The new mercantilism

Next March will see the 250th anniversary of the publication of Adam Smith’s ‘Wealth of Nations,’ the book that rejected mercantilism and created the study of economics. But many analysts argue that recent US tariffs suggest a renewed tilt toward mercantilism, or at least a mercantilist-style trade strategy. 

At its core, mercantilism emphasizes using tariffs and trade restrictions to boost national exports, limit imports, and accumulate wealth or power, rather than relying on free-market trade flows to optimize global welfare. 

The current trade strategy of President Trump and his administration largely echoes those principles, with aggressive and broad tariffs on imports, plus reciprocal tariffs meant to penalize trade partners. 

Some commentators call this a new mercantilism,adapted for 21st-century global trade conflicts. It is characterized by combining tariffs, trade restrictions, and industrial policy aimed at re-shoring manufacturing and reducing dependency on rival powers. Economists critical of this shift argue the present policies echo mercantilist thinking that treats imports with suspicion, exports as the real reward, and trade deficits as a national failing.

So, in terms of motivation and tools, the US seems to be embracing a mercantilist trade-power strategy again, even if it doesn’t use the same rhetoric as 18th-century mercantilist states.

But it’s not a full throwback because modern global trade is far more complex, with global supply chains, multinational production, services trade, and more. Policies labelled ‘mercantilist’ today must navigate those realities. Some recent tariff changes show nuance, in that parts of the US-China tariff regime have been adjusted. For instance, certain tariff-exemptions or reductions have been extended rather than blanket tariff impositions. 

Moreover, the ideological case for trade liberalization, that freer trade tends to raise overall welfare, hasn’t disappeared; there is still debate and pushback in the US against a wholesale shift to protectionism. 

Some economic analyses suggest that while tariff hikes can modestly boost domestic manufacturing output, the overall welfare effects are small or even negative, especially if trading partners retaliate or re-route supply chains. What we are seeing is ‘mercantilism-inspired policy’ rather than a literal return to 17th and 18th-Century mercantilism.

What motivates this turn toward mercantilism is adesire to reduce trade deficits, especially with key rivals. Many of the new tariffs are justified as instruments to rebalance trade. It is also a political incentive to protect, or try to resurrect domestic manufacturing, and to appeal to working-class voters dislocated by globalization.

There is strategic competition with economic rivals, notably China, especially around advanced technology, supply-chain dominance, and industrial sovereignty.

But tariffs raise costs for domestic firms that rely on imported components, in some cases hurting USmanufacturers rather than helping them. Indeed, recent data show US manufacturing has contracted, with some firms citing tariffs as a reason for layoffs or relocation. Retaliation from trade partners can offset gains via higher tariffs abroad, disrupted supply chains, and increased uncertainty.

The welfare benefits of rising domestic output are modest under many models because gains might be outweighed by efficiency losses, higher consumer prices, and reduced variety. And the government risks politicizing trade decisions, which may lead to cronyism or poorly targeted protection by helping politically connected sectors rather than broadly boosting national economic health

There has been a tilt toward mercantilist-style thinking, but with modern constraints. We are witnessing a re-orientation of US trade and economic policy toward many mercantilist-style practices, such as tariffs, trade leverage, industrial protection, and strategic rivalry. But it is not a wholesale return to classical mercantilism. Instead, it represents a changed industrial policy, plus selective protection, plus strategic positioning, but limited by the constraints of a globalized, interdependent economy.

Madsen Pirie