Donald Trump is a Mercantilist

A lot of ink is being spilled on Donald Trump and his America First approach to trade negotiations which has generated considerable trepidation and angst in both Ottawa and Mexico City as NAFTA appears headed for termination. Donald Trump is obsessed with the concept of trade deficits – which the United States does have on an overall basis. If one is to take President Trump at his word, he believes that if the United States sold more to the rest of the world than it imported from them, the country’s economy and manufacturing sector would be better off.

He appears to feel that the trade deficit is bad for the economy even though the evidence over time demonstrates that US GDP has grown at the same time that its trade deficit has grown. True, some sectors have done better than others and manufacturing employment has suffered but overall, per capita GDP and total output in the United States has grown in an environment of free trade – or reciprocity – if one feels like using a nineteenth century term. In the end, there seems to be an absence of evidence based decision making going on here but that does not mean Donald Trump is not making decisions based on some type of economic theory. It clearly seems to me that Donald Trump is simply a Mercantilist.

Mercantilism was a set of ideas which dominated economic discourse from about the 16th to the 18th centuries. It was not a systematic body of theory but rather a loose set of policies designed the enhance the economic and political power of the nation-state by maximizing economic inflows and minimizing outflows. These ideas were set against the background of the times- the expansion of nation states via maritime trade and colonies and an era when monarchs were trying to build up their nation states in an environment where there were often powerful rivals.

The policies were essentially geared towards the overall size of the economy – extensive growth – rather than raising per capita income – intensive growth. So, if you want a head’s up over what to expect from President Trump in the future when it comes to American economic and trade policy, you should brush up on Mercantilist thought. If you want a concise summary of what Mercantilist policies were like, look no further than the work of Austrian lawyer Philip Wilhelm von Hornick who in 1684 put out his manifesto summarizing his mercantilist policy prescription. As laid out in Ekelund and Hebert’s classic history of economic thought text:

1) That every inch of a country's soil be utilized for agriculture, mining, or manufacturing.

2) That all raw materials found in a country be used in domestic manufacturing, since finished goods have a higher value than raw materials.

3) That a large, working population be encouraged.

4) That all export of gold and silver be prohibited and all domestic money be kept in circulation.

5) That all imports of foreign goods be discouraged as much as possible.

6) That where certain imports are vital that they be obtained at first hand, in exchange for other domestic goods instead of gold and silver.

7) That as much as possible, imports be confined to raw materials that can be finished at home.

8) That opportunities be constantly sought for selling a country's surplus manufactures to foreigners, so far as necessary, for gold and silver.

9) That no importation be allowed if such goods are sufficiently and suitably supplied at home.

I suppose Thomas Mun’s 12-point plan for increasing the export of goods from the British economy is also worth a look (which I have mainly borrowed from Spechler’s history of economic thought book). Briefly:

1) Use all available land for production of goods that are currently imported. The country should first become self-sufficient and then trade.

2) Diminish imports.

3) When exporting, if a surplus of goods is present, sell it cheaply in order to maintain your market share of the market. (I guess we can look forward to dumping as a future worthwhile American trade policy initiative).

4) Use only domestically owned ships for shipping exports.

5) Be frugal with the domestic use of national wealth and resources so that more would be available to export abroad.

6) Take over the coastal fishing industry. (Watch out Atlantic Canada…)

7) Warehousing for imported commodities should be centralized in one or two locations to facilitate and increase revenue collection via taxes and tariffs.

8) Long distance trade routes should be pursued. Along with the increase in freight and shipping, such goods are also more profitable. For example, why buy pepper from Dutch merchants in Amsterdam when you can travel directly to the far East to get it and once having brought it back, can export it yourself.

9) Export money as well as wares in certain cases in order to enlarge trade.(You have to spend money to make money! Best done I suppose if it is other people's money.)

10) Allow imports that can be processed into goods to be allowed in duty free so that the processing can create wealth domestically. The re-export of goods should not be taxed so that you can import goods and then re-export them.

11) Do not levy taxes on any goods destined for export.

12) Endeavor to make the most of domestic skills and resources and attempt to produce goods at all stages of industrial production.

So there you have it. Mercantilist thought reduces to a few key concepts: the balance of trade, with an excess of exports over imports as the index of prosperity; the regulation of trade to produce an excess of exports over imports and hence a constant inflow of nation building gold and silver; promotion of domestic industry by inducing imports of cheap raw materials and placing duties on competing imports of manufactured products; and encouraging the export of finished goods because it maximizes employment.

Mercantilism stressed the importance of colonization to build up the economic power of the state, and if necessary the odd military adventure to acquire markets and bring in more gold and silver. Economic and political power is seen as a zero-sum game and this fuels the view that countries and their economies can only grow at the expense of others.

If the NAFTA negotiations do fall apart, Canada’s only recourse may simply be to license privateers on both our coasts and start to raid American shipping.

Comments

[Lord]

I am not sure Trump is coherent enough to have any political philosophy, but I wouldn't necessarily consider him mercantilist in full. I think he cares as much or more about wealth as consumption so financial flows are more important than trade flows but the latter may be easier to attack as the former were largely in the past. Tax cuts reign paramount, so he doesn't care as much about the country's wealth as his own, so he doesn't care about them that much. Mostly political theater and a way to pressure multinationals as much as governments. That he is 10 years out of date is his chief problem.

[Gene Shaw]

He is a con man that is far away from a mercantilist. The US runs a trade deficit because they run the biggest consumption racket in the world. If they cut their consumption via hire inflation and instead focused on investment, the trade deficit would fall to squat.

Then you have his problem of being a Russian asset. NAFTA had quite a bit of mercantilist support for the US. I suspect the Eurasians would not want to see this support cut and cause a financial crisis in the US. They got things for Donald to do before his time is up.

[Jacques René Giguère]

If you are not the issuer of the global currency, mercantilism is the only logical conclusion.
The problem with DJT is not a misunderstanding of trade but of money.
And of course, given that resources are not fungible and not Ohio worker can be transmogrified into a Silicon Valley programmer, his policies and politics make sense.
That they are destructive is an unfortunate side effects.

[Neil]

I seem to recall that balance of trade numbers only cover goods, not services. Is this still true in the "USA has a trade deficit" assessment?

[Andrew_FL]

"The policies were essentially geared towards the overall size of the economy – extensive growth – rather than raising per capita income – intensive growth."

"3) That a large, working population be encouraged."

His immigration policies are at odds with both these points, though. Hm.

[Livio Di Matteo]

Re the US trade deficit, see: https://www.nytimes.com/2017/10/05/us/politics/united-states-trade-deficit-shrinks-in-august-as-exports-rise.html?_r=0

Good point regarding immigration policy though my guess is Mercantilists probably would have preferred large working populations to be created via natural increase - i.e., more births.

[Tel]

"Mercantilist thought reduces to a few key concepts: the balance of trade, with an excess of exports over imports as the index of prosperity."

Seems a remarkably low risk of the USA achieving an excess of exports over imports any time soon... not under Trump, nor any other President.