Trump is a Mercantilist, and Mercantilism Will Weaken America

By Samuel Gregg Published on February 15, 2016

Consistency is not a virtue many associate with Donald Trump. He has cheerfully evolved his positions on many important issues, some just in time for his presidential run. But on his economic views, one label has consistently fit him: neo-mercantilist. And that’s worrying. Mercantilism dominated Western Europe between the sixteenth and eighteenth centuries. And while it benefited particular groups — most notably government officials and politically connected businessmen — it hurt just about everyone else.

So what is “mercantilism?” It wasn’t socialism, whether of the Soviet or Bernie Sanders variety. Yet it contained a major economic role for government far beyond upholding rule of law, property-rights, and a basic safety net.

At the core of mercantilism were two things. The first was cozy relationships between certain business leaders and the government. The second was the extensive use of tariffs, quotas and even bans on certain imports to protect domestic manufacturers. Mercantilists wanted to limit competition (particularly from foreigners) rather than embrace competition as a discipline that helped companies and countries discover and develop what they did best in terms of low-costs and high-returns relative to everyone else.

Much of Adam Smith’s Wealth of Nations amounts to a shattering critique of what he called “the mercantile system.” Smith observed that, contrary to mercantilist doctrine, free trade encourages people to specialize in what they are good at, or what economists call “comparative advantage.” This promotes economic growth and lowers prices over time, something that directly benefits lower-income people.

Smith was equally critical of how mercantilism promoted collusion between the already rich and government officials. Established merchants didn’t like competition that might threaten their dominance, while government ministers and civil servants wanted the tax revenues and guaranteed political support from the very same merchants. Mercantilist policies cemented this cozy alliance.

Under mercantilism, the “losers” (to use a Trumpism) were (1) ordinary folks without political connections, (2) consumers required to pay higher prices for lower-quality goods and (3) employees encouraged to stay in industries that became less and less competitive and thus less and less viable until the bottom drops out.

Mercantilism eventually broke down, partly because of the sheer intellectual force of Smith’s critique but also because mercantilist policies proved so expensive. Leaving aside the high costs associated with governments trying to stop widespread smuggling aimed at getting around all of the trade barriers, mercantilism led many businesses to become complacent, sluggish and slow to adapt to technological change.

But despite the clear lessons of history illustrating the failures of mercantilism, the mercantilist mindset continues to reassert itself, especially during tough economic times, such as now.

Trump, for instance, has talked about imposing tariffs ranging from 25 to 35 percent on imports until China (which in Trump’s lexicon seems to function as a catch-all phrase for all foreign competition) plays ball. That would most likely provoke a trade war with China. Unfortunately, a trade war would make both China and the United States poorer.

But even before such a trade war, the costs of such tariffs would be passed onto ordinary Americans. They would find themselves paying far more for all kinds of things, and not just for retail items imported from abroad. It’s easy to forget, for instance, that your average American car built in Michigan or Kentucky consists of materials from all over the world.

Likewise, Trump’s vocal defense of broad interpretations of eminent domain comes straight out of a mercantilist playbook. The primary purpose of eminent domain is to allow governments to undertake certain indispensable functions (building roads, bridges, etc.) by expropriating private property for public use, while generously compensating private owners. But the Supreme Court’s ruling in Kelo v. City of New London, 545 U.S. 469 (2005) allowed governments to permit specific businesses to take over even perfectly nice, non-blighted private property so they could build, say, strip-malls or limousine parking-lots, as Trump sought to do back in the mid-1990s. It is hard to imagine a more mercantilist tactic.

One reason for Trump’s popularity is legitimate frustration with the economic status quo of low growth, stagnating wages and a sense that fewer Americans are getting ahead. This is often blamed on free markets, with government intervention seen as the cure. But in fact, government is already heavily involved in economic life. As the recently released 2016 Index of Economic Freedom notes, “Total government spending [in America] amounts to about 39 percent of GDP.”

And America’s economy has been growing less and less free. “Following declines in seven of the past eight years, the United States this year has equaled its worst score ever in the Index of Economic Freedom,” the 2016 Index notes. “Ratings for labor freedom, business freedom and fiscal freedom have flagged notably, and the regulatory burden is increasingly costly.”

Trump is an established businessman and we often assume that established business leaders favor free markets. Unfortunately, as Adam Smith underscored on several occasions, this presumption is often untrue. Mercantilists, whether from the seventeenth or twenty-first century, have no commitment to anything — such as free trade and competition, domestic or foreign — likely to threaten their immediate interest, force them to compete harder, or be more economically creative.

To that extent, the present policy preferences of Trump and many other business leaders show why economic conservatives should be more careful before labeling themselves “pro-business.” Instead, we should speak of being pro-freedom, and emphasize how free markets and limited government benefit those who would otherwise be walled off from many of the blessings of economic prosperity. We should also hold accountable businesses that would like to shelter themselves from the discipline and dynamism of open markets while passing higher prices on to the rest of us.

The economic medicine Trump is peddling — call it Trumpantilism. It may enrich the Donald and his well-connected friends, but it won’t make America great again.

 

Samuel Gregg is Research Director at the Acton Institute and author of Becoming Europe (2013).

 

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  • markuzick

    Without foreign policy reforms, a weak US will be good for the world, just as an economically weak USSR was. It seems we need a collapse before we can accept reform.

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