Has the economic order really changed that much?
Free trade is dead. According to Bridgewater Capital, a large and influential hedge fund, it has been replaced by the “new mercantilism.” This is basically a reheating of the old mercantilism, in which trade deficits are a sign of weakness, and the economy is a to improve national strength. Gone are the days when a strong economy sufficed as the end goal of policy.
This is oversimplified and overstated. Looking at new mercantilism in a more granular way reveals that in fact, the only major country which is currently going through an ideological sea change is the US. China has always been mercantilist, while other major Asian, American or European countries either remain committed to free trade or lack the means to implement a mercantilist vision. So, while the US turn will cause shifts, global trade will continue to expand. Trade will diversify away from the US, thus entering into a new era of multidirectional trade relationships entailing ever-greater complexity.
New mercantilism is an arresting phrase but in fact only describes a relatively small, if prominent, part of how the world economy is currently developing. Outside of China’s strategic zombie industries, most international trade still overwhelmingly profit- and consumer focused. China’s economy is systematically distorted for strategic reasons, which has suppressed Chinese living standards for decades. Suppressing Chinese consumption suppression has served as a subsidy for EU and US consumers. While the US is trying to reverse this, doing so would entail suppression of American living standards as the Chinese have been doing for years. This is politically impossible, so it won’t happen.
Outside of China, most economic decisions are decided by the private sector based on business considerations, which usually means price. Few businesses have the luxury of worrying about political rhetoric. There will continue to be a gap between political noise that sounds like mercantilism, and day-to-day business logic that will favour continuing global specialisation and integration. There will be a shift in trade directly between the US and China, but overall global integration is likely to continue to rise.
Mercantilism is a luxury of the powerful, and only the US and China possess the means to inflict their versions of it on their trade partners. Middling powers, which means essentially everyone else, are still playing by the old rules. European countries’ commitment to world trade has changed little; while developing countries in Asia, Africa and the Americas lack the ability to pursue meaningful mercantilism. Despite the undoubted power and size of China and the US, trade between other countries and, crucially, within trade blocs, accounts for most of the world’s global capital and trade flows.
Furthermore, while the US and China account for a significant proportion of world trade, the US’ dominance is declining and China’s relationship with the rest of the world is unlikely to change much. China’s mercantilism has essentially meant subsidizing consumption in Western nations, which is why little will change in its dealings over the next decade. Despite ever-protectionist France’s perennial complaints, the China-EU relationship essentially suits both sides. The EU is also developing greater trade integration with secondary low-cost players such as Vietnam, which has further diversified global trade.
The US is unable to domesticise low-cost production. Most of its trade deficit with such countries consists of low value products which cannot be made in the US without causing significant inflation through consequent cost rises and labour market tightness. The alternative is forcing American workers to work for wages that they will not accept willingly. The great onshoring promised by Trump’s tariffs will not occur. The US constitutes a significant customer to countries hard-hit by tariffs, such as Cambodia, but it does not even make up most of the international demands for countries outside the Western Hemisphere. Therefore, low-cost manufacturing will continue to take place in these countries, who will likely use other, lower-tariffed countries to avoid high trade barrier. China is already doing this in Mexico.
Tariffs constitute only part of the new mercantilist policy mix. Indeed, the more consequential mercantilist policies followed by the US in the last few years were the impressive subsidies for American industry instituted by the Biden administration. These had considerably greater potential to reshape the global economy as investment, particularly green-tinted, was dragged from Europe to the US. However, the current administration’s hostility to environmentalism has resulted in a dramatic policy turn on this, and the resulting politicisation of green industry will inhibit investment if the political wind changes again in 2028. There must also be serious doubt about the US’ future ability to finance massive subsidies, given the current administration’s assault on the dollar and the US’ ability to borrow apparently infinite money. In any case, China’s exports were only limitedly affected by the Green New Deal, as the US is just one market amongst many. Price advantage continues to be decisive in business decisions, irrespective of political rhetoric.
These days, US trade is quite a small proportion of total world trade. Thus, a policy switch, akin to holding back the tide just on American trade, will have a correspondingly smaller impact on global flows. US importance to the global economy will not implode, but will rather grow at a slower pace, reflecting not a dramatic change of direction but rather the accumulation of missed opportunities that will be taken instead by economic actors elsewhere. Opportunity costs will be real, but the second-best alternatives taken instead will still provide rewards to those who take them.
Even given the economic nonsense of current US policy, the US economy is likely to be resilient. International trade is a remarkably small proportion of total US trade compared to other developed countries. It is dwarfed by internal business. This illuminates the basic fact that external tariffs do not interfere with most of the trade that is happening within the US. The same applies to the EU trading block, which conducts far more trade within itself than it does with the US. There may be a realignment of trade in certain symbolic industries – cars being probably the most obvious example – but Germany’s large trade surplus is with far more countries than just the US. The extraordinarily low barriers to trade within the EU will continue to facilitate internal business, which remains of greater importance than external. The manufacturing countries in Asia are of greater importance to the European business model than is the US.
Outside of the three large economic blocs of the EU, US and China, countries are forced to be rule takers. This still means, for better or for worse, WTO rules. African countries are still, despite all much chatter about alternatives from China, largely dependent on Western, WB and IMF finance to remain solvent. This means they are forced to follow economic orthodoxy. Countries that have taken financial support from China have quickly found out that China is an even more ruthless creditor than the West. Therefore, the future of Africa remains one of enforced economic orthodoxy, and slow movement towards greater regional economic integration. African States overwhelmingly lack the capacity to pursue New Mercantilism. They will continue to slowly integrate into the global economy, but with periodic setbacks caused by the political instability made inevitable by African countries’ failure to provide an acceptable standard of living for most of their citizens.
Countries in the Americas will rue their geographical proximity to the US. Mexico and Canada will continue to incur Trump’s wrath, particularly as Mexico’s surplus is likely to increase as Asian countries route trade through it. They will be heartened, however, by the short attention span of the President and by continuing American dependence on Canadian fossil fuels and on Mexico’s ability to do things cheaper than is possible in the US. They will also be encouraged by the president’s almost infallible record of shying from the consequences of his promises. Other major Latin American economies, meanwhile, remain weakly integrated both with the US and each other, and will continue to be peripheral to world trade flows. They retain greater ability than African countries to defy economic orthodoxy, but are also hamstrung by geography, entrenched political inertia, and economic incompetence. Argentina is the big exception to this trend, but remains combustible and thus could continue down its current path of liberalisation, or could see a strong return to the failed economic policies of its past. The new mercantilism will have limited impact in states that, like those elsewhere in the developing world, lack the means to impactfully pursue its aims.
The Donald Trump global psychodrama dominates headlines and headspace. However, economically, from a global, long-term perspective, his self-defeating incoherence on protectionism is unlikely to fundamentally change much. Some growth will be lost, some business will be redirected, and the tide of globalisation will continue to rise. The US is the principal economic player in the world, but even the biggest players can’t stop the game.
