Dani Rodrik: Mercantilism isn’t always bad but Trump’s trade policy is

Economists are right to denigrate Trump’s trade policies. Other countries’ unfair trade practices are not the main reason for the US trade deficit and targeting bilateral trade imbalances is downright silly. While the trade deficit has contributed to the decline of US manufacturing, it is hardly the most important factor. Besides, it enables American consumers and investors to borrow cheaply—a privilege most other countries would love to have.

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In truth, mercantilism has never been as dead as economists thought, nor is it necessarily as misguided as they insist. Thanks to Smith’s followers, laissez-faire and free trade often did find favour in leading countries, but others that were trying to catch up with frontier economies 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 infant industries. The Argentine economist Raúl Prebisch and others of the “dependency school" thought that developing countries should shield their manufacturing industries from import competition. Some countries that followed their advice, like Brazil, Mexico and Turkey, experienced decades of rapid economic growth. 

Similarly, East Asian governments pursued a mix of mercantilist and Smithian approaches, leveraging exports and private enterprise, but often behind protectionist walls. Many saw the result as an economic miracle. While few of these policymakers would explicitly associate themselves with mercantilism, the ‘developmentalism’ they espoused shared many of its features.

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The fundamental difference between the Smithian and mercantilist approaches derives from how consumption and production are treated. Modern economics takes its cue from Smith in focusing on consumption as the ultimate goal of economic activity. Smith countered mercantilists by arguing that “consumption is the sole end and purpose of all production," noting that, “the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer."

Mercantilists, on the other hand, emphasize production and jobs. What a country produces matters. It is absurd to claim, as one of George H.W. Bush’s advisers once put it, that there is no difference between producing potato chips and producing computer chips. Moreover, once production, especially of manufactured goods, becomes the top priority of policymakers, it follows that a trade surplus is preferable to a trade deficit.

It is possible to reconcile these two perspectives by adding various market failures to the conventional mainstream account.

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Contemporary economists’ Smithian focus on consumption leads them to underestimate the importance of jobs in determining well-being. In the standard ‘utility function’ that economists use to characterize consumer behaviour, jobs are a necessary evil: they create purchasing power, but otherwise have negative value insofar as they decrease leisure time. But, in truth, jobs are a source of meaning, esteem and social recognition. Economists’ failure to appreciate the personal and social costs of job losses made them insensitive to the consequences of the China trade shock and automation.

Another key difference revolves around the government’s relationship with firms. Smith thought one of mercantilism’s defects was that it promoted cozy relationships between policymakers and the private sector, which was a recipe for corruption. 

Contemporary models of political economy and rent-seeking emphasize the importance of keeping firms at arm’s length from policymakers. But in settings such as frontier innovation, green industrial policies or regional development, close iterative relationships between governments and firms have been highly successful. 

There is a good reason for this. When there is significant uncertainty (whether technological or of some other kind), working closely with firms can be preferable to maintaining strict separation. The latter would make it difficult to learn about constraints and opportunities, and what is working and what is not.

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Each perspective has its own blind spots.

Mercantilists too easily associate the interests of producers, especially those well-connected to the state, with the national interest. Smith’s intellectual children, on the other hand, underplay the importance of production and jobs, and overlook the advantages of public-private collaboration. Good policy is often a matter of getting the combination right.

This does not vindicate Trump’s approach, of course. His chaotic and indiscriminate trade policies do little to expand critical strategic investments in the US, and they are riddled with cronyism, exempting politically connected firms and allowing them to game the system.

There will be no upside to Trump’s mercantilism because it embodies the strategy’s worst defects. ©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’.