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Mercantilism: The theory that explains Trump’s trade war

Mercantilism, the oldest thing in economics, is back in a big way.

FADEL SENNA/AFP/Getty Images
  • The use of tariffs by the Trump administration has confused more than a few leading economists.
  • The policy and the motivations behind them do reflect an economic theory with a long tradition: mercantilism.
  • Understanding mercantilism can help us understand why there is a call for more tariffs, and what might happen to the economy as a result of them.
Nobody can say that President Trump's implementation of tariffs (with the promise of more on the way) hasn't had an effect. What confuses many people is the nature of, and motivation behind, the tactic. Most economists agree that tariffs are a double-edged sword in the best cases and rarely recommend their use. The current trade war strikes many as strange at best and counter-productive at worst. There is a method to the madness, however. Donald Trump's trade policies call back to mercantilism.

What is mercantilism?

Those of you who didn't sleep through history class might remember that the early modern period was shaped in part by an economic theory called mercantilism. Not so much an ideology as it was a rationalization for policies that countries were implementing, it drove colonization and imperialism for much of the 17th and 18th centuries before being replaced by capitalism.

The idea was to maximize the value of your exports and minimize the value of your imports in order to increase the amount of wealth your country had. This was accomplished by preventing imports of finished products by means of tariffs, the promotion of domestic manufacturing, and strict control over the money supply. These policies were best expressed in France under Jean-Baptiste Colbert, who reorganized the entire French economy to follow mercantilist theories, and in England and during the 17th century.

There was also a significant national security element to mercantilism, since a bad trade deal would reduce your economic standing compared to another country and potentially place you at a military disadvantage over the long run. This reinforced the idea that every country was out for themselves and motivated countries to try and maximize the amount of wealth they had; preferably at the expense of everybody else.

How is this different from the economics that came afterward?

There are several differences, not only in the policies each philosophy endorses but how Mercantilism views trade and economic interactions compared to how we see them now.

While today most economists view trade as a win-win interaction, with each trading partner focusing on making a lot of something they can make well and then trading for what they lack, mercantilists viewed trade as a zero-sum game. In every trade, there was a winner and a loser. Each country strove to export only finished products and import as little as possible.

Mercantilists also wanted to make a country as close to self-sufficient as possible, as part of their goal to minimize imports. This runs counter to modern economic theories that suggest a country should produce what it is best at making and import what it cannot make cheaply.

Lastly, while modern economic theories argue that increasing productivity will lead to economic growth, Mercantilists argued that an endlessly positive balance of trade alone was the key. This point was so important that nobody even realized this was impossible until David Hume came along.

How does Donald Trump follow this?

The rhetoric he uses when he tries to rationalize the tariffs hits all of the mercantilist concerns on the head. Tariffs against the industries of American allies are framed as issues of national security, free trade agreements are viewed as bad deals, trade surpluses are emphasized as a sign of economic progress.

Even his love of tariffs as a tool harkens back to old-timey economic theories, even economists who call themselves neo-mercantilists don't advise the use of tariffs.

However, he isn't exactly doing it right. Mercantilists like Colbert tried to get raw materials as cheaply as possible while placing tariffs on finished products to encourage domestic production. Currently, the United States is putting tariffs on things like steel that are used to make other products. This, while potentially having economic or political payoffs, is nonsensical from a mercantilist perspective. They would place the tariffs on cars and washing machines, not steel.

What does this mean for the future?

There is a reason that Mercantilism went out with the 18th century.

At the scale of the entire economy, tariffs tend to increase prices and lower employment. They can, however, preserve jobs and profits in the protected industries as intended. The Trade Partnership, a trade and economic consulting firm, estimated that the steel and aluminum tariffs will cost 100,000 jobs while only 30,000 are gained.

Former Chairman of the Federal Reserve Alan Greenspan called the tariffs "insane" and compared them to excise taxes, which are taxes on production. He further questioned the ability of anybody to win a trade war, saying "There are victors and there are losers in a tariff fight. But that doesn't say that a more important issue is both are losing, it's just the winner loses less."

On the other hand, they are doing the job they are supposed to be doing. The prices of the tariffed goods are rising to a point where some consumers to choosing to buy from American producers again. If these purchases will be enough to stave off the job losses predicted in other sectors of the economy is another question.

The global tendency towards free trade is unlikely to end anytime soon, for the reasons mentioned above. However, the current trend of closing markets and starting trade wars is not without some precedent in history. The final effect of these tariffs on the global economy remains to be seen, but history and economic theory suggest we should be in for a bit of excitement.

Trade, diplomacy, culture: How America can lead the world

Live today! Unfiltered lessons of a female entrepreneur

Join Pulitzer Prize-winning reporter and best-selling author Charles Duhigg as he interviews Victoria Montgomery Brown, co-founder and CEO of Big Think, live at 1pm EDT today.

Two MIT students just solved Richard Feynman’s famed physics puzzle

Richard Feynman once asked a silly question. Two MIT students just answered it.

Surprising Science

Here's a fun experiment to try. Go to your pantry and see if you have a box of spaghetti. If you do, take out a noodle. Grab both ends of it and bend it until it breaks in half. How many pieces did it break into? If you got two large pieces and at least one small piece you're not alone.

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Two-thirds of parents say technology makes parenting harder

Parental anxieties stem from the complex relationship between technology, child development, and the internet's trove of unseemly content.

Sex & Relationships
  • Today's parents believe parenting is harder now than 20 years ago.
  • A Pew Research Center survey found this belief stems from the new challenges and worries brought by technology.
  • With some schools going remote next year, many parents will need to adjust expectations and re-learn that measured screen usage won't harm their children.

Parents and guardians have always endured a tough road. They are the providers of an entire human being's subsistence. They keep that person feed, clothed, and bathe; They help them learn and invest in their enrichment and experiences; They also help them navigate social life in their early years, and they do all this with limited time and resources, while simultaneously balancing their own lives and careers.

Add to that a barrage of advice and reminders that they can always spend more money, dedicate more time, or flat-out do better, and it's no wonder that psychologists worry about parental burnout.

But is parenting harder today than it was, say, 20 years ago? The Pew Research Center asked more than 3,600 parents this question, and a majority (66 percent) believe the answer is yes. While some classic complaints made the list—a lack of discipline, a disrespectful generation, and the changing moral landscape—the most common reason cited was the impact of digital technology and social media.

A mixed response to technology

children using desktop computer

Parents worry that their children spend too much time in front of screens while also recognizing technologies educational benefits.

(Photo: Chris Hondros/Getty Images)

This parental concern stems not only from the ubiquity of screens in children's lives, but the well-publicized relationship between screen time and child development. Headlines abound citing the pernicious effects screen time has on cognitive and language development. Professional organizations, such as the American Academy of Child and Adolescent Psychiatry, issue warnings that too much screen time can lead to sleep problems, lower grades, weight problems, mood problems, poor self-image, and the fear of missing out—to name a few!

According to Pew's research, parents—which Pew defines as an adult or guardian with at least one child under their care, though they may also have adult children—have taken these warnings to heart. While 84 percent of those surveyed are confident they know how much screen time is appropriate, 71 percent worry their child spends too much time in front of screens.

To counter this worry, most parents take the measured approach of setting limits on the length of time children can access screens. Others limit which technologies children have access to. A majority of parents (71 percent) view smartphones as potentially harmful to children. They believe the devices impair learning effective social skills, developing healthy friendships, or being creative. As a result, about the same percentage of parents believe children should be at least 12 years old before owning a smartphone or using social media.

But a deeper concern than screen time seems to be what content those screens can access. An overwhelming 98 percent of those surveyed say parents and guardians shouldered the responsibility of protecting children from inappropriate online content. Far less put the responsibility on tech companies (78 percent) or the government (65 percent).

Parents of young children say they check the websites and apps their children use and set parental controls to restrict access. A minority of parents admit to looking at call and text records, tracking their child's location with GPS, or following their child on social media.

Yet, parents also recognize the value of digital technology or, at least, have acquiesced to its omnipresence. The poster child for this dichotomy is YouTube, with its one billion hours played daily, many before children's eyes. Seventy-three percent of parents with young children are concerned that their child will encounter inappropriate content on the platform, and 46 percent say they already have. Yet, 80 percent still let their children watch videos, many letting them do so daily. Some reasons cited are that they can learn new things or be exposed to different cultures. The number one cited reason, however, is to keep children entertained.

For the Pew Research Center's complete report, check out "Parenting Children in the Age of Screens."

Screens, parents, and pandemics

Perhaps most troubling, Pew's survey was conducted in early March. That's before novel coronavirus spread wildly across the United States. Before shelter-in-place laws. Before schools shuttered their doors. Before desperate parents, who suddenly found themselves their child's only social and educational outlet, needed a digital lifeline to help them cope.

The COVID-19 pandemic has led many parents to rely on e-learning platforms and YouTube to supplement their children's education—or just let the kids enjoy their umpteenth viewing of "Moana" so they can eke out a bit more work. With that increase in screen time comes a corresponding increase in guilt, anxiety, and frustration.

But are these concerns overblown?

As Jenny Radesky, M.D., a pediatrician and expert on children and the media at the University of Michigan's C.S. Mott Children's Hospital, told the New York Times, parents don't always need to view screen time as a negative. "Even the phrase 'screen time' itself is problematic. It reduces the debate to a black and white issue, when the reality is much more nuanced," Radesky said.

Radesky helped the American Academy of Pediatrics craft its statement about screen time use during the pandemic. While the AAP urges parents to preserve offline experiences and maintain limits, the organization acknowledges that children's media use will, by necessity, increase. To make it a supportive experience, the statement recommends parents make a plan with their children, be selective of the quality of media, and use social media to maintain connections together. It also encourages parents to adjust their expectations and notice their own technology use.

"We are trying to prevent parents from feeling like they are not meeting some sort of standard," Radesky said. "There is no science behind this right now. If you are looking for specific time limits, then I would say: Don't be on it all day."

This is good advice for parents, now and after the pandemic. While studies show that excessive screen time is deleterious, others show no harm from measured, metered use. For every fear that screens make our kids stupid, there's a study showing the kids are all right. If we maintain realistic standards and learn to weigh quality and quantity within those standards, maybe parenting in the digital age won't seem so darn difficult.

How meditation can change your life and mind

Reaching beyond the stereotypes of meditation and embracing the science of mindfulness.

Videos
  • There are a lot of misconceptions when it comes to what mindfulness is and what meditation can do for those who practice it. In this video, professors, neuroscientists, psychologists, composers, authors, and a former Buddhist monk share their experiences, explain the science behind meditation, and discuss the benefits of learning to be in the moment.
  • "Mindfulness allows us to shift our relationship to our experience," explains psychologist Daniel Goleman. The science shows that long-term meditators have higher levels of gamma waves in their brains even when they are not meditating. The effect of this altered response is yet unknown, though it shows that there are lasting cognitive effects.
  • "I think we're looking at meditation as the next big public health revolution," says ABC News anchor Dan Harris. "Meditation is going to join the pantheon of no-brainers like exercise, brushing your teeth and taking the meds that your doctor prescribes to you." Closing out the video is a guided meditation experience led by author Damien Echols that can be practiced anywhere and repeated as many times as you'd like.
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