The Neo-mercantilist Moment

The world is witnessing a neo-mercantilist moment, especially in the United States. The free trade ideas that dominated the global economic conversation since the end of the Cold War and led to hyper-globalization are being replaced. It is not simple protectionism, much less the promotion of autarky. It is the return of an old vision that links the prosperity of states to their military, industrial, financial, or technological power and uses trade policy as a tool to secure those goals. From the liberal point of view—especially dominant in Europe—the mercantilist vision is often dismissed as short-sighted, irrational and, above all, outdated. Wouldn’t the last decade of trade liberalization, rapid economic growth, and poverty reduction show that economic policy should embrace open markets?

Perhaps so, but reality is stubborn. Governments are aware that the fragmentation of the world economy will entail significant economic costs. However, goals such as economic security, energy autonomy, resilience of supply chains or technological supremacy are more relevant today in the design of domestic and foreign economic policies than the embracement of free markets and the maintenance of a rules-based open global economy. The idea that the loss in efficiency from redundancies and selective protectionism may be worth it if it reduces vulnerabilities and increases resilience is gaining ground. Moreover, the discontent with the inequalities generated by globalization in the last decades has increased the legitimacy of government intervention in the economy. In sum, priorities have shifted and today, geopolitics trump economics.

China has for decades been using a neo-mercantilist strategy to increase its influence and power. Notably, neo-mercantilist ideas are now powerful in the West. This paradigm shift is becoming increasingly clear in the United States, where both Democratic and Republican elites fear the rise of China. The economic focus of President Biden’s State of the Union speech was on the defense of domestic production (Buy American), the need for supply chains to begin and end in North America, and the certainty that the subsidies and investments of the Inflation Reduction Act and the CHIPS and Science Act will lead to the awakening of a new U.S. technological and green energy leadership that will leave China behind.

Likewise, the dominant discourse in the Treasury and Commerce Departments are centered on countering Russia’s unjustified and illegal invasion of Ukraine with sanctions, controls on technology exports to China, and so-called friend-shoring (i.e., free trade with only friendly countries). This is combined with wide support of national industries and a new industrial policy that has been baptized as the "new supply-side economics" and attempts to accelerate the United States’ geopolitical clout and the fight against climate change. Recent speeches by U.S. national security adviser Jake Sullivan, and Treasury Secretary Janet Yellen, have synthesized this emerging view, emphasizing the need to create well-paid manufacturing jobs in the United States and increase the resilience of the economy to external shocks. In sum, the Biden administration’s foreign economic policy for the middle class means more government intervention and much less enthusiasm for free trade and globalization, which have been identified as drivers of inequality, political polarization, and mistrust on democracy.

On the other side of the Atlantic, it is taking longer to incorporate this paradigm within the European Union. Brussels is home to the biggest proponents of the liberal international economic order based on trade, rules, and multilateralism, and the European Union is built on the idea of the capacity of trade to generate not only prosperity but, above all, lasting peace. The war in Ukraine and Europe’s energy crisis have revealed that interdependence can be weaponized. Since the European Union is not a political union and does not have a large federal budget, it is much more difficult to react to American, Chinese, Japanese, or Indian subsidies. In any case, the European Union is gradually recalibrating its liberal views.

As professor of political economy Eric Helleiner shows in his book The Neomercantilists, there is an extensive and sophisticated tradition that started at the end of the eighteenth century, advocating for trade policy that combines liberal elements with state intervention through subsidies, tariffs, taxes, control of foreign investments and directing credit towards strategic sectors. These ideas are now making a comeback and have had a great deal of currency beyond the West. For example, in Japanese, the origin of the terms "economy" (keizai) and "political economy" (keisei saimin) mean "to govern the nation and save the people," which is very different from the Western view of the economy as "household management" (from the Greek oikonomia), used in Western economics textbooks and so well personified by the austere Chancellor Merkel during the eurozone crisis.

This new paradigm of interventionism has been in the making for several years. Commercially, this complements the delegitimization of part of the financial globalization that took place following the 2008 crisis and now threatens to return due to the turbulence in the banking sector resulting from rapid interest rate hikes to control inflation. Covid-19, the Russian invasion of Ukraine, and the geopolitical rivalry between China and the United States have given it a new push. If history is anything to go by, the dominance of neo-mercantilist ideas could last for quite some time.

This does not mean that the world is heading toward de-globalization where there is a fall in trade volumes or on the overall ratio of trade to GDP. It is more accurate to speak about de-risking strategies by the West to reduce vulnerabilities, fragmentation of the global economy and corrosion of its governance. There will likely be substantial technological decoupling between China and Russia and advanced democracies, growing (and perhaps inevitable) green protectionism to fight climate change, and control of inwards and outwards investments from and to countries considered hostile. Additionally, there is the likelihood of the search for energy autonomy and a subsidy war to promote domestic industries, to which the European Union would have to react soon and imaginatively, and which could be problematic for developing countries with limited resources. Despite this, trade in basic goods—such as textiles—is unlikely to de-globalize because the cost differences between rich and poor countries are still large. Likewise, the mobility of people will continue to grow, as will be the case with the exchange of digital services, especially between advanced countries.

It is unlikely that the United States will pass comprehensive free trade agreements in the coming years. But the European Union will try to integrate with some of the emerging economies of the Global South, while China will continue to expand its trade ties in Asia (and beyond) with a neo-imperial philosophy.

There will likely be two victims for this ascent neo-mercantilist economic ideology. First, global economic growth, which likely will be reduced and perhaps accompanied by higher inflation due to efficiency losses. Second, the governance of globalization based on the rules of the World Trade Organization, which both the United States and China are neglecting with their policies despite its calls for reform. This would be unfortunate for Europeans who have always been defenders of multilateralism and cooperation. It would also be damaging for small- and middle-income countries who benefit from a predictable rules-based international economic system with a credible dispute settlement mechanism.

Federico Steinberg is visiting fellow with the Europe, Russia, and Eurasia Program at the Center for Strategic and International Studies in Washington, D.C., and a senior analyst at the Royal Elcano Institute.