There is a word so antiquated and so out of favor that I thought I would not have much exposure to it during the rest of my life. That word is mercantilism. And there is a word so much in favor and so prominent in the present world that I find myself confronted by it at almost every turn. That word is globalization.
Mercantilist theory is all about what economists call the balance of trade. A country that practices mercantilism is focused on exporting more goods and services to other countries than it imports from them and employs all the tools at its disposal—economic as well as political—to achieve a surplus in that two-way traffic. Diplomacy as well as such economic means as biased tariffs, skewed incentives and currency manipulation are deployed to ensure a positive trade balance.
In contrast, globalization theory rests on the principle that the operations of producers are optimized, and the welfare of consumers is maximized, when the world economic environment is a level playing field and world trade is conducted with minimal restraint. This is the exact opposite of the protect-our-producers, beggar-our-neighbor environment fostered by mercantilism. With the spirit of globalization guiding world trade, the producers of all nations fiercely compete with one another, in the process giving rise to efficiencies that translate into declining consumer prices and stable living conditions for people all over the world.
Since its early days as a British colony the US has been a staunch practitioner of good old-fashioned trading, trying to sell to the world market at least as much of its products as it bought from it. Records show that since its early years the young North American republic maintained trade relations not only with the Western Hemisphere and European countries of Africa and the Asia-Pacific region, including Japan after the opening up of that country to the world in the 1850s.
Realizing that trade disputes had been one of the principal causes of the wars between the European Powers in the 18th, 19th and 20th centuries, the now-powerful US made the maintenance of order and stability in world trade—no more tariff wars, no more trade embargoes—one of the cornerstones of its post-World War II international agenda. At the Bretton Woods conference that set up the United Nations system the US proposed the establishment of three international institutions: an International Monetary Fund (IMF) to function as a central bank of central banks, an International Bank for Reconstruction and Development (IBRD, or World Bank) to provide the underdeveloped countries with long-term financing for economic development and a World Trade Organization (WTO) to regulate and police world trade. The proposals to create the IMF and the World Bank were universally accepted, but certain provisions of the General Agreement on Tariffs and Trade (GATT) were objected to by some of the major powers. As a stopgap solution, a world trade organization was brought into being but bearing the name GATT and not WTO. Only in the 1990s did the UN General Assembly agree to replace GATT with WTO.
All the efforts that the US has exerted during the last seven decades to prevent a reversion to the bad trade practices of the pre-World War II era are currently under threat from the policies and actions of the administration of newly elected President Donald J. Trump. These policies and actions have turned the world’s most powerful country from being the poster-boy of globalization to its leading purveyor of mercantilism.
During the Presidential campaign Mr. Trump made so secret of what he called “trade deals that are bad for America.” He set his sights on two of the most important regional trade groupings in world history: the Trans-Pacific Partnership (TPP) involving around a dozen countries in the Asia-Pacific area and NAFTA (North American Free Trade Area), which comprises Canada, Mexico and the US. True to his word, upon entering the White House Donald Trump issued an executive order withdrawing the US from TPT and announced his administration’s intention to seek a renegotiation of NAFTA’s terms. The NAFTA renegotiation has yet to start.
Labeling those two countries “unfair” traders, Mr. Trump has denounced China and Germany for running trade surpluses with the US—selling more to the US than buying from the US—and thereby “taking jobs away from American workers.” He declared that those counties achieved their surpluses with the US through unfair trade practices: currency manipulation, in the case of China, and aggressive marketing in the case of Germany. Germany has protested the accusation, and Mr. Trump lately has had to withdraw his currency-manipulation charge against the Chinese.
Clearly, when it comes to international economic relations—as with international relations generally—Mr. Trump is in over his head. He needs a crash International Trade 101 course, from which he will learn that the US was one of the prime movers for the establishment of WTO and is one of its principal supporters and enforcers.
Hopefully the US will change its trade course as a result. In the meantime, say hello to Donald J. Trump, 21st century mercantilist.
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