Economic populism has swept the West since before former President Donald Trump entered the political arena. What once began as a ripple of populist sentiment has surged into a wave of protectionist platforms enchanting leaders on both the left and right. Our international order has crept closer to our mercantilist past as a result, diminishing economic growth and increasing tensions among nations.

Understanding why countries are courting protectionist worldviews is crucial to revitalizing international trade, reducing global poverty, and easing foreign policy tensions. There are countless theories that could explain such an inward shift, but I’ve whittled them down to what I believe are the three best explanations that capture our current moment.

1.      Fall in Global Economic Inequality

One possible explanation for the surge of economic populism in the West is the narrowing of global economic inequality. As poorer nations catch up, wealthy nations view themselves as falling behind in the race for economic hegemony. Frequent cries of rising rates of economic inequality by economists such as Thomas Piketty and Branko Milanovic only incite deeper feelings of inadequacy among wealthier nations. Despite declarations of rising global inequality from all corners of academia, poorer nations are growing faster than wealthier nations, generating increased resentment among the West. Such sentiments are rooted in zero-sum thinking — often negative-sum — in which developing nations are believed to benefit at the expense of their wealthier counterparts.  

It’s important to note that it’s not globalization per se that’s fueling this populist backlash, but an acute feeling among the West of falling behind the rest. As Johan Norberg explains in his most recent book, “Twenty years ago, capitalism was wrong because supposedly it made the world’s poor poorer. Now it is wrong because it makes the poor richer.”  Or take Trump’s own words from a speech he delivered on the campaign trail in 2016:

“From 1947 to 2001, a span of over five decades, our inflation-adjusted Gross Domestic Product grew at a rate of 3.5 percent. However, since 2002, the year after we fully opened our markets to Chinese imports, the GDP growth rate has been cut in half.”

Similar statements are echoed far beyond American shores, from the United Kingdom’s Nigel Farage to Hungary’s Viktor Orbán. And it’s not only right-leaning politicians who sing their anti-globalist songs. President Biden delivered a similar proposal to outcompete the rest of the world within his first month in office. His decision to keep a majority of Trump’s tariffs illustrate the bipartisan appeal of protectionism.

A strange inversion has occurred since the economic optimism of the post-Cold War world has waned: it is now the developing countries that are viewed as looting the West, and the only way to reassert global supremacy is to raise trade barriers.

2.      Special Interest Groups

When Mancur Olson published his influential 1982 book, The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities, many Western countries were exiting a serious stage of economic malaise, marked by high inflation and unemployment. Olson attributed this era of stagflation to the rise of “distributional coalitions,” or special interest groups who clamor for industry-specific regulations so they can prevent would-be competitors from chiseling their profit margins. As nations develop over time, special interest groups become more prevalent and organized, reducing innovation and economic growth.

While Olson’s theory doesn’t explain the whole story behind the West’s slower growth rates — union membership has fallen precipitously since the 1950s, for example — it’s illustrative of the many institutional forces contributing to economic sluggishness today. For instance, entrenched special interests in highly regulated states such as California and New York continue to thwart new housing construction, dampening growth rates and prolonging America’s chronic housing crunch. Special interest groups — from the American Medical Association to State Boards of Cosmetology to young people petitioning for student loan forgiveness — undercut the forces of competition critical to a dynamic economy.

Economic populists harness these internal causes of growth decline and redirect them toward “outsiders” — developing nations who are supposedly sapping the West of their economic potential. Mancur Olson’s theory of special interest coalitions gumming the engines of economic growth has presaged the economics of grievance luring the West into their populist stupor.

3.      Identity Crisis

The attraction of economic populism has become so alluring because it addresses deep social and cultural concerns shaking Western nations worldwide. Traditional “globalists” — and even many classical liberals — have failed to speak the language of economic populists, whose platforms speak directly to feelings of lost national identity and social cohesion. As AIER’s Samuel Gregg writes in his book, The Next American Economy: Nation, State, and Markets in an Uncertain World, classical liberals have an opportunity to reintroduce the ideas of free enterprise in ways that address long standing social and cultural unease. In fact, Gregg argues that the very case for free markets needs to be “wrapped into a broader story about America.”

Until pro-market ideas are woven into a larger narrative about identity, economic populists will continue to exploit economic grievances that bleed into greater social and cultural anxieties. Be it crime, immigration, or globalization, populist leaders appear to be listening to the pleas of their people, even if their misguided protectionism leads them astray.

A Perfect Storm?

There are many factors contributing to the avalanche of economic populism in the West. The three explanations I present here are not intended to be exhaustive, but merely to serve as a guide to diagnosing the leading causes of economic populism in our age. While globalization is partly to blame for the rise of economic populism, it’s misleading to assert that free trade is itself the culprit of the West’s inward turn. Rather, zero-sum thinking combined with decades-old institutional rigidities and widespread identity crises have created the perfect storm of economic discontent upon which populists have been quick to seize. Addressing these root causes of economic populism through the lens of classical liberalism will require careful choreography, but we must advance the principles of free trade and permissionless innovation if we are to inspire faith in human progress and national flourishing.