Will Trump’s Trade Policy Lead to War?

President Trump is stuck in the 80s, not the Reagan era of the 1980s but the 1680s.

Mercantilism is a philosophy from about 300 years ago. It was the economic system of major trading nations during 16^th-18^th centuries. It was premised on the belief that national wealth and power were best served by increasing exports and collecting gold in return. The theory suggests that the world has only a fixed amount of wealth and to increase a country’s wealth, one had to take it from someone else. Essentially, a “zero-sum” game. High tariffs were an almost universal feature of mercantilist policy. Mercantilism is an offensive policy aimed at accumulating surpluses while protectionism is a defensive policy aimed at reducing a trade deficit.

Since the level of world trade was fixed, it followed that the only way to increase a nation’s trade was to take it from another. Hence, the Anglo-Dutch Wars and the Franco-Dutch Wars. Mercantilism fuelled the imperialism of that era. That’s why the Portuguese, Dutch and English turned up in Malacca and other parts of Asia, Africa and South America.

Adam Smith, David Hume and David Ricardo turned much of this thinking on its head. Wealth comes from increasing productivity not amassing gold! How do you increase productivity? By specialising in areas that you do well – that’s comparative advantage. Then when you trade with others, everyone gets richer. Trade is not a zero-sum game but positive sum. Trump has missed the point. And his advice comes from Peter Navarro.

Peter Kent Navarro (born July 1949) is an American economist who serves as Assistant to the President, Director of Trade and Industrial Policy and Director of the White House National Trade Council. A professor emeritus of University California, Irvine. He has a B.A. (from Tufts), Master of Public Administration (Harvard) and a PhD in economics from Harvard. His doctoral thesis is on why corporations donate to charity – not on international trade! Many noted economists consider him an “oddball” and “outside of the mainstream” for he endorses few of the key tenets of the economics profession.

So Navarro and Trump, like any 16^th century mercantilist, cannot perceive mutual gains from trade. In any transaction, from their point of view, there is only a winner and a loser. And the winner is the one with a trade surplus. And it will be no surprise, at least privately or in Trump’s mind, that he wants to go to war with Mexico, Canada, Germany, Japan, China and South Korea.

John Maynard Keynes once said men who fancy themselves as independent thinkers are usually just slaves to some defunct economist.

Reference

1. Mercantilism/ International Trade – pick any economics course on trade

2. Trump’s trade policy is stuck in the ‘80s – the 1680s by Catherine Rampell