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Trumponomics: The mercantilist perspective is back in force

The Paris Climate Accord is simply the latest example of Washington entering into an agreement that disadvantages the United States, to the exclusive benefit of other countries, leaving American workers, who I love, and taxpayers to absorb the cost in terms of lost jobs, lowered wages, shuttered factories and vastly diminished economic production.”
—Donald Trump, June 1, 2017

This quote captures the lens through which the president views economics. He appears to believe that if the Paris Climate Accord is good for everyone else, then it must be bad for us. In the language of game theory, Trumponomics is “zero sum”—what you win, I must have lost. As others have observed, this is the typical outcome of a real estate transaction. Only one developer gets to control a building site—one’s win is another’s loss. A negotiator’s job is to extract as much of the gain as possible. (Perhaps the other Paris signatories should have urged Mr. Trump to walk away if they hoped to keep the U.S. in the accord!)

This perspective is called “mercantilism” and was the dominant economic philosophy from the 16th through the 19th centuries. Mercantilism preaches that there is a fixed amount of wealth in the world. The well-being of one nation depends on the share of global wealth it can capture from everyone else. That’s why the era’s powers wanted colonies—raw materials could be imported from their dependents, with high-priced goods exported to the colonies in exchange. This unequal trading relationship was a key factor driving colonial America to cast off the British yoke. The goal of economic policy was to generate a trade SURPLUS—we sell you more than you sell us. To a mercantilist, the key measure of success is the trade balance—surplus is good, deficit is bad. The president’s focus on the Chinese trade deficit is typical of a mercantilist perspective.

The problem with mercantilism is not that it is strictly wrong. It can work—for a time. Spain was flying high in the 16th century—until the defeat of the Spanish Armada in 1588 left Spain’s colonies and its trade routes open to conquest. “Rule Britannia” was more than a slogan in the 17th and 18th centuries, enforced by the all-powerful British Navy. Success over time, however, depends on a nation’s continued ability to extract the better deal. It is no wonder that this period was punctuated by war. If the goal is always to get more than your partner, then trade must be backed up with power.

The free trade philosophy that began to hold sway in the 19th and 20th centuries proved that trade need not be zero sum—both parties to trade can gain and gain handsomely. The relative peace enjoyed among the global powers for the past 70 years can, to a large degree, be attributed to a rejection of “zero sum” economics.

Trump opponents who were expecting (hoping?) that the economy would collapse under a Trump presidency have been disappointed. Although the “Trump Bump” may have run its course, the stock market is up 19 percent since the election. The Dow Jones Industrial Average may tell us very little about the “real” economy, but it is a good bellwether of investor sentiment. A consistent “America First” negotiating position can indeed extract gains from trade from our partners, for as long as we have the power to back up our demands. At the moment, the U.S. economy is the strongest on the planet. Although Europe is recovering, it has yet to get back to pre-Recession levels. China’s mighty march forward continues but at a less torrid pace and with evident growing pains. This won’t last forever—and deals cut from a position of power can unravel when the power ebbs.

That’s another lesson from game theory—two- or multi-party games have different “solutions” if the game is played again and again. In the 1983 film classic, “War Games,” global thermonuclear war is averted when the computer “learns” from repetitive tic-tac-toe that “the only winning move is not to play.”

Global trade—and diplomacy, incidentally—is a classic repetitive game. That’s why multilateral trade rules (called the “General Agreement on Tariffs and Trade”) have taken—literally—generations to negotiate.

Every part of every deal does have winners and losers—in a repeated game, we give a little in this trade “round,” and expect to gain something in the next. Or we give up something in part of the game—say, agriculture—and get something else in intellectual property protection. As the largest player on the board, the U.S. also gains from global stability.

Multiplayer, intertemporal games rely on trust—not blind trust, but trust that is built on experience gained over multiple “plays.” That’s one of the reasons nations should keep agreements—if tortuous negotiations like the Paris Climate Accord can be reversed with every new presidential administration, why would any nation or group of nations bother with us in the future?

Mercantilism is a failed philosophy, both as a foundation for trading relationships and diplomacy. Mr. Trump’s vision is too narrow for the complex role the United States plays in the global economy and will, over time, impoverish us and our trading partners.

Kent Gardner is chief economist and chief research officer of the Center for Governmental Research Inc.

(c) 2017 Rochester Business Journal. To obtain permission to reprint this article, call 585-363-7269 or email madams@bridgetowermedia.com.

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