What does Trump's 'mercantilism' mean for US investors?
Bone fide free trade has already disappeared
While the US celebrates Independence Day and freedom from the British, there is no better time to take a look at what US President Donald Trump's mercantilism means for the US investment outlook, given Europe's own mercantilism served as stepping stones to the American Revolution.
However, the problem with mercantilism in the XXI century is that its ultimate economic consequences could be quite different from what they were when this economic theory was first implemented in Europe, in the XVII century.
The posture taken on trade by the US towards China, but also Europe, and most recently India, is happening at an awkward time for the US economic cycle. It puts at risk in the short term an economy already evidencing signs of slowing momentum. Indeed, the global economy has been decelerating significantly over the past 12 months, and while the US dynamic remains superior to many of its trading partners, it is inevitably starting to be affected by the global reversal. In this context, rising tensions and uncertainties are a particularly powerful deterrent to investments. In a slowing economy, making large capital expenditure decisions is made even more questionable when you do not know what the impact of government negotiations will be on the final demand for your products, on their price competitiveness, let alone on the endgame for your supply chain, which you have globalised in the past ten years to optimise efficiency.
The global risks influencing the US
Beyond the short term, however, the question is a lot more complex. The reason is that what we are witnessing is a growing rebellion against free trade by the US Administration. The argument is on the surface perfectly coherent; free trade, or economic liberalism, posits that it is the economic system most apt to promote optimal economic growth for all trading partners. However, if this system is gamed by some, then it becomes a fools' game for those that play by the rules. As the US Administration argues that all large nations other than the US, ie China, but also the European Union, India and Mexico are cheaters, then, for all practical purposes, bone fide free trade has already disappeared. What replaced it is a combat between mercantilist countries, which the Trump Administration is only too keen to join.
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Back then, England, France and Holland ‘invented' mercantilism. The underlying idea was, and still is today, that economic growth, global trade, wealth creation in general constitute a zero-sum game. In the XVII century, European colonial countries were not shy to exert manly pressure on their far-away colonies so as to enrich themselves. More precisely, the plan was to build a very strong manufacturing sector via massive state intervention, while at the same time protecting national champions from foreign competition and helping them export their goods by forcing the colonies to buy them. This system made the European mercantilist countries commercial powerhouses, enabling them to accumulate vast quantities of gold, the only undisputed measure of wealth and success at the time.
