Introduction
As economists celebrate the 250th anniversary of Adam Smith’s “The Wealth of Nations” next year, President Donald Trump’s mercantilist policies create an incongruous backdrop. Trump’s obsession with bilateral trade balances, glorification of import tariffs, and a zero-sum approach to international trade have revived the worst mercantilist practices, challenging Smith’s teachings.
Why Trump’s Mercantilism Fails
Economists are right to criticize Trump’s trade policies. Unequal trade practices by other countries aren’t the primary cause of the US trade deficit, and focusing on bilateral trade imbalances is foolish. While the trade deficit has contributed to the decline of US manufacturing, it’s not the most significant factor. Moreover, it allows American consumers and investors to borrow cheaply, a privilege most other countries would envy.
Mercantilism isn’t as dead or wrong as economists believe. Thanks to Smith’s followers, laissez-faire and free trade often enjoyed support in leading economies. However, others aiming to catch up with advanced economies adopted mixed strategies.
Historical Examples of Mixed Strategies
For instance, Alexander Hamilton in the US and Friedrich List in Germany explicitly rejected Smith’s ideas, advocating for import protection to boost nascent industries. Argentine economist Raúl Prebisch and others from the “dependency school” thought developing countries should shield their manufacturing industries from import competition. Countries following this advice, like Brazil, Mexico, and Turkey, experienced rapid economic growth for decades.
Similarly, East Asian governments combined mercantilist and Smithian approaches, promoting exports and private enterprise behind protective barriers. The result was what many considered an economic miracle.
Smith vs. Mercantilist Approaches
The fundamental difference between Smith’s and mercantilist approaches lies in consumption versus production. Modern economies, inspired by Smith, prioritize consumption as the ultimate goal of economic activity. Smith argued that “consumption is the sole end and object of all production,” emphasizing that producers’ interests should only be served to the extent they promote consumer interests.
Mercantilists, however, instinctively prioritize production and employment. What a country produces matters. It’s absurd to claim, as one of George H.W. Bush’s advisors once said, that there’s no difference between producing potato chips and computer chips.
Once production, especially of manufactured goods, becomes politicians’ top priority, a trade surplus is preferred over a deficit.
Reconciling the Perspectives
These perspectives can be reconciled by incorporating market failures into the conventional explanation. Smithian economists today would acknowledge that policymakers shouldn’t ignore production structure when certain manufactures generate technological spillovers or face coordination issues. However, the starting point matters.
Someone with mercantilist or developmental inclinations wouldn’t hesitate to decide what to produce and how. The question is who bears the burden of proof, determining whether we view policies like East Asia’s industrial strategy as normal or an aberration.
Smithian economists’ focus on consumption also leads them to underestimate the importance of employment for well-being. In the standard utility function economists use to characterize consumer behavior, employment is a necessary evil: it creates purchasing power but reduces leisure time. However, employment is a source of meaning, esteem, and social recognition.
Economists’ failure to appreciate the personal and social costs of job loss made them insensitive to the consequences of China’s trade shock and automation.
Government-Business Relationships
Another key difference concerns the government’s relationship with businesses. Smith saw promoting close relationships between policymakers and the private sector as a mercantilist flaw, a recipe for corruption. Contemporary economies have heeded this warning.
Trade-off models and search for rent emphasize keeping businesses at arm’s length from policymakers. However, in many settings—like frontier innovation, green industrial policies, or regional development—close, iterative relationships between governments and businesses have been successful.
There’s a good reason for this. While keeping businesses and governments separate minimizes capture risk, it also makes learning about limitations and opportunities, what works and what doesn’t, extremely difficult. When significant uncertainty exists—whether technological or otherwise—close collaboration with businesses may be preferable to strict separation.
Each perspective has its blind spots. Mercantilists easily associate producers’ interests, especially those well-connected to the state, with national interest. Smith’s intellectual children, on the other hand, minimize production and employment importance and overlook public-private collaboration’s advantages. A good policy often involves striking the right balance.
None of this justifies Trump’s approach. His haphazard, indiscriminate trade policies barely expand crucial strategic investments in the US and are riddled with favoritism, exempting politically connected businesses from rules and allowing them to manipulate the system. His mercantilism offers no advantages, as it embodies the worst flaws of the strategy.
About the Author
Dani Rodrik, Professor of International Political Economy at Harvard Kennedy School, was President of the International Economic Association and author of the upcoming book “Prosperity for All in a Fractured World: A New Economics for the Middle Class, the Global Poor, and Our Planet” (Princeton University Press, November 2025).
Copyright
Project Syndicate, 1995 – 2025
www.project-syndicate.org
Key Questions and Answers
- Q: Why are economists critical of Trump’s trade policies?
A: Economists argue that Trump’s obsession with bilateral trade balances, glorification of import tariffs, and a zero-sum approach to international trade revive worst mercantilist practices, challenging Adam Smith’s teachings.
- Q: What are some historical examples of mixed mercantilist and Smithian approaches?
A: Examples include Alexander Hamilton’s import protection in the US, Friedrich List’s advocacy for industrial development in Germany, and East Asian governments’ combination of export promotion and protective barriers.
- Q: How do Smithian and mercantilist approaches differ?
A: Smith prioritizes consumption as the ultimate goal of economic activity, while mercantilists emphasize production and employment. Smithians view close government-business relationships as a corruption risk, whereas mercantilists see them as beneficial.
- Q: What is the significance of employment in economic well-being?
A: Smithian economists underestimate employment’s importance for well-being, failing to appreciate its social and personal value. This insensitivity made them oblivious to job loss consequences from China’s trade shock and automation.
- Q: How should governments relate to businesses in economic policy?
A: While keeping businesses and governments separate minimizes capture risk, close collaboration can be preferable when significant uncertainty exists, as in frontier innovation or green industrial policies.
