Mercantilism and Trump

March 31, 2025

“For some two hundred years both economic theorists and practical men did not doubt that there is a peculiar advantage to a country in a favorable balance of trade and grave danger in an unfavorable balance, particularly if the results in an efflux of the precious metals. …anxiety concerning such matters is absolutely groundless, except on a very short view, since the mechanism of foreign trade is self-adjusting and attempts to interfere with it are not only futile, but greatly impoverish those who practice them because they forfeit the advantages of the international division of labor.” John Maynard Keynes, The General Theory of Employment, Interest, and Money

John Maynard Keynes was the greatest economist of the 20th century. This quote comes from his chapter “Notes on Mercantilism”.  We are now living through mercantilism in the Trump administration. We will soon see who was right, Keynes or Trump. My money is on Keynes.

Mercantilism was the dominant economic philosophy of the 17th, 18th 19th, and early 20th centuries. This was a time when the European powers of England, Germany, Spain, Italy, France, and Belgium attempted to control the rest of the world with their superior military technology and their Bible. This was the age of imperialism and colonialism. America was born during this period as one of the first independence movements away from European colonialism.

Under mercantilism, the colonial powers attempted to control resources to enrich the elites in the European capitals. This was not an effort to spread the wealth. Furthermore, mercantilist European countries also attempted to restrict trade among the other European colonial powers. These limits on global supply chains to include only their colonial holdings in Africa, South America, Asia, and North America meant that the world was divided into distinct spheres of influence.

To keep international tensions between the colonial mercantile powers to a minimum, they got together at the Conference of Berlin in 1884-85 and divided Africa into geographic regions, with no respect for local national (tribal) boundaries that had existed for centuries. In fact, the Berlin Conference is the root of most of the political and economic problems African countries have experienced in the past 150 years. Every African country today defines its borders based on how the mercantilists in Berlin in 1884 decided to carve up the continent and create today’s African political map despite indigenous nations that were well established before the Europeans ever set foot in Africa.

The 18th and 19th and 20th century mercantilist countries fought so many wars amongst themselves trying to control their colonial supply chains that it is hard to name all the wars. From the perspective of mercantilists, if the elite wanted bananas, oranges, cotton, rice, tobacco, corn, sugar, or slaves, they had to control land far away from London, Paris, Amsterdam, Rome, Berlin, Lisbon, or Madrid. The mercantilist elites in Europe were in an existential competition against the elites in the other mercantilist capitals. In mercantilism, global control of resources, imperialism, and colonialism are by their nature fertile ground for war and violence.

Beginning with Adam Smith and later David Ricardo, “liberal” economists began to show that mercantilism is not as efficient, competitive, peaceful, or beneficial to consumers as is a system built on trade between nations and regions based not on military might, but on comparative advantage, what Keynes called the international division of labor.

Mercantilists were very clear on the purpose of the economic order: it was to provide them with the highest standards of living possible and be damned the rest of society. It was economic Darwinism in its purest form.

Trade based on comparative advantage was better not because it was better for the mercantilist elites. Trade based on comparative advantaged was better because consumers could get more for less. Comparative advantage and “free” markets would deliver more goods and lower priced goods for more consumers than a mercantilist organized society.  Mercantilists who could not compete based on comparative advantage would be competed out of business.

To illustrate the case, in a mercantilist country, the bananas you import would be limited to bananas grown in colonies you controlled. In a comparative advantage world, the bananas you import can come from any banana growing region in the world.  For consumers, trade based on comparative advantage is far superior to a mercantilist world.

While this is an example of natural products like bananas, this is even more true for manufactured goods and services. There is a reason why you do not see cars made in Russia on American streets. Quite simply Russian cars suck. Russia is basically a mercantilist economy, which explains its aggression in Ukraine and elsewhere around the world. Trump’s lust for controlling Canada, Greenland, Gaza, and Panama are straight out of the mercantilist’s playbook. Mercantilists hate competition. They want protected markets and all the benefits. This is where we are headed if Trump succeeds.

Corporate and financial strategists need to understand the implications of a mercantilist administration on their own growth and survival.

The notion of “free trade” based on comparative advantage is a relatively new concept. President Trump is a 21st century version of an older mercantilist system. I do not know if he knows this history or the economic theory that supports the two diametrically opposed ways of organizing global economic relationships, but his trade policies are and will be a colossal mistake.

You already see the heightened tensions and raised temperatures of international relationships between the United States and Canada, the EU, Mexico, China, and Japan that two years ago, while not perfect, were by comparison, copasetic.

History tells us the mercantilist path that Trump is taking the nation down, is also a path that leads to war. Economic and political theorists and historians should share our knowledge with the American people so that they too can learn the lessons of history, or we will suffer an even more violent world.