The return of mercantilism? Libertarians and Trump’s trade war

It is a generally uncontroversial tenant of economic liberalism that free trade is a ‘good thing’. This
idea can be traced back to one of liberalism’s founding thinkers, 18 th century economist Adam Smith,
whose famous The Wealth of Nations was written to make the case for free trade and against the
then common mercantilist practice of states imposing tariffs to lower imports and stimulate exports.
With President Donald Trump turning on free trade and embracing the mercantilist outlook that
Smith opposed, the obvious conclusion is that liberals and libertarians should be in uproar.


Not quite.

The Trump administration’s recourse to tariffs imposed especially (but by no means exclusively) on
Chinese goods is certainly misguided, and must be called out as such by Smith’s successors. But it
has also opened the way towards a much needed discussion of the real mercantilist threat, namely
Chinese economic practices. For this, liberals can be grateful.

President Trump’s tariffs rest on the general premise that globalisation has hurt the US, and a more
particular one that the ‘unfair’ Chinese approach to trade has done this. The first is deeply mistaken,
and acting on it will only harm the economy. The second cannot be dismissed.


The modern form of globalisation resulted from capitalism winning the Cold War. As the economies
of communist states collapsed, and their ideology was discredited, the late 1980s and 1990s saw
free markets embraced from Eastern Europe to Asia. But as trade barriers lowered and work was
outsourced to new capitalist states, the US manufacturing industry declined and those it once
employed began to call for tariffs to turn back the clock and save their jobs. Cue President Trump.
The idea that globalisation harms the American economy and tariffs are the solution flies in the face
of everything liberals and libertarians believe. Not only did the benefits of outsourcing outweigh
their costs, but statist attempts to stimulate local manufacturing help no one and harm everyone.
Take the Trump administration’s imposition of aluminium and steel tariffs. In the short term, the
resulting rise in steel prices is will undoubtedly benefit US metal producers and their employees, but
in the long term automation means there will be fewer jobs available in such industries anyway.
Meanwhile, the gains from global supply chains that lowered prices for everyone will be undone. As
US companies reliant on these metals for their own products are forced to raise prices to
compensate for their own increased expenditure, it is the majority of consumers that will be hurt.
The administration’s tariffs, alongside retaliatory ones from US trading partners, already threaten to
increase the costs of products ranging from Coca Cola to washing machines to housing.

It is as though the Republican Party has forgotten one of its most cherished arguments against state
intervention: that, in the words of libertarian thinker Henry Hazlit, it is necessary to think about the
consequences of any given economic policy ‘not merely for one group, but for all groups’.

President Trump’s particular targeting of China as a threat to US employment, however, rests on
much more legitimate concerns and cannot be similarly dismissed. Among the states rejecting
communism in the 1980s was China. In China, however, it was the ruling Communist Party itself that
was responsible for the change, turning to a mercantilist state-led form of capitalism that threatens
more liberal economies. Under Communist Party rule, state-owned firms benefit from subsidies in
order to ensure particularly high production of products such as steel, while foreign firms are forced
to hand over their technological as a condition of trade with China. All of these policies serve the
traditional mercantilist aim of stimulating Chinese exports, in this case taken to the extreme with
hopes of Chinese global economic dominance under the ‘Made in China 2025’ plan.

So while his response remains an act of economic self-harm, free traders should not dismiss the
genuine concern that underpins President Trump’s tariff policy. It is the mercantilism in China, rather
than the more limited form in the US, that is at the heart of current threats to free trade. Liberals
must be prepared to engage in the debate on China that President Trump has opened if the
globalised capitalism they champion is to survive.


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