The New Age of Global Trade: Aggressive Neo-Mercantilism

Learning is pattern recognition, spotting a picture before all its constituent dots are explicitly connected. What’s the pattern formed by the following “dots” – all international trade events that occurred in the eight years between two U.S. presidential inaugurations, on January 20 in 2017 and 2025?

First, President Donald Trump imposed tariffs of 25 percent on Chinese-origin merchandise under Section 301 of the Trade Act of 1974, as amended. Throughout his term, U.S. President Joe Biden maintained the tariffs imposed by his predecessor and successor, and hiked some of them to 100 percent.

Second, Biden toughened export controls on sensitive technology (e.g., advanced semiconductors). The People’s Republic of China responded in tit-for-tat fashion, including imposing limits on rare earth shipments to the United States.

Third, in his first and second terms, Trump pledged an “America First” trade policy, which in the Biden interregnum became the euphemism “worker friendly trade policy.” In perhaps the biggest trade difference between them, Biden negotiated the inchoate, big yawn Indo-Pacific Economic Framework (IPEF) after Trump foolishly withdrew from the best-ever trade deal to contain China – the Trans-Pacific Partnership (TPP).

Fourth, during the presidential campaign of 2024, Trump threatened additional 10 percent, or even 100-200 percent, tariffs on China, plus 25 percent tariffs on Canada and Mexico if they didn’t police their borders against fentanyl and undocumented migrants. He also proposed a universal tariff of maybe 10-60 percent on goods from all other countries. These threats continued after he took office. He refined the universal tariff threat: maybe it would be 25 percent, phased in via 2.5 percent increments, to rectify the United States’ trade deficit and protect U.S. jobs. In response to such threats, President Xi Jinping of China, Prime Minister Justin Trudeau of Canada, and Mexican President Claudia Sheinbaum vowed to tariff U.S.-made goods in retaliation.

Fifth, throughout all of this disruption, the 166-member World Trade Organization (WTO) was, and continues to be, a non-factor. Its “Supreme Court” (the Appellate Body), devoid of new members needed to replace term-limited ones because the U.S. opposes all candidates as judicially active, is a null set. Thus, the premier global trade body has been largely impotent in policing its fundamental rules favoring trade liberalization, those dating from the General Agreement on Tariffs and Trade (GATT).

Added to these dots were the dramatic events of late January-early and February 2025, namely: threats to impose 25 percent tariffs on all steel and aluminum from all countries, threats to hit all goods from all countries with reciprocal tariffs, threats to put sector-specific tariffs on autos, chips, lumber, and pharmaceuticals, threats to fight digital services taxes of other countries with tariffs on their goods, and levying 10 percent tariffs on all Chinese merchandise.

The pattern connecting these, and many other, dots is “aggressive neo-mercantilism.” The picture formed is of a paradigm shift in the theory and practice of global trade, from a disposition to free trade, with a tolerance for managed trade, to an embrace of protectionism justified by national security.

Trade is no longer about economic openness with a view to harmony among nations. Now, from the United States’ perspective, trade is about fending off the “other” – read, China – to extend Washington’s post-World War II pre-eminence. In the post-colonial narrative of the People’s Republic of China (PRC), trade is exploitative, as it was for the Middle Kingdom after the 1839-1842 and 1856-1860 Opium Wars.

Hence, for the U.S. and China alike, trade isn’t merely about trade, and tariffs aren’t just about tariffs. Trade also encompasses boatloads of non-import-export matters, with the goal of reaching an ostensible safe harbor, the beacon of which is not efficiency, not amity, and definitely not generosity – but national security. That harbor flag says, “aggressive neo-mercantilism.”

Middling and small powers have little choice but to imitate or drown.

The Erstwhile Paradigm: “Free” and “Managed” Trade

If national security calculations center on how to connect dots into a pattern of protectionism best described as aggressive neo-mercantilism, what does that rubric mean?

Let’s start with the terms that characterize the erstwhile paradigm: “free trade” and “managed trade.”

In the purest legal sense, “free trade” means all imports and exports of goods and services pass across an international boundary duty-free, quota-free. They do so immediately upon entry into force of a trade treaty to which the countries on different sides of that boundary are parties. The gurus of free trade – Adam Smith (1723-1790) and David Ricardo (1772-1823) – taught that it results in two benefits that provide a net gain to society.

Production gains from free trade occur because each country specializes in making merchandise in which it has a comparative labor cost advantage. Thanks to efficient international division of labor, more output is available to consumers at cheaper prices. (Smith and Ricardo didn’t consider the assault on our environment, or our souls, by endlessly producing stuff.) Smith proved the easy case with his Law of Absolute Advantage, where, for instance, India is better than China at making garments, but China is better at producing steel. Ricardo proved the hard case with his Law of Comparative Advantage, where China can make both goods at a lower cost than India, but China’s advantage over India is greater in one sector, say garments, than the other sector.

A completely duty-free, quota-free reality is nearly illusory. In fact, with two notable exceptions, it almost never happens. The first is the post-Corn Law history of Britain (1846-1932). The second is inside the ideologically-convulsed minds of some economists.

That’s because every country has sensitive sectors – ones embedded in its cultural mythology, or so politically powerful their avatars can topple a government. Think agriculture in France and India, rice in South Korea and Japan, or dairy and lumber in Canada. Think steel in the United States, and the high-tech, IT, AI oligarchy against which Biden railed in his January 15, 2025 Farewell Address.

Thus, the reality ever since the late 18th-early 19th century era of the classical economists, Smith and Ricardo, has been managed trade.

The October 30, 1947 General Agreement on Tariffs and Trade (GATT), and its institutional successor, the World Trade Organization (WTO), aspired through a bevy of trade treaties that emerged from the 1986-1994 Uruguay Round of multilateral trade negotiations to achieve across-the-board duty-free, quota-free treatment for goods, and ultimately services. But, from 1947-1994, Smith’s and Ricardo’s home country, and many other lands, held back on liberalizing trade in agriculture and services. Post-1994 history shows the WTO’s Agreement on Agriculture and General Agreement on Trade in Services (GATS) proved underwhelming in terms of fully opening trade in primary and processed farm products (e.g., beef), and to many service suppliers (e.g., lawyers).

But managed trade is not the ninth circle of hell.

If in a trade treaty, 90 percent of merchandise is duty-free, quota-free, and if the service sectors subject to “non-conforming measures” are few, then trade is freer (emphasis on -er), as it is more liberalized than before, in the short term. The long term is copacetic if the applicable trade treaty provides for staging categories for merchandise in sensitive sectors that phase out tariffs over 10 years (hopefully in a front-end loaded way, i.e., over half the tariff comes down in the first five of those 10 years), and market access and national treatment commitments ensure progressive liberalization of services.

The Breakdown

That was all well and good – until China acceded to the WTO on December 11, 2001.

At the time, most of the world agreed with the optimism of (among others) former U.S. President Bill Clinton: China’s WTO membership would be doubly beneficial. Economically, it would catalyze free-market reforms in China. Such changes were necessary to implement its accession commitments. Politically, it would trigger reforms. Surely Milton Friedman was right in his 1962 sacred scripture, “Capitalism and Freedom” – political and economic freedom are rather symbiotic (as was – emphasis on was – the case in Friedman’s heaven, Hong Kong).

Enter Xi Jinping, China’s top leader since 2012.

As the brilliant (and Mandarin speaking) former Australian Prime Minister Kevin Rudd argues in “On Xi Jinping” (2024), Xi has orchestrated three domestic paradigmatic shifts: to hard-right Maoism on economics, hard-right Leninism on politics, and hard-left nationalism on national security. Those shifts undergird aggressive neo-mercantilism. Indeed, for the United States and its allies, this toxic trifecta catalyzed the China-U.S. trade war in March 2018.

Redolent of Afghanistan and Iraq, this conflict is another one of the United States’ forever wars – though not a shooting one, yet. This war is the shift away from free and/or managed trade. And not just to pre-Smith, pre-Ricardo mercantilism, but to aggressive neo-mercantilism. The implication is a decoupling of the U.S. and Chinese economies because of national security concerns.

Recalling “Mercantilism”

The foundational term for the new paradigm, “mercantilism,” describes European trade policy from the 16th to late 18th centuries. Writing in “The Wealth of Nations” (1776), Smith was the first to use the word. He described a political economy in which a country seeks to maximize exports of manufactured goods, and maximize imports of raw materials, as a “mercantile system.” That way, the country would produce and ship high-value goods, the sales of which would generate export revenues (in the form of gold and other precious metals – the then-means of payment), and not send abroad inputs for foreign manufacturers to incorporate into finished goods (preserving their supply for itself). In sum, industrial trade surpluses would enrich the official treasury.

But there was more to mercantilism, as relevant today as 500 years ago: the use of net export revenues to strengthen a country.

Export surpluses generate investible funds that can be channeled to the military. Especially important is a navy that can secure shipping lanes and protect choke points against hostile powers and pirates.

Think back to “Rule Britannia,” the 1740 poem-song commemorating the rise of the Royal Navy as the dominant naval power well into the early 20th century. That navy secured British East India Company interests to obtain raw materials from its colonies (including cotton from the Crown Jewel, India) for its domestic manufacturers (e.g., textile and apparel mills), export finished goods (e.g., clothes) from the Mother Country back to the colonies, and spawn surpluses to reinforce exploitation of the periphery by the center. Small wonder why Mahatma Gandhi (1869-1948) preferred homespun garments (as J.T.F. Jordens intimated with the title of his 1998 biography, “Gandhi’s Religion: A Homespun Shawl”).

As the sun set on that empire after World War II, it rose on another one. The U.S. Navy ruled the waves, and the United States ran trade surpluses until 1975 that it channeled into its military-industrial complex.

Now think forward. The United States’ persistent trade deficits worry Washington’s trade warriors. They see vulnerability to maritime traffic disruption by China in the Panama Canal, and encroachment by China in the Northwest Passage. The next step for them is to take back the canal and buy Greenland, in partnership with the modern incarnations of the East India Company.

The Canadian economist, Jacob Viner (1892-1970), in his superb 1968 essay on “Mercantilist Thought,” laid out the five “essentials” of mercantilism:

(1) policy should be framed and executed in strictly nationalistic terms, that is, national advantage alone is to be given weight; (2) in appraising any relevant element of national policy or of foreign trade, great weight is always to be put on its effect, direct or indirect, on the national stock of the precious metals; (3) in the absence of domestic gold or silver mines, a primary national goal should be the attainment of as large an excess of exports over imports as is practicable, as the sole means whereby the national stock of the precious metals can be augmented; (4) a balance of trade “in favor” of one’s country is to be sought through direct promotion by the authorities of exports and restriction of imports or by other measures which will operate indirectly in these directions; (5) economic foreign policy and political foreign policy are to be pursued with constant attention to both plenty and “power” (including security under this latter term) as coordinate and generally mutually supporting national objectives, each capable of being used as a means to the attainment of the other. [Emphasis added.]

These five propositions constitute “the solid core of mercantilist doctrine.”

But the doctrine cannot logically add up globally, as Smith appreciated.

It’s impossible for every country simultaneously to generate a trade surplus through repeatedly emphasizing domestic production of manufactured goods. So, persuasively, Smith and Ricardo presented free trade as the protagonist against the antagonist of mercantilism. Their case remained persuasive for the almost 80 years that followed the remarkable GATT, which made the world safe(r) for free, or at least managed, trade.

What Do Hamilton, Trump, and Xi Have in Common? “Neo-Mercantilism.”

The antagonists fought back with “neo”-mercantilism, an updated version of mercantilism.

“Neo-mercantilism” calls for trade surplus maximization, and further, counsels for centralized capital controls to stem outflows of hard (that is, liquid) currencies, and for centralized decision-making about foreign exchange policy. Neo-mercantilism also values the wealth of a nation not only in its stock of bullion, but also its productive capacity. It pursues protectionism to increase domestic employment, because foreign competition means foreigners stealing “our” jobs. (Never mind the fact-checked point that technology, not trade, typically is the greater cause of job loss.) Trade is a zero-sum, not positive-sum, game. Winning requires government interventions via tariffs, non-trade barriers, subsidies, foreign exchange management, and industrial policy.

Neo-mercantilist roots trace back to Alexander Hamilton (1757-1804), the United States’ first secretary of the treasury, and his “Report on Manufactures” (1791), and Friedrich List (1789-1846), a German American economist who, in “The National System of Political Economy” (1841), argued for state-driven industrialization. Those roots flourish today.

Some of President Donald Trump’s January 20, 2025 memorandum, entitled “America First Trade Policy,” is neo-mercantilist. Although it calls for studies, Section 2 intimates a preference for a weak dollar to stimulate exports, and minimize imports, of industrial products, plus high tariffs to protect U.S. manufacturers against like products from foreign competitors. Nevermind that those duties would strain WTO rules such as most-favored nation (MFN) and national treatment, enshrined in GATT Articles I:1 and III:1-2 and 4, respectively, and restrictions on bound tariffs in Article II:1(b).

Trump’s political base relies on his promises to resurrect high-wage jobs. Relatedly, “drill baby drill” is more than an ignorant denial of climate change science. It’s also a trumpet blast to on-shore or friend-shore sources of critical inputs from hydrocarbons to semiconductors.

Maybe it’s all a foolish fixation redolent of Captain Ahab’s pursuit of Moby Dick in Herman Melville’s eponymous 1851 novel. Maybe the foreseeable result for the global trade community is what the multinational crew of the Pequod (save for Ishmael) suffered: mass drowning. But the purpose of a political party in a democracy is to win elections, and Trumpian trade policy has won two of them.

Ditto for Xi and his grip on the Chinese Communist Party (CCP). China manages the yuan-dollar exchange rate within a relatively tight band to incentivize Chinese exports and disincentivize imports. Beijing supports state-owned enterprises (SOEs) to over-produce in sectors like steel to keep Chinese citizens employed. China restricts and/or bans exports of key raw materials (such as rare earths) – even on a non-MFN basis in violation of GATT Article I:1.

Rule Number 1 of the CCP is to stay in power. To do so, Xi’s political base within the party must minimize industrial unrest by providing meaningful employment for the masses. Otherwise, why put up with authoritarian governance?

But there is one difference between Trump and Xi. For Trump, neither multilateral trade law nor care for our common home (as Pope Francis puts it in his 2015 Encyclical, Laudato Si’) matters much. For Xi , both matter – at least in rhetorical terms, if ceaseless CCP pronouncements that China is the responsible stakeholder in the GATT-WTO system Clinton wished it to be back in 2001 are to be believed.

On to “Aggressive” Neo-Mercantilism

Aggressive neo-mercantilism is nearly self-evident in U.S. trade policies toward China – and vice versa. There is, from the U.S. side, a fixation on the bilateral trade deficit with China.

That’s clear, for example, in the January 2020 Phase One Agreement, which aimed, among other things, to cut that deficit through China buying $200 billion of U.S. goods across two years. The agreement failed, with China meeting only about 60 percent of its purchase obligations. Likewise, Sections 2 and 3 of the January 2025 “America First Trade Policy” memorandum are about unbalanced trade with China.

That’s also obvious from the four waves of Section 301 tariffs, the first of which struck Chinese merchandise in March 2018. The goal is to push back Chinese-origin merchandise, and thereby orchestrate a sea-change in China’s acts, policies, and practices that undermine U.S. economic (including intellectual property) interests. Viewed from China’s shore, its Made in China 2025 industrial policy expressly embodied domestic and global market share targets for its companies, many of which are SOEs.

Aggressive neo-mercantilism strikes more than traditional agricultural and legacy industry trade. It’s applied to 21st century goods.

Consider U.S. export restrictions on critical inputs, such as high-tech goods and services. Protecting national security against geopolitical rivals is the subject of Section 4 of the Trump memorandum. Similarly, from China’s angle, the new paradigm covers both old and new sectors. The CCP needs to minimize challenges to party rule not only by keeping its factories humming, but also by limiting exports of key resources such as rare earths that are essential for advanced items from jet fighters to smart phones.

The cross-Pacific rhetoric is aggressive, too, emblematic of Viner’s first proposition for mercantilism – a nationalist mindset. There’s the ad nauseam MAGA epithet, “America First.” There are constant assurances from Chinese leaders of their country’s “peaceful rise,” coupled with admonitions against “comprehensive containment and suppression by Western countries led by the U.S…” Underlying both is more than love of country (patriotism); there’s a sense of superiority (nationalism).

Rationales for “Aggressive” Neo-Mercantilism

These illustrations beg a question: In a world cursed with academic jargon, what justifies a new term – “aggressive neo-mercantilism” – to theorize about decoupling amidst the China-U.S. trade war?

Let’s start with the prefix: Why are the two great powers “neo-” mercantilist?

Here are three reasons.

First, U.S. and Chinese measures bash trade not only in agricultural and industrial goods, but also in services, and restrict foreign direct investment (FDI), and portfolio investment. They torque every link in every supply chain. Save for a trade embargo (e.g., U.S.President Thomas Jefferson’s 1807 Embargo Act, or today’s bans on dealing with Iran, North Korea, and Russia), they are the most all-encompassing synthesis of measures experienced in the post- World War II era.

Second, what the United States is trying to do to China is snuff out its fire in currency markets, stab its investments in U.S. securities, and starve it of U.S. investment. Think of naysaying by the Committee on Foreign Investment Review of the United States of proposed acquisitions of domestic companies by Chinese-linked entities. Think of prohibitions on U.S. investments in Chinese military industrial complex companies. Beijing lashes back with (for instance) its Unreliable Entities List that targets foreign companies for sanctions.

Third, Viner characterized mercantilism as “essentially a folk doctrine” that “evolved in the light of historical circumstances and values by simple inference from the apparent facts,” and thus “a doctrine of practical men not given to subtle economic analysis,” and which did not attract “deep” or “disciplined scholarship.” That’s no longer accurate. Mercantilism for Trump and Xi is far more than a “folk doctrine.” It’s about connecting trade with national security policy.

But why dub this neo-mercantilism “aggressive”?

Again, consider three rationales.

First, the United States and China incentivize decoupling. Lessening reliance on each other for imports, exports, foreign direct and portfolio investment, research collaborations, overseas students – most aspects of human life – seems to be the (at least implicit) intent.

In earlier centuries, European powers were never as thoroughly connected to one another as China and the U.S. have been, especially since China’s WTO entry. “Mercantilism” meant eschewing interdependence through globalization, but orchestrating dependence of peripheral countries on the mother colonial power.

In the 21st century, mercantilism “aggressively” seeks to de-link through an admixture of economic, political, and military policies. Fragmentation is the deliberate outcome of policies that, collectively, are designed to cope with security threats.

Second, and following logically from the first, “aggressive” neo-mercantilism entails supply-chain reconfiguration. In contrast to conventional mercantilist commercial policy, import duties on inputs and raw materials are not necessarily low. The U.S. and China seek to lessen their dependence on each other for those items – to re-do their supply chains through tariff and non-tariff means. Witness, for instance, U.S. Section 232 tariffs on steel and aluminium (25 and 10 percent, respectively), and statutory (under the 2022 CHIPS and Science Act) subsidies for building semiconductor manufacturing facilities in the United States.

Third, “aggressive” neo-mercantilism contemplates the unthinkable: a trade war that becomes a shooting war. The Pentagon and People’s Liberation Army (PLA) are building up their capabilities, and they play war games across the Indo-Pacific. The first two logics – decoupling and repatriating supply chains – supposedly reduce their vulnerability to each other. Neither side can cut off the other’s sources of military and dual-use items, thus (perversely) increasing the likelihood of war owing to a sense (false) of invulnerability.

Perceived Threat

What underlies these rationales? Why do countries – the United States and China, in particular – go to all this trouble? Why have they lost faith in the rules-based multilateral order? Why can’t, or won’t, they trust each other to respect and strengthen those rules?

Perceived threat is the answer.

One country judges another country to be more than a competitor. It sees the other as a threat – even if it deploys diplomatic euphemisms for the word. Witness, for instance, the 2022 White House declaration that “[t]he PRC is the only competitor with both the intent to reshape the international order and, increasingly, the economic, diplomatic, military, and technological power to do it.” China’s intent and power imperil U.S. pre-eminence.

So, “aggressive” neo-mercantilism explicitly identifies a threat from abroad, and responds to it with a set of trade- and trade-related measures that are, by their nature, conflictual. That perceived threat has two salient characteristics: credibility and scope.

The threat is credible. The first country has relevant, probative evidence of practices of the other country that challenge its interests. The U.S. has adduced such proof in its March 2018 Section 301 report and November 2018 follow up report, and the June 2018 White House report, citing among other matters China’s technology transfer practices and the Made in China 2025 industrial policy.

The scope of the threat is also broad, targeting not just the economy of the first country. The threat also is to the foreign policy of the first country, in terms of its ability to forge closer ties with certain third countries and align third countries on its side.

The threat, in the language of the 1977 International Emergency Economic Powers Act (IEEPA), is to the national security, foreign policy, or economy of the United States. Not surprisingly, presidents of both U.S. political parties cite the IEEPA in various executive orders issued to prosecute the China-U.S. trade war. Section 232 of the Trade Expansion Act of 1962 takes a similar approach to that of the IEEPA, albeit with narrower phraseology: Section 232 speaks of “impairment” to U.S. national security caused by imports.

In this view, military confrontation, whether direct or through proxies, is foreseeable (though still avoidable). Repeated confrontations between U.S. and Chinese naval vessels in the South China Sea, given China’s insistence on sovereignty within its self-drawn nine-dash line, are examples. So, too, are breaches by Chinese air force and naval vessels of the midline of the Taiwan Strait in pursuit of the CCP’s goal to “reunify” Taiwan with the mainland.

Thus, to deal with the perceived threat, “aggressive” neo-mercantilist tools go far beyond old-fashioned mercantilist ones.

The restrictive trade and investment measures actively used by the first country are intended to contain and, if possible, neutralize the perceived threat the second country poses. They are purposive not merely in a generic sense of strengthening the first country. Rather, they are targeted against the threat. They may be taken unilaterally, or with partners, in which case what has been called “mercantilist regional rivalry” occurs.

So much of China’s and the United States’ behavior fits this pattern. That includes China’s Belt and Road Initiative (BRI), with countries such as Cambodia, Laos, and (even for a time) Italy, signing up to be on the Beijing-ballyhooed new Silk Road. That includes China’s strategically-placed ports from Pakistan (Gwadar) to Peru (Chancay). Other manifestations are the United States’ recalibrated financing of the Development Finance Corporation (DFC), and its efforts to court India into its camp.

In sum, “aggressive” neo-mercantilism has all the elements of “neo-mercantilism” and “mercantilism” – and a lot more – to frame the cross-cutting concerns at stake in global trade.

President Carter on Trade

How might the United States and China (and, for that matter, many other trading partners) step back from aggressive neo-mercantilism and turn back to managed trade?

They might look to U.S. President Jimmy Carter’s vision of collaboration in pursuit of free, fair trade. The late Carter is best known for his successful promotion of human rights and Middle East peace, but his legacy in trade is noble, too.

As president, Carter shepherded to its conclusion the 1976-1979 Tokyo Round – the last great multilateral trade negotiation before the Uruguay Round, and the one that produced the enabling clause that put generalized system of preference (GSP) programs to help poor countries on a permanent legal footing (by giving them a waiver from the GATT Article I:1 MFN rule). It was Carter who normalized relations with the PRC as of 1979 (why give Nixon and Kissinger all the credit?), ending decades of official isolation. It was he who, in 1977, transferred control of the Panama Canal (thus, perhaps, undermining its appeal to Islamist extremists as an “American” target and laying a foundation for the 2012 U.S.-Panama Free Trade Agreement ).

Here’s what Carter said in his January 1978 State of the Union Address:

We are a great country, a strong country, a vital and a dynamic country – and so we will remain.

We are a confident people and a hardworking people, a decent and a compassionate people – and so we will remain…

Each generation of Americans has to face circumstances not of its own choosing, but by which its character is measured and its spirit is tested.

There are times of emergency, when a nation and its leaders must bring their energies to bear on a single urgent task…

There are other times when there is no single overwhelming crisis, yet profound national interests are at stake…

Economic success at home is also the key to success in our international economic policy. An effective energy program, strong investment and productivity, and controlled inflation will … [improve] our trade balance and balance it, and it will help to protect the integrity of the dollar overseas.

By working closely with our friends abroad, we can promote the economic health of the whole world, with fair and balanced agreements lowering the barriers to trade.

Despite the inevitable pressures that build up when the world economy suffers from high unemployment, we must firmly resist the demands for self-defeating protectionism. But free trade must also be fair trade. And I am determined to protect American industry and American workers against foreign trade practices which are unfair or illegal. [Emphasis added.]

His words are stunningly prescient.