Next year, economists will mark the 250th anniversary of the publication of Adam Smith's The Wealth of Nations, and the mercantilism of US President Donald Trump will serve as a most incongruous backdrop to that anniversary. Trump is obsessed with bilateral trade balances, praises import tariffs and views international trade as a zero-sum game, reviving, despite Smith's teachings, the worst forms of mercantilism.
Economists are right to condemn Trump's trade policies. Unfair trade practices used by other countries are not the main cause of the US trade deficit, and fighting the imbalance in bilateral trade is simply nonsense. While the trade deficit has contributed to the decline of American industry, it is unlikely to be the most important factor. In addition, the deficit allows American consumers and investors to borrow cheaply - a privilege that most other countries would like to have.
However, in reality, mercantilism is not as dead as economists thought, nor is it as wrong as some of them claim. Thanks to Smith's followers, leading countries often supported the principles of free trade and laissez-faire, while countries trying to catch up with more economically developed countries usually chose a mixed strategy.
Alexander Hamilton in the United States and Friedrich List in Germany, for example, openly rejected Smith's ideas and advocated import protectionism to develop new industries. Argentine economist Raul Prebisch and other representatives of the "dependent development school" believed that developing countries should protect their industrial sectors from import competition. Some of the countries that followed their advice, including Brazil, Mexico, and Turkey, achieved decades of rapid economic growth.
East Asian governments also adopted mixed approaches that combined mercantilism and Smithsonianism: they encouraged exports and private enterprise, but usually behind protectionist barriers. The result they achieved is often called an economic miracle. Although these governments generally did not consider themselves overtly mercantilist, the development strategies they pursued (so-called developmentalism) had much in common with mercantilism.
The main difference between the Smithian and mercantilist approaches concerns their relationship to consumption and production. Modern economics, following Smith, considers consumption to be the ultimate goal of economic activity. Smith opposed the mercantilists by arguing that "consumption is the sole purpose and end of every process of production". He emphasized that "the interests of the producers must be taken into account only to the extent that they are necessary to the interests of the consumers".
Mercantilists, on the other hand, instinctively emphasize production and jobs. What matters is what a country produces. It is absurd to claim, as one of George W. Bush's senior advisers once said, that there is no difference between making chips and making computer chips. Moreover, as soon as production - especially of manufactured goods - becomes a political priority, a trade surplus becomes preferable to a deficit.
These two views can be reconciled if the dominant, generally accepted economic understanding is supplemented by insights into various market failures. Modern Smithians would probably admit that governments should not remain indifferent to the structure of production when individual producers have a strong influence on the development of technology or when they face coordination problems. However, the initial assumptions are important. Without strong and convincing evidence to the contrary, the traditional economist will generally object to the idea of “picking winners.”
On the other hand, people with mercantilist or developmentalist views readily and without hesitation take on the role of those who decide what and how to produce. The key question is: who bears the burden of proof? It depends on this whether, for example, we will view the industrial policies of East Asian countries as the norm or the exception.
Because of the Smithian emphasis on consumption, contemporary economists often underestimate the importance of jobs to overall well-being. According to the standard “utility function” that economists use to describe consumer behavior, jobs are a necessary evil—they serve to create purchasing power, but they are otherwise assigned a negative value because they take up time that could be used for leisure. In reality, however, work brings meaning, respect, and social recognition. Economists have failed to properly assess the personal and social costs of job losses, and have thus remained insensitive to the consequences of automation and the trade shock caused by the rise of China.
Another key difference concerns the relationship between the state and business. Smith believed that one of the shortcomings of mercantilism was that it encouraged close, informal ties between politicians and the private sector—a recipe for corruption. Modern economics takes this warning very seriously. Political economy models that describe rentierism emphasize the importance of keeping private companies at a “long stick,” i.e. at a distance from government.
However, in many situations – such as advanced innovation, green industrial policy or regional development – close and regular links between the state and companies contribute to success. There is a good reason for this. While distancing companies from the authorities helps to minimise the risk of corruption, it also makes it more difficult for the authorities to obtain the necessary information about problems and new opportunities, as well as which measures work and which do not. When there is significant uncertainty – for example, regarding technologies – close cooperation with companies can be more effective and beneficial than maintaining a strict distance.
Both approaches have their "blind spots." Mercantilists easily declare the interests of producers (especially those close to the government) to be the interests of the state. On the other hand, Adam Smith's intellectual successors underestimate the importance of production and jobs, as well as the benefits of public-private cooperation.
Good policy often comes from the right combination of these two approaches. And, of course, none of this excuses Trump’s methods. His chaotic, disorganized trade policy does little to boost critical and strategic investment in the United States, and it is riddled with corruption, favoring politically connected firms and allowing them to circumvent the system. His mercantilism will do no good because it embodies the worst weaknesses of that strategy.
The author is a professor of international political economy at Harvard University
Copyright: Project Syndicate, 2025. (translation: NR)
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