global leadership in advanced manufacturing. The Obama administration focused on overcoming market failures and initiating basic frameworks for advanced manufacturing. The Trump administration adopted a more proactive approach, prioritizing technological innovation in sectors like smart manufacturing, microelectronics, and medical products. The Biden administration had similar goals to those of Trump, emphasizing innovation in microelectronics and materials, while also focusing on clean energy and supporting the bioeconomy. This reflects bipartisan consensus on advancing U.S. manufacturing capabilities.

• Strengthening Public Investment in Basic and Applied Research to Enhance Innovation in Advanced Manufacturing

Since World War II, the U.S. federal government has played a crucial role in funding scientific research and technological innovations. From Obama to Biden, each administration has continued to emphasize research but with different focuses. Obama, facing the financial crisis, promised to double the budgets of key scientific agencies and approved significant funding for federal research projects. However, fiscal constraints followed. Trump prioritized applied research, particularly in emerging technologies such as AI and quantum computing, making significant investments in these areas. Biden emphasized both basic and applied research through initiatives like the CHIPS and Science Act, which allocated billions for semiconductor and energy research. Despite delays in funding for the NSF (National Science Foundation), Biden’s administration emphasized advancing both foundational and applied research to maintain technological leadership in semiconductor manufacturing, clean energy, and other critical areas. This continued focus on research funding reflects the importance of strengthening America’s innovation base in advanced manufacturing.

• Actively Optimizing and Developing Advanced Manufacturing’s Domestic Ecosystem

A favorable domestic ecosystem is crucial for the development of advanced manufacturing. Although each administration has had different focuses, Presidents from Obama to Biden have implemented policies to optimize the U.S. advanced manufacturing ecosystem.

First, tax credits play a significant role in reducing the economic burden on manufacturers and stimulating investment. Initially established under the Economic Recovery Tax Act of 1981, R&D tax credits were permanently extended in 2015 through the Protecting Americans from Tax Hikes Act. Obama expanded these credits to renewable energy, providing $13 billion in tax incentives for the industry. Additionally, Obama introduced incentives to bring jobs back to the U.S. and supported manufacturers through tax reductions on equipment investments. Biden’s administration focused tax incentives on semiconductors and clean energy. The CHIPS Act offers a 25% investment tax credit for semiconductor manufacturing, while the Inflation Reduction Act provides substantial incentives for clean energy industries.

Secondly, Biden’s industrial subsidies, including the CHIPS Act and the Inflation Reduction Act, provided significant financial support for domestic semiconductor manufacturing and clean energy.

Finally, the federal government’s establishment of innovation centers fosters advanced manufacturing through collaboration and innovation: Obama’s Advanced Manufacturing Partnership and Biden’s TechHubs Program continue to perform these functions.

• Revitalizing Domestic Advanced Manufacturing and Strengthening Supply Chain Resilience

Although the importance of supply chain resilience was recognized during Obama's presidency, it was viewed mainly from a global trade perspective. The U.S. aimed to ensure the efficient and secure flow of goods in global supply chains. Obama’s strategy focused on maintaining global trade stability and securing supply chains against disruptions.

In contrast, the Trump administration focused on manufacturing and national security. In 2017, he ordered an evaluation of U.S. manufacturing capacity and supply chain resilience. Based on the findings, Trump emphasized strengthening domestic manufacturing supply chains as part of his advanced manufacturing strategy. His policies prioritized small and medium-sized manufacturers, innovation ecosystems, and defense-related industries. Biden, building on Trump’s efforts, responded to the COVID-19 crisis by addressing the structural weaknesses of U.S. supply chains, particularly through historic investments in semiconductors and clean energy industries. Biden’s approach also emphasized leveraging the U.S.’s alliances to build resilient global supply chains while strengthening domestic manufacturing.

• Using Infrastructure Construction to Propel Advanced Manufacturing Development

While infrastructure itself doesn’t directly drive advanced manufacturing, strong infrastructure can reduce transportation bottlenecks, lower production costs, and stimulate demand for manufacturing services. Historically, the U.S. had the world’s most advanced infrastructure, but it now faces deterioration.

Trump initiated the push to rebuild U.S. infrastructure, proposing a $200 billion federal investment to stimulate $1.5 trillion in state and local spending. However, partisan disagreements led to a legislative stalemate. After the 2020 elections, the Democrat-led Congress passed the Bipartisan Infrastructure Bill, marking the largest federal investment in infrastructure, including $110 billion for roads, bridges, rail, and energy projects, alongside significant investments in clean energy and public transit systems.

4. The Paradigm Shift in Contemporary American Economics and its Logical Mechanisms

Since the Obama administration, US government strategy and policy to promote the development of advanced manufacturing have reflected adjustments made in response to crises and opportunities. These adjustments have been promoted by major political forces in the United States. They represent the fundamental fact that the neoliberal economic paradigm, which has dominated the United States for nearly half a century since the late 1970s and early 1980s, is increasingly declining, and a new economic paradigm is emerging.

• Signs of a Shift in U.S. Economic Paradigms: Two Major Sides Seek a New Consensus

Throughout U.S. history, shifts in economic paradigms have not been exclusive to one party but have gradually formed a dominant policy consensus between the two major political factions. In the 20th century, figures like Franklin Roosevelt, Dwight Eisenhower, and Ronald Reagan helped mold the New Deal and later the neoliberal consensus. However, this paradigm began to shift during Obama’s presidency, with his focus on strengthening domestic manufacturing. The 2016 U.S. election, marked by Trump’s withdrawal from the Trans-Pacific Partnership (TPP), signaled a growing rejection of neoliberalism. Both parties, through think tanks like the Roosevelt Institute and conservative groups such as American Compass, began seeking alternatives. These groups advocated for industrial policies focused on rebuilding U.S. manufacturing, recognizing its strategic importance for national security and economic resilience. This shift is evident in policies like the CHIPS Act and the Endless Frontier Act, indicating a bipartisan push toward modern industrial strategy.

• The Historical Tradition of Federal Policies Promoting U.S. Manufacturing

The push for industrial development through federal policies is deeply rooted in U.S. history, reflecting core American values. This tradition, known as the “American Syetem,” was championed by early political figures like Henry Clay and Alexander Hamilton, who emphasized the importance of manufacturing for national security and independence. Hamilton’s ideas influenced later presidents, including Abraham Lincoln, who enacted protective tariffs and infrastructure projects to support industrial growth. Scholars like Friedrich List and Henry Carey further developed these ideas, advocating for tariffs and government intervention to foster domestic industries and protect economic sovereignty. The debate between “big government” and “small government” continues to shape U.S. economic policy today.

• Opportunities, Challenges, and the Shift in the U.S. Economic Paradigm

Shifts in economic paradigms often occur in response to significant opportunities or challenges. In the U.S., the Great Depression and the stagflation of the 1970s led to the rise of the New Deal and neoliberalism, respectively. The latest paradigm shift has been spurred by a new technological revolution, changing global power dynamics, and the COVID-19 pandemic. Technological advancements present both opportunities and risks, with U.S. policymakers focusing on maintaining leadership in advanced manufacturing. Meanwhile, rising competition from China, particularly in industries like manufacturing and high-tech, has fueled concerns and prompted calls for bold industrial policies to ensure economic security and competitiveness.

Conclusion

Neoliberal economics has significantly impacted U.S. economic security and prosperity, while a new technological revolution presents both opportunities and challenges. Additionally, the emerging global competition from other great powers has led both liberal and conservative thinkers in the U.S. to recognize the necessity of abandoning the neoliberal philosophy that has dominated since the Reagan era. Federal industrial policy is now seen as essential and inevitable. The core idea behind this shift, seen in movements like the “New Washington Consensus”, ”Bidenomics”, and “National Developmentism”, is the need for comprehensive policies to ensure U.S. leadership in advanced manufacturing and emerging technologies. Despite neoliberal inertia, this paradigm shift is likely to have lasting effects on U.S. economic policy, regardless of which party is in power.

About the Author

Liu Guozhu 刘国柱：He is a professor and researcher at Zhejiang University, and the director/researcher of the Center for American Studies. His main research areas include US foreign relations, international relations, and non-traditional security issues. Liu’s multiple research reports have been collected and reported by the National Development and Reform Commission, the Ministry of Foreign Affairs, and CCTV.

About the Publication

Forum of World Economy & Politics 《世界经济与政治论坛》：Forum of World Economy & Politics is an academic journal sponsored by the Jiang Su Provincial Academy of Social Sciences. It reflects the latest developments in the fields of global economics and international politics, and tracks topical international issues.

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