SVET Reports
What’s Up With the New Mercantilism?
The shift from market liberalism to “new mercantilism” became obvious to everyone after Trump’s tariff shock. The fact is that the era of geopolitical confrontation we have been slowly entering over the past decade does, indeed, require new economic strategies from governments. However, no one knows what that new, “patriotic economics” must be.
History shows that highly centralized governments often prefer the simplest — and often the most misguided — economic “strategies” in times of war, as illustrated by Napoleon’s continental blockade or England’s attempts to close international trade for the U.S. after the Revolution. These economic measures are inherently mercantilist, where local manufacturers are granted every possible advantage while ‘bad, spying foreigners’ are excluded from the domestic markets. Classically, it limits competition, increases governments controls and feeds inflation while “patriotic” industrialists and bankers which are positioned close to ruling political elites thrive.
From the perspective of the Treasury, mercantilism seeks to ‘bring gold into the coffers’ by ensuring positive trade balances. This is a playbook that has existed for 300 years among both royal and democratically elected autocrats. In the post-gold standard era, when fiat money became dominant, the strategy evolved to include devaluing local currencies to boost exports, ostensibly giving local producers a price advantage when selling their products abroad.
But will this approach work in contemporary markets, where services — rather than manufacturing — prevail, and carry-trades as well as foreign direct investment (FDI) play a far more significant role in defining ‘winners’ than mere trade balances? I doubt it. Yes, you can lower borrowing costs by issuing more Treasuries, but this method won’t attract the investments that are largely influenced by interest rates and corporate profits, not to mention the economic growth that is impossible to accelerate in “closed” markets beyond the rate of population growth without drastically increasing government spending and triggering inflation. This ultimately leads to the ‘Impossible Trio’ — economic growth, government spending, and exchange rate stability — which cannot coexist harmoniously.
We have already seen how the pursuit of economic ‘self-sufficiency’ has played out in China, which has teetered on the edge of stagnation for the past three years as Xi prioritized politics over economic well-being. It’s clear that when you initiate a trade war, you cannot expect your goods to be welcomed by adversaries, many of whom you have alienated through your actions. This was the case during the Napoleonic and American Revolutionary Wars, when most trade shifted underground and growth relied heavily on government war efforts. A similar pattern emerged during WWI and WWII, when industries were forcibly militarized, with growth occurring in direct proportion to government investments in tanks and bombers.
In short, wartime is ideal for mercantilism, but it falters under other geopolitical regimes. So, are we heading toward the global war? Hopefully not, given the enormous stockpiles of nuclear weapons. It may be that the dangerous games autocrats have recently begun playing worldwide will lead to numerous localized, ‘decentralized’ conflicts without resulting in total disruptions of trade and travel. Almost everyone who follows politics and economics seems to expect this outcome. But is this realistic? Looks like we are playing a high-stakes game of poker.