The Mercantilist: Why Trump Economics Are Stuck In 17th Century
WASHINGTON — President Donald Trump often seems as though he's stuck in the "80s. But maybe the better comparison is to the 1680s, not the Reagan era.
Consider his announcement Thursday of new tariffs on steel and aluminum imported from the European Union, Canada and Mexico. These countries not only supply about half of our imports of these metals; they are also among our closest allies.
Astonishingly, the White House claims that alienating these important military allies is necessary "to protect America's national security."
These trade policies, and the supposed rationale behind them, bear an uncanny resemblance to classical mercantilism.
What is mercantilism, exactly? As you may remember from some long-ago high school class, it's an economic philosophy that was prevalent in the 17th and 18th centuries. In a nutshell, mercantilists believed a country should try to maximize exports and minimize imports.
The logic was this: Military power comes from wealth; wealth comes from accumulating gold and silver; and the way you accumulate gold and silver is through trade surpluses. Your merchant ships should go out loaded with attractive goods and came back overflowing with shiny specie.
There basically was no such thing as modern-day trade diplomacy; tariffs were high, and no one would have trusted anyone to stick to trade agreements anyway, since everyone was trying to maintain trade surpluses at once. Which is fundamentally impossible.
It was a zero-sum view of the world. Nothing was win-win, everything was win-lose, and everyone was suspicious of everyone else.
As you also may remember from high school history, then a dude name Adam Smith waltzed onto the scene.
He (and subsequently other classical economists, such as David Ricardo) turned much of this thinking on its head. Smith showed that real national wealth doesn't come from amassing piles of gold, which are transitory. Wealth comes from increasing productivity — that is, by figuring out how to make stuff more efficiently, which permanently increases living standards.
How do you increase productivity? By specializing in what you do well and honing your skills in that area. Then you trade with other people who do other stuff well. Through these transactions, over time, everyone gets richer.
In other words: Trade is not zero-sum; it's positive-sum.
This revelation would eventually revolutionize international relations, trade historian Craig VanGrasstek writes in his upcoming book "Trade and American Leadership: The Paradoxes of Power and Wealth From Alexander Hamilton to Donald Trump." After all, "It implied that countries could focus more on the cooperative creation of wealth than on appropriating it all to themselves."
He seems to believe everyone's going to cheat anyway.
Trump seems to have missed this lesson, however. Like an 18th-century mercantilist, Trump perceives no mutual gains from trade. In any transaction, he sees only a winner and a loser. And the winner is determined by who has the trade surplus.
Since there's no way everyone could come out ahead, there's no point in trying to create a system of rules oriented toward that outcome. Plus, he seems to believe everyone's going to cheat anyway — including, and perhaps especially, our supposed friends.
"Frankly, our friends did more damage to us than our enemies," Trump said in March. "Because we didn't deal with our enemies, we dealt with our friends, and we dealt incompetently."
Also, like those mercantilists of yore, he conflates our balance of trade with national security, though the exact connection between the two remains a bit muddled.
Unfortunately, Trump has proved a poor trade negotiator, as evidenced by both the public fighting within his own trade team, and the fact that the European Union, Mexico and China are retaliating with tariffs on U.S. products from politically sensitive states (Iowa pork, Kentucky bourbon, Wisconsin-manufactured Harley-Davidsons).
Perhaps more embarrassing, Trump even turns out to be a pretty lousy mercantilist.
Even 18th-century mercantilists knew that if you were trying to use tariffs to boost your trade surplus, you wanted to tax imports of finished goods, not the inputs that your domestic industry needs to make those high-value, finished-good exports.
Trump still hasn't figured this out. In protecting U.S. steel and aluminum, he is threatening the much larger manufacturing industries that purchase these materials to make, and then sell, high-value exports such as cars and appliances.
And steel and aluminum are hardly alone in this respect. In April, after Trump announced a list of 1,333 Chinese products that could be subject to tariffs, Peterson Institute for International Economics senior fellow Chad Bown found that about 85 percent of them were intermediate inputs and capital equipment.
John Maynard Keynes once said that men who fancy themselves independent thinkers are usually just slaves to some defunct economist. But what do you call a man who can't even manage to get his guiding economic anachronism right?