Are We the Mercantilists?

The U.S. is playing defense against this practice, not embracing it.

As proponents of national-interest economics begin to take primacy on the American Right, a number of formerly stigmatized terms have been reclaimed. “Industrial policy” and “economic nationalism,” for example, have undergone a process of semantic lustration, cleansing them of their formerly negative connotations. The next question, then, is just how far such reclamation goes, and which terms will be welcomed into the newly reemergent fold, or sorted back into the realm of the insult. Perhaps the biggest of these is “mercantilism,” a word used for centuries to describe a controversial beggar-thy-neighbor approach to international trade. Is this what President Trump and his acolytes are practicing, and if so, can it be accurately described as a positive?

While some might find this temptingly edgy, embracing mercantilism is a bad idea for two reasons. The first is that the term has effectively become a meaningless slur. The second and more important reason is that China, not the Trump administration or the U.S. in general, has destroyed political and popular support for a neoliberal trading system worldwide with its aggressive use of strategies that seek to maximize the Chinese share of crucial manufacturing industries at the expense of trading partners. Not only the U.S. but also the nations of Europe, India, and other countries are throwing up barriers to Chinese monopolization of their markets for steel, automobiles, and other goods in self-defense, not as part of systematic strategies to corner the global market themselves. Far from representing mercantilist aggression, the trade strategy of the two Trump administrations, like that of the Biden administration, represents a defensive reaction against aggressive Chinese mercantilism. And the strategies of import substitution and reciprocity in trade are not forms of mercantilism but defensive alternatives to it.

For libertarians and neoliberals of Left, Right, and Center, “mercantilism” has become an all-purpose smear deployed against President Trump for any deviation from free-market orthodoxy. Calling modern economic nationalism “mercantilist” serves the same function as right-wing charges of “socialism” or “communism” or left-wing charges of “fascism.” All three smears seek to delegitimate reasonable and debatable contemporary policies by associating them with hateful and extinct regimes, such as the USSR and Maoist China (“socialism”) and Nazi Germany and Fascist Italy (“fascism”). The charge of “mercantilism” seeks to stigmatize strategic trade and industrial policies in the U.S. and other advanced industrial societies by associating them with the allegedly discredited practices of seventeenth- and eighteenth-century European empires. An example is the headline of an op-ed by economic journalist Kate Andrews in the Washington Post last March: “Trump is all in on a bad economic policy from centuries ago: Mercantilism made Europe’s colonial powers poorer. Trump is trying a modern version anyway.”

As smears go, “fascism” and “communism” are more vivid and potentially effective than any claim of misguided mercantilism: “The Trump administration is repeating the mistakes of the Walpole ministry in eighteenth-century Britain and of Colbert in Louis XIV’s France!” But while normal people might not feel horror and disgust at the thought of restrictions on the colonial carrying trade of the British, French, and Spanish empires, the founding myth of modern academic economics (in the U.S., not necessarily other countries, and only since World War II) is that the “science” of economics was founded by Adam Smith’s publication of The Wealth of Nations in 1776. The book, as the story goes, laid waste to the false economic theory of mercantilism as a pseudoscientific equivalent of alchemy or astrology. New York Times columnist Binyamin Applebaum summed up the quasi-religious fundamentalism of conventional neoliberal economists and economic journalists in a 2016 piece titled: “On Trade, Donald Trump Breaks with 200 Years of Economic Orthodoxy.”

Physicists, chemists, and other genuine scientists generally do not feel the need to defend “orthodoxy” against heretics. Moreover, despite Appelbaum’s claims to the contrary, free market economics has never been “orthodoxy” in government practice or in academic economics. In the United States, the dominant school of economic policy was the “American School” of “national economy,” inspired by Alexander Hamilton and developed by Henry Clay and the economist Henry Carey. In this system, trade, infrastructure, and finance were coordinated to promote industrialization of the United States through a policy of “import substitution” based on tariffs that protected infant industries.

German-American thinker Friedrich List transplanted the American School to continental Europe, which already had well-developed traditions of strategic protectionism and state supervision of the economy. The U.S., Germany following its 1871 unification, the Tsarist Empire, and other countries all followed variants of import substitution in order to catch up with Britain, the world’s first industrialized nation, in the interest of military security and prosperity.

Britain itself adopted free trade only in the 1840s, after it had achieved a lead in manufacturing through centuries of sectoral protectionism and sophisticated strategic trade policy. While Adam Smith recognized practical exceptions to the dogma of free trade, the mid-nineteenth century liberal politicians Richard Cobden and John Bright infused free market economics with Protestant Christian religious fervor and messianic utopianism. In an 1846 speech titled “Free Trade With All Nations,” Cobden declared that abolishing tariffs would produce world peace and universal harmony: “I believe that the desire and the motive for large and mighty empires—for gigantic armies and great navies—for those materials which are used for the destruction of life and the desolation of the rewards of labour, will die away,” Cobden said. “I believe that such things will cease to be necessary, or to be used, when man becomes one family and freely exchanges the fruits of his labour with his brother man.”

Cobdenite liberalism triumphed in England—and spelled the beginning of the end for Britain’s industrial supremacy. By engaging in free trade with nations like the U.S. and Germany that protected and promoted their domestic manufacturers, Britain lost entire critical manufacturing industries to foreign competition—a disaster repeated by the U.S. in the last half-century via one-sided trade with China, Japan, South Korea, and Taiwan.

Not only were free traders ignored by government policymakers for most of the modern industrial era, they also had to contend with other schools of academic thought, including the German Historical School—a cousin of the American national economy school—and the institutionalist school, as well as varieties of Marxist economic thought. Only after World War II did an algebraic, pseudoscientific free-market school, “neoclassical economics,” drive its institutionalist and Marxist rivals out of American university economics departments.

The triumph of neoclassical economics after 1945 was aided by false framing of the Cold War as a struggle between two economic systems—free market capitalism and state socialism—rather than a great-power struggle. But to the extent that the Cold War was a conflict of economic models, there were actually three—liberal capitalism, communism, and East Asian developmentalism.

“The developmental state” is a term popularized by the political scientist Chalmers Johnson in his classic 1982 study, “MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975.” As Johnson pointed out, the rapid, state-sponsored, business-friendly industrialization of Japan after 1945 did not fit the Cold War patterns of free market capitalism or communism. While Johnson cautioned that every country is different, scholars like Ha-Joon Chang and Erik Reinert have pointed out that Japan’s model of industrial policy and export promotion can be seen as a variant of the successful industrial strategies of the pre-1945 United States, Bismarck’s Germany, and Britain prior to the 1840s.

It is this “third way” between state socialism and an idealized free market capitalism that economic nationalists on Right, Left, and Center are rehabilitating. But if it’s not mercantilism, what should this centuries-old third way between Adam Smith and Karl Marx be called?

Although it is relatively new, “developmentalism” is the best catch-all phrase for the heterodox approach displacing Cold War-vintage neoclassical economics. In the developmental tradition, from Renaissance city-states to colonial empires to modern industrial nation-states, the state should promote targeted industrial production—and productivity growth in general—in the territory it controls to promote national security and prosperity. For developmentalists, Adam Smith’s statement that “consumption is the sole end and purpose of all production” seems insane. At the very least, as Alexander Hamilton observed in his 1791 Report on the Subject of Manufactures, a government should aim to foster and maintain industries “favorable to national independence and safety.”

All mercantilist states are developmentalist—but not all developmentalist states are mercantilist. Mercantilism is best described as a particular kind of trade strategy, one of several that a developmental state might choose to adopt in order to promote its domestic industrial policy goals. Protectionism and reciprocity are the other major trade strategies.

Ignorant professors and pundits who think all economists have favored free trade for 200 years are likely to pair this view with the historical myth that premodern mercantilism was all about accumulating gold reserves by running perpetual trade surpluses. But as historians like Erik Reinert have pointed out, there was more to traditional mercantilism. The most sophisticated mercantilist strategies, run by city-states, empires, and nation-states alike, sought to affect the structure of international trade, even in the absence of chronic export surpluses. The goal was to sell high-value-added manufacturing goods to trading partners while buying food, fiber, and raw materials, thus lowering the costs to manufacturers of inputs, including the cost of workers fed by cheap imported food. In other words, a seller’s market in manufacturing and a buyer’s market in commodities. If 10% of global market share in manufacturing is good, 50% or 100% is even better. In the words of Mae West, “Too much of a good thing can be wonderful.”

Adam Smith, who was influenced by the agrarian French physiocrats, believed that a country could flourish solely as a producer of primary products. In The Wealth of Nations, Smith wrote: “Were the Americans, either by combination or by another sort of violence, to stop the importation of European manufactures, and, by thus giving a monopoly to such of their own countrymen as could manufacture the like goods, divert any considerable part of their capital into his employment, they will retard instead of accelerating the further increase in the value of their annual produce, and would obstruct it instead of promoting the progress of their country toward real wealth and greatness.”

Confederate President Jefferson Davis agreed, promising in his Second Inaugural Address in 1862 that if the Southern States secured their independence they “will offer to manufacturing nations the most favorable markets which ever invited their commerce. Cotton, sugar, rice, tobacco, provisions, timber, and naval stores will furnish attractive exchanges.” In 1877 the American economist Simon Patten observed: “Had our nation followed the lines of relative advantage advocated by free-traders, our country would be divided into three parallel belts, used for cotton, tobacco, and wheat.” Fortunately, the federal government defeated the Confederates and embarked on a selectively protectionist, high-tariff import-substitution strategy that turned the U.S. into the world’s leading industrial power by World War I and the world’s leading military power by World War II.

Import substitution and mercantilism can be promoted simultaneously, as in the case of contemporary China, Japan, and other rapidly industrialized East Asian economies which have protected and promoted their national producers while using subsidies and other measures to undercut foreign rivals. Usually mercantilist trade strategies are pursued by countries which already enjoy a manufacturing advantage and wish to expand the markets for their manufactured goods in return for primary products. Adam Smith to the contrary, most leaders of most countries have known for centuries that economies dominated by primary products tend to be poorer than those of manufacturing countries, unless the primary product is highly in demand, such as oil. For most of modern history, therefore, import substitution policies have been adopted by previously agrarian countries like the early United States to diversify their economies and prevent them from becoming dependent resource colonies of industrialized states. Manufacturing-export mercantilism is an aggressive strategy; import substitution a defensive one.

There is a tension between independent countries who aim to become manufacturing powers and mercantilist states that want a seller’s market in manufactures and a buyer’s market in primary goods. The typical historical solution has been eliminating the independence of trading partners by turning them into colonies with no control over their own trade. This was the practice of early modern European empires, including the British empire, which outlawed many varieties of local manufacturing in subjugated Ireland, the Anglo-American colonies, and India, forcing their inhabitants to supply England’s factories with raw materials which could be returned to them in the form of more expensive, high-value-added manufactured goods.

The British Hat Act of 1732 followed this mercantilist logic, limiting the local production of beaver hats and banning their export. The role of American colonists in the empire was to trap and skin the beavers and send the fur to Britain, whose manufacturers would enjoy a hefty profit when selling beaver hats back to the Americans. The American War of Independence allowed the federal government to protect and grow the American beaver hat industry with tariffs, with lamentable effects on North American beavers, who were hunted nearly to extinction by the twentieth century.

Subjugating trading partners and incorporating them into an empire or bloc under common regulations effectively renders mercantilism as a trade strategy irrelevant, because it replaces trade among the imperial sub-units with empire-wide or bloc-wide legislation. A localized mercantilism may survive within the integrated unit because of the division of labor among manufacturing and commodity-producing regions, as in the U.S. between the Civil War and the New Deal.

Mercantilism, then, is inherently unstable for political reasons. Either trading partners refuse to play the role of preindustrial or deindustrialized commodity or service supplier to the factories of an advanced manufacturing nation, or they lose their sovereign independence and are incorporated into an empire or bloc in which trade is replaced by externally enforced regulation.

The U.S. since the end of World War II has been a major exception to the rule that mercantilism is practiced by the stronger power. Japan, West Germany, and South Korea were semi-sovereign states at the beginning of this period and dependent on the U.S. military. A mercantilist U.S. would have coerced them into specializing in low value-added primary products while forcing them to buy American manufactured goods. Instead, from Truman and Eisenhower until Trump, American presidents turned a blind eye to the industrial protectionism and nakedly mercantilist manufacturing trade surpluses of these client-states, despite the harm done to U.S. industries. Bipartisan toleration of German and East Asian mercantilism was justified for geopolitical reasons, initially to keep these powerful industrial countries on the American side in the Cold War.

From the 1990s until the 2010s, American policymakers of both parties displayed the same indifference to foreign mercantilism—increasingly that of China. It was assumed that China would remain a low-value-added, cheap-labor export platform used by American corporations, similar in this respect to Mexico. This policy was really driven by the corruption of the American political elite by multinational corporations and Wall Street, and rationalized for public consumption with a version of Adam Smith’s claim that what matters is the cheapest possible prices for consumers. If most cell phones and civilian drones and global ship fleets are manufactured in China, then that is a blessing for American consumers, who do not have to pay higher prices for American-made goods and can specialize instead in “industries of the future” like dating apps and video games.

But the bipartisan consensus in favor of lopsided, misnamed “free trade” with China has been destroyed by China’s own policies. Foreign business elites who hoped to profit from the vast Chinese market have learned the hard way that the CCP’s dictatorship will use alliances and foreign investment to create its own national champion firms which, having dominated the domestic market, can then battle for global market share. Meanwhile, China is converting its manufacturing power into military power and diplomatic influence through a system of parallel institutions, including the Shanghai Cooperation Organization, an anti-Western military alliance that includes Russia and Iran, and the world’s largest trading bloc, the Regional Comprehensive Economic Partnership (RCEP). It is the rise of China, not American aggression, that is bifurcating global economic institutions and trade flows into parallel structures around one of the two contemporary superpowers.

To defend itself against Chinese trade mercantilism, the U.S. is pursuing two strategic trade policies, neither of which can be accurately described as mercantilist—import substitution and reciprocity. Instead of fostering new “infant industries,” the purpose of today’s American tariffs, subsidies, and related measures is to bring back critical industries and supply chains that were lost to China during a generation of ill-conceived neoliberal policies.

While some tariffs are intended to permanently reshore essential industries, others are being used as bargaining chips in reciprocal liberalization agreements with trading partners which, unlike China, are not military and economic rivals. Reciprocity can achieve one goal of classic mercantilism—maximizing the scale of domestic manufacturing—by sharing production and sales in some manufacturing sectors on a reciprocal basis with trade-bloc partners who have similar, partly integrated industries and home markets, rather than by coercing weak trading partners into becoming non-industrial resource colonies of a powerful manufacturing state.

The goal is something like the trans-Atlantic pattern, in which the U.S. and Germany buy, sell, and produce cars in one another’s markets, rather than the East Asian pattern in which the U.S. exports soybeans and pork to industrial nations in return for consumer electronics and automobiles.

To blame America rather than China for disrupting world trade is to denounce the victim for engaging in self-defense. The greatest threat to a relatively liberal global trading system is the East Asian mercantilist-industrial complex, which first developed first in postwar Japan and the Little Tigers and is metastasizing in China. The true heirs of premodern mercantilists like Colbert and Walpole are not in Washington, D.C., but in Beijing. In Washington, the heirs of Alexander Hamilton, Henry Clay, Friedrich List, and Henry Carey are slowly regaining the primacy they held before their half-century exile by the libertarian disciples of Smith, Cobden, and Bright.