Dani Rodrik: Mercantilism is not always bad but Trump's trade policy is

Copyright © HT Digital Streams Limit all rights reserved. Dani Rodrik 4 min Read May 12, 2025, 12:30 pm The fundamental difference between the Smithian and Mercantilistic approaches comes from how consumption and production are treated. (Scottish National Gallery, Public Domain, Via Wikimedia Commons) Summary that violates Adam Smith’s free trade advice can yield strategic benefits that economists were slow to recognize, but the approach used by the US under Donald Trump reflects the worst defects of mercantilism. When economists celebrate the 250th anniversary of the publication of Adam Smith’s The Wealth of Nations, US President Donald Trump’s Merkantilism will form an incompatible background. After all, Trump’s obsession with bilateral trade balances, glorification of import tariffs and zero-sum approach to international trade-in-fight with Smith’s teaching revived-the worst mark antilistic practices. Economists are ready to reduce Trump’s trade policy. Other countries’ unfair trading practices are not the main reason for the US trading deficit, and to guide bilateral imbalances in trading is very stupid. Although the trade deficit has contributed to the decline in US manufacturing, it is hardly the most important factor. In addition, it enables US consumers and investors to borrow cheaply – a privilege most other countries would like. Also read: America’s War on Trade Gaps have a very risky side in the truth, Merkantilism has never been as dead as economists thought, nor is it necessarily deceived as they insist. Thanks to Smith’s followers, Laissez-faire and free trade have often found favor in leading countries, but others trying to catch up with the boundary economies have typically adopted a mixed strategy. For example, Alexander Hamilton in the US and Friedrich list in Germany explicitly rejected Smithian ideas and advocated import protection to grow baby industries. Argentine economist Raúl Prebisch and others of the ‘Dependent School’ thought that developing countries should protect their manufacturing industries from import competition. Some countries that followed their advice, such as Brazil, Mexico and Turkey, have experienced decades of rapid economic growth. Similarly, East Asian governments pursued a mixture of mercantilistic and Smithian approaches, utilized the export and private enterprise, but often behind protectionist walls. Many people have seen the result as an economic miracle. Although few of these policymakers would explicitly identify with Merkantilism, the ‘developmental time’ they advocated shared many of its features. Also read: Alexander Hamilton wrote the production of Playbook. Trump is shredding it. The fundamental difference between the Smithian and Mercantilist approaches comes from how consumption and production are treated. Modern economy is indicating Smith in focus on consumption as the ultimate goal of economic activity. Smith opposed mercantilists by arguing that “consumption is the only end and purpose of all production” and pointed out that “the interest of the producer should pay attention, just as far as it may be necessary to promote the consumer.” On the other hand, mercantilists emphasize production and jobs. What a country produces business. It is absurd to claim, as one of George HW Bush’s advisers once stated that there is no difference between the production of potato chips and the production of computer chips. Once the production, especially of manufactured goods, becomes the top priority of policymakers, it follows that a trade surplus is preferable as a trade deficiency. It is possible to reconcile these two perspectives by adding different market errors to the conventional mainstream account. Also read: Adam Smith’s’ Wealth of Nations’ has valuable lessons for the Eternity Contemporary Economists’ Smithian focus on consumption leads them to underestimate the importance of work in determining well-being. In the standard ‘utility function’ that economists use to characterize consumer behavior, work is an essential evil: it creates purchasing power, but otherwise has negative value in so far as it reduces the free time. But in reality, work is a source of meaning, respect and social recognition. Economists’ failure to appreciate the personal and social costs of job losses made them insensitive to the effects of the China trading shock and automation. Another important difference is about the government’s relationship with firms. Smith thought that one of the defects of brandantilism was that it promoted cozy relationships between policy makers and the private sector, which was a recipe for corruption. Contemporary models of political economy and rent-search emphasize the importance of keeping firms on an arm’s length of policymakers. But in institutions such as border innovation, green industrial policies or regional development, the close iterative relationships between governments and firms were very successful. There is a good reason for this. If there is significant uncertainty (whether technologically or from another kind), it may now be preferable to maintain strict separation. The latter would make it difficult to learn about restrictions and opportunities, and what works and what is not. Also read: Vivek Kaul: ‘dumb, stupid, stupid’ is the only way to describe us that each perspective has its own blind spots. Mercantilists easily associate the interests of producers, especially those well -linked to the state, with the national interest. Smith’s intellectual children, on the other hand, play over the importance of production and work and the benefits of public-private collaboration. Good policy is often a matter of combining the combination. Of course, this does not confirm Trump’s approach. His chaotic and indiscriminate trading policies do little to expand critical strategic investments in the US, and they are full of delinquency, which has released politically connected firms and let them play the system. There will be no advantage of Trump’s mercantilism because it embodies the worst defects of the strategy. © 2025/Project Syndicate The author is a professor of international political economy at Harvard Kennedy School, and the author of ‘Straight Talk on Trade: Ideas for a Sane World Economy’. Catch all the business news, market news, news reports and latest news updates on Live Mint. Download the Mint News app to get daily market updates. More Topics #Donald Trump #us Economy #Tariff Hike Mint Special