The Return of Mercantilism: How Trump’s Economic Nationalism is Reshaping Global Trade (free read)

Mar 5

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The Return of Mercantilism: How Trump’s Economic Nationalism is Reshaping Global Trade

Donald Trump's policies and thinking seem to align with the mercantilist mindset of the 18th century. Slobalization, and geoeconomic fragmentation, terms mentioned in the IMF's staff discussion note: "Geoeconomic Fragmentation and the Future of Multilateralism", resonate with him.

In January 2023, the IMF published the above note examining how decades of global economic integration are under threat from policy-driven reversals - the phenomenon they call geoeconomic fragmentation (GEF).

Is this reversal accidental? No, it is a deliberate retreat from economic openness and jeopardizes the economic gains made up to today.

For decades, the world moved towards integration. A move that helped reduce poverty, increased the flow of ideas and innovation, and facilited the capital flow to where it could be used best. A perfect system? No, but in general, it leads to a safer and more prosperous world. Trade lowered prices and increased efficiency; migration ensured human labour was available where and when needed, and capital flows increased foreign direct investment and technology development.

The Industrial Revolution introduced the gold-standard trade system, while the post-World War II Bretton Woods framework established institutions promoting stability and cooperation. Institutions such as the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), known as the World Bank. Are they perfect? No.

These institutions have been subject to significant controversy regarding their structural adjustment programs, which have been criticized for imposing harsh austerity measures on developing nations and prioritizing Western economic interests over equitable global growth.

While these institutions have their shortcomings, their role in maintaining global economic stability cannot be overlooked. Instead of advocating for meaningful reforms, Trump's unilateral policies accelerate fragmentation, compounding the risks rather than addressing the root issues.

In the late 20th century, Liberalization integrated economies such as China, India and other Eastern European countries such as Poland. Liberalization opened world trade and investment and boosted the world economy.

Geoeconomic fragmentation, driven by protectionism and populist political ideologies, will have the opposite effect: segmented trade, slow knowledge and technology sharing, and global financial safety nets will disappear.

Trump's "America First": Its Role in Accelerating Fragmentation

Trump embodies protectionism championing his "America First" agenda - a key driver of the current shift towards fragmentation.

Trump's economic approach mirrors the 18th-century mercantilist model, which persisted into the 19th century and was embraced by both monarchical and non-monarchical regimes.

Key to mercantilism is the belief that a nation's prosperity depends on maximizing exports and minimizing imports, i.e. a favourable trade balance. Governments actively intervened in the economy using protectionist measures such as tariffs and subsidies.

Why did this system decline? In short, because the rigid economic controls of mercantilism no longer suited the needs of growing industrial economies. Free trade became more attractive as industrialized nations sought new markets for their goods. Intellectual challenges from Adam Smith noted the restrictive nature of mercantilism and promoted free trade, open markets, and the concept of comparative advantage, where countries benefitted from specialization.

Government restrictions, monopolies, and tariffs stifled competition and innovation, and domestic industries became reliant on protectionist policies rather than genuine competitiveness, leading to stagnation. The cost of enforcing mercantilist policies became a burden, as maintaining monopolies, trade regulations, and colonial dominance required significant state intervention.

Mercantilism disappeared, but elements of it exist today. Many governments use tariffs, subsidies, re-shoring and trade restrictions to protect domestic industries. But, the modern world has changed - and operates under vastly different economic conditions.

While full economic self-sufficiency is nearly impossible in today's interconnected world, some nations attempt strategic autonomy in critical industries, such as China's semiconductor policies. However, broad protectionist measures remain economically inefficient and counterproductive.

By imposing high tariffs on imports from China, Canada, and Mexico and by threatening more punitive measures (such as a 100% tariff on BRICS nations if they attempt to challenge the U.S. dollar), Trump seeks to rebalance the U.S. trade deficit and reassert American economic power.

While Trump argues that tariffs are costless and even beneficial— claiming, for instance, that foreign exporters will absorb the costs — the empirical evidence suggests otherwise. Research on Trump's first-term tariffs indicates that increased tariffs were passed on to American consumers through higher prices and contributed to inflationary pressures. In addition, these unilateral actions have strained relations with traditional allies, as seen in retaliatory measures by Canada and Mexico, and have left the U.S. increasingly isolated in multilateral fora.

Trump's policies have extended into foreign policy, where his willingness to negotiate bilateral deals and his readiness to threaten allies have contributed to a more fractured international order. For example, his administration's controversial moves—such as proposing a minerals deal with Ukraine that would extract up to 50% of the country's resource revenues in exchange for U.S. support or repeatedly suggesting that Canada might be annexed as the "51st state"—underscore a transactional view of global affairs. These actions not only undermined the stability of long-standing alliances but set a precedent for using economic coercion as a tool of statecraft.

The Broader Implications of Fragmentation

The consequences of a fragmented global economy are far-reaching. Studies discussed in the IMF note that the economic costs of fragmentation could be immense—ranging from modest output losses under limited scenarios to reductions in global GDP of up to 7% or more in severe cases when coupled with technological decoupling. Reduced trade integration would diminish the productivity gains achieved through the global division of labour, lead to higher consumer prices, and slow down technological diffusion. The resulting economic slowdown would disproportionately affect low-income countries and emerging economies that rely on global value chains and access to foreign technology.

Moreover, Trump's policies risk accelerating the erosion of the multilateral institutions that have long provided a framework for international cooperation. His administration's scepticism toward bodies such as the World Trade Organization, the International Monetary Fund, and even the World Health Organization signals a retreat from the rules-based order established after World War II. As countries observe the United States turning inward, there is a growing impetus for them to forge alternative arrangements. Indeed, nations like China have taken steps to deepen economic ties through initiatives such as the Belt and Road Initiative and regional trade agreements like the Regional Comprehensive Economic Partnership (RCEP), further contributing to a bifurcated global economic system.

Trump's Legacy and the Future of Multilateralism

Trump's return to power has reinvigorated debates over the future of global economic governance. His second term is likely to continue a policy trajectory that prioritizes unilateral, protectionist measures over collective action. While his supporters argue that these policies will revitalize American manufacturing and protect national interests, critics warn that this approach will not only increase domestic costs but accelerate the disintegration of the global economic order.

A key challenge for policymakers is to manage the transition without triggering a full-scale trade war or long-term damage to international cooperation. This situation calls for a pragmatic approach that balances national security and economic interests with the need for global stability. Experts have suggested that, rather than relying on blunt instruments like tariffs, the United States should engage in differential or plurilateral initiatives that allow for selective cooperation with like-minded partners. These approaches could preserve the benefits of integration while addressing legitimate security concerns.

In this context, Trump's policies have inadvertently created both risks and opportunities. On the one hand, his aggressive tariff regime and unilateral foreign policy stances risk deepening economic fragmentation and alienating key allies. On the other hand, they provide a cautionary tale of the perils of protectionism—one that underscores the importance of rebuilding trust and reforming multilateral institutions to adapt to a changing geopolitical landscape.

The integration that fueled decades of growth is being challenged by forces of fragmentation driven by protectionist policies and a retreat from multilateralism. President Trump's "America First" agenda, with its reliance on tariffs, economic coercion, and unilateral decision-making, has accelerated these trends. While aimed at restoring American strength, these policies risk imposing higher costs on consumers, undermining alliances, and fragmenting the global financial and trade systems.

Conclusion

The IMF's analysis, combined with recent research on Trump's policies, suggests that the cost of a fragmented world could be staggering. Policymakers will have to navigate a delicate balance—reforming international institutions and embracing selective multilateralism to preserve the benefits of global integration while addressing legitimate national security concerns.

Proponents argue that fragmentation protects national interests and prevents economic overreliance on geopolitical rivals, but historical precedent suggests the long-term costs outweigh the short-term gains.

Werner Mouton