What Is Economic Nationalism?
Everyone’s talking about economic nationalism, but no one seems to know what it is.
This article clears that up. I’ll tell you what economic nationalism is, give you some historical examples of economic nationalism in action, and let you know its potential impact on America.
And of course, I’ll answer the burning question: does economic nationalism work? (spoiler: yes).
But first, let’s answer the hot political question of the day: is Donald Trump an economic nationalist? How about Steve Bannon?
Donald Trump Is An Economic Nationalist—Steve Bannon Too
Donald Trump’s been called a protectionist, an economic nationalist, even a mercantilist by establishment republicans and libertarians—as has his chief strategist, Steve Bannon.
Yes. Donald Trump is an economic nationalist—this is actually one of the few issues that he hasn’t flip-flopped on over the past decades.
As far back as 1988 (appearing on the Oprah Winfrey Show), Trump was criticizing the rarefied notion of international free trade and economic globalism as a driver of economic growth. Basically, he thought it didn’t work—particularly in cases where the trade relationship was asymmetrical (eg. between China and the US).
His opinions have changed little in the intervening decades, as you can see here in his 2016 speech where Donald Trump comments on America’s asymmetrical trade with China:
If there are lingering doubts regarding Trump’s opinions on economic nationalism, there are none for Steve Bannon, the former editor of Breitbart, and Trump’s policy adviser.
Steve Bannon told the Hollywood Reporter point blank that he’s an economic nationalist in their exclusive interview:
I’m a nationalist. I’m an economic nationalist…the globalists gutted the American working class and created a middle class in Asia. The issue now is about Americans looking to not get fucked over…
What does that mean? For Bannon, it means re-balancing America’s trade deficit and investing in infrastructure, which is why he has been:
pushing a trillion-dollar infrastructure plan. With negative interest rates throughout the world, it’s the greatest opportunity to rebuild everything.
It’s clear that Donald Trump, and Steve Bannon are economic nationalists; but it’s less clear what that means.
What does economic nationalism mean?
What Is Economic Nationalism? A Definition.
So what is economic nationalism anyways?
Economic nationalism is best defined as an umbrella term for the variety of economic theories and policies that prioritize the economic interests of one nation, and its citizens, above those of another.
Examples of economic nationalism range from fairly mild protectionist regimes, such as Canada’s protection of its dairy industry, to the mercantile policies adopted by Great Britain during the Industrial Revolution.
Either way, the goal of an economic nationalist is to enrich and empower the nation to the maximum possible degree.
This is done by instituting policies, such as tariffs, development subsidies, or infrastructure investment programs, that are designed to create, attract, and retain as much economic activity as possible within the nation’s borders.
Basically, economic nationalists want to make the national economy as big as possible.
These policies are usually imposed on an ad hoc basis, according to the needs of the time—they vary from place to place and region to region, depending on the type of economy in question.
For example, a country with bad roads would get the most bang for its buck improving its roads, whereas a country with decent roads may benefit more from improving its airports—it entirely depends on the local context, there is no one size fits all solution.
In this way, economic nationalism is not so much a coherent economic model or theory, as it is as collection of policies that have been passed down over time—it evolved as a body of practical knowledge via historical accident, trial and error—as opposed to theories like global free trade, which is based on the work of David Ricardo, or communism, based on the writings of Karl Marx.
It is this adherence to pragmatism that separates economic nationalism from other economic “theories”.
So that’s what economic nationalism is generally, now let’s get into the nuance.
Economic Nationalism: Protectionism Or Mercantilism?
Many conflate economic nationalism and mercantilism, in an attempt to disparage the former by linking it with the latter—they routinely do it to Donald Trump, describing him as a mercantilist.
This works because mercantilism is old, and most people (including those flinging the mud) don’t know what it is—they think it’s about something silly like hoarding gold, or fighting wars over opium (see above picture). It’s not.
Mercantilism is just unadulterated economic nationalism.
Like I said, economic nationalism is a blanket term: all mercantilists are economic nationalists, but not all economic nationalists are mercantilists.
However, you can’t understand economic nationalism without understanding mercantilism, so that’s what we’ll focus on next—also check out the linked article for an in-depth discussion.
I’ll tell you exactly how protectionism is different from mercantilism, and then tell you what mercantilism is (just a heads up, everything you’ve heard about mercantilism is probably wrong).
Protectionism vs Mercantilism: What’s The Difference?
Basically, protectionism is passive, mercantilism is active.
What does that mean?
Economic protectionists seek to isolate their domestic markets from foreign competition, so that their local producers cannot be out-competed and replaced by imported products.
This is usually done by imposing high tariffs (taxes) on competing imports.
An example of a protectionist measure would be if Switzerland taxed foreign watches: this would make imported watches more expensive than Swiss watches (which aren’t taxed), and thereby make Swiss customers more likely to buy Swiss watches.
Importantly, economic protectionism focuses on protecting, or defending domestic markets: it does not necessarily seek to expand them. This is why protectionism is passive: it seems economic isolation.
Mercantilism takes this one step further: mercantilists are active, they seek to grow the domestic economy by actively investing in it, and by expanding international markets for their products—while still limiting foreign competition.
Basically, protectionists are happy with their economic pie, they just don’t want to share; mercantilists not only want their pie, but they want some of yours too. This is why mercantilism is active.
What Is The Economic Theory Of Mercantilism?
Since most people don’t have the foggiest idea what mercantilism is, I think it’s best to start my explanation by telling you what mercantilism is not.
Mercantilism is not about hoarding gold.
Mercantilism and gold are linked in the popular imagination because mercantile policies generate trade surpluses.
Historically, gold or silver was physically shipped from country to country to balance the books. For example, if England sold France 100 sheep, but bought only 50 sheep worth of stuff, France would have to pay for the other 50 sheep with gold.
You can imagine if this goes on for a decade then England will accumulate a “hoard” of gold—much like how China accumulated most of the world’s silver under the Canton System.
But England didn’t really care about the gold: they cared about growing their flocks of sheep, and employing more shepherds.
We know this not only because of history, but because mercantilists themselves told us. For example, Anoine de Montchrestien, the godfather of French mercantilism, wrote:
…it is not the abundance of gold and silver, the quantity of pearls and diamonds, which makes states opulent… it is the supply of things necessary for life and suitable for clothing…
Mercantilists didn’t really care about acquiring gold, and even if they did, it was of secondary importance—the point was to increase domestic industrial production and employment so as to enrich and empower the nation, not to sit on mountains of metal.
Mercantilism is not about colonialism.
Mercantilism is an economic policy that countries employed to benefit their own economies, nothing more.
To make this clear let us turn to history: the British and the Americans both employed mercantile policies during the 19th century, however only Britain acquired a global empire—the latter was fairly isolationist.
Therefore, mercantilism is not predicated upon colonialism, nor does it necessitate conquest—they are linked due to historical accident.
Mercantilism was not invented, it evolved.
There is no Adam Smith or David Ricardo we can point to and say: “he created it”.
Instead, mercantilism evolved through trial and error over hundreds of years. It is a collection of tricks-of-the-trade, of policies and practices that worked.
It was only during the Seventeenth Century that intellectuals began to distill the lessons of economic statecraft into a coherent set of principles, and only in the Nineteenth Century, when man’s arrogance clouded his mind to the wisdom of experience, that radical alternative systems, like free trade and communism, were born.
Mercantilism is not a zero-sum economic model.
It’s often (incorrectly) suggested by liberal economists that mercantilism is a zero-sum economic model, meaning that mercantilists believe that when one country gains economically, another loses—the economic pie is only so big.
They point out that when two countries freely trade, they both benefit: therefore mercantilism is wrong.
However, this is a straw man: they confuse mercantilism’s economic and political components—mercantilism deals with both money and power.
Economics may not be zero sum, but politics is. Simply put, the more powerful your rival is, the less powerful you are relative to them.
When dealing with power, when one country gains, another loses. Period. Power is zero sum.
Therefore, since mercantilism evolved in a period of endemic warfare, it made sense to conflate economic gain with political gain—the richer your rival became, the more powerful they became. So, if you wanted to limit their power, you needed to limit their economy.
Mercantilists aren’t necessarily opposed to asymmetrical trade relationships on economic grounds—they recognize that both partners may benefit. However, they would reject such a relationship, because it narrows the relative power differential between the two states.
For example, let’s say that America trades with China. America’s economy grows an extra 1% per year because of this trade, while China grows an extra 4% a year. Economically, both benefit—this makes liberal economists happy.
However, mercantile theory says this is a bad trade because China gains much more than America, and if it keeps up, China will eventually catch America—thus America is relatively weakened by China’s strength, which is bad for America in the long run.
Mercantilism is not against the free market.
There’s a difference between domestic markets and international markets, and mercantilists recognize this difference (whereas proponents of open markets don’t).
For example, during the Industrial Revolution, Great Britain had relatively free domestic markets (there were few regulations, people were free to travel throughout Britain), but they practiced heavily mercantilist trade policies internationally by imposing a 50% import tariff on manufactured goods, and making it a crime to export technology or machinery to rival nations.
In a counter-intuitive way, mercantile policies often protect domestic markets.
How? Just look at China and America as an example.
Right now, America imports Chinese stuff. This stuff is cheap—way cheaper than it should be.
This is because China practices predatory trading via currency manipulation, wage suppression, export subsidies etc. In the end, this cheap stuff out-competes American producers, who either have to offshore or close down.
I ask you: is America’s “free market” actually free?
American companies do not compete with Chinese companies, they compete with China’s government, who crushes them with its monolithic fist. In today’s “free market” the government picks winners and losers, China’s government. Japan’s government. Even Canada’s government.
So that’s what mercantilism isn’t. But what is it?
How Does Mercantilism Work?
Let’s flesh out our definition of mercantilism.
Mercantilism has 2 goals:
- Make the nation as rich as possible.
- Make the nation as powerful as possible.
The first goal is pretty simple: mercantilists want to make the economy as big and technologically advanced as they can. This is done by maximizing the amount, and efficiency of economic activity (particularly advanced industry) occurring within the nations borders.
Often this involves:
- Imposing high taxes on value-added imports, while limiting them on raw materials or non-competing products (eg. tax imported laptops, not bananas).
- Limiting taxes on value-added exports, and imposing high taxes on exported raw materials (eg. don’t tax exported automobiles, do tax wheat exports).
- Seeking out new markets to export advanced products in exchange for raw materials (eg. sign trade deals to sell aircraft in exchange for uranium, not the other way around).
- Investing in productivity-boosting infrastructure that will improve the economy’s overall efficiency (eg. build better roads, airports, internet infrastructure).
The second goal is where most misunderstandings arise.
Most economic theories only focus on absolute gains, ie. do both parties benefit? This is why liberal economic models (the Austrian School of economics) recommend highly asymmetrical, but mutually advantageous trades (eg. where China gains 10% while America gains 1%).
Mercantilism is different because it also focuses on relative gains/losses in relation to power.
This is why mercantilists (and other ardent economic nationalists) reject asymmetrical trade deals—they undermine the power of their nation by unduly benefiting the other (power is zero sum).
Some common tools mercantilists use to maintain power include:
- Acquiring national monopolies in a specific resource (eg. OPEC benefits from manipulating oil prices higher than fair market rates).
- Restricting the foreign ownership of domestic companies and resources.
- Pursuing exclusive trade deals with new markets (you can trade with me, but not my rival).
Done right, a mercantile trade regime should result in the country exporting advanced products, and importing raw materials. This artificially expands the nation’s production, leading to full employment and a shortage of labor, which creates a powerful incentive to invest in better technology—it promotes long run economic growth.
It also ensures that trading partners remain relatively weak: industry is concentrated in the mercantile nation, whereas resource extraction is delegated to its trading partners. This creates a relationship of dependency and economic subservience, which relatively increases the power of the mercantile nation.
A good example is actually trade in colonial America—the colonies imported everything from tools to firearms from Britain, which left them relatively helpless at the beginning of the revolution (and Britain relatively strong). It was only because of help from Britain’s rivals that the colonists could raise a viable army.
Those are the goals, and some of the primary tools, of mercantilism. Now let’s look at how they work in context.
An Example Of Mercantile Economic Nationalism In Action
Let’s visualize this with an example.
Pretend there’s a country called Camelot. There’s nothing particularly special about it, but it does have a lot of sheep.
Right now, Camelot trades freely with the surrounding regions, particularly Avalon, to whom it trades wool in exchange for woolen cloth—it gets cold in Camelot, and they love Avalonian sweaters.
In this situation, a liberal economist would say that this trade setup is ideal, since both parties are trading freely, and both are benefiting.
But King Arthur of Camelot doesn’t care what economists has to say: he looks at Avalon with envy.
“Why should they have all the advanced textile mills, and live an urban lifestyle, while my people walk the hills guarding sheep?”
To fix this, Arthur raises a tax on exporting wool, and another on importing cloth. Not only does this make it lucrative to set up textile mills in Camelot, but Arthur also decides to reinvest these taxes in Camelot.
He invests in the mills, and builds some roads so they can get their textiles to market easier. Not only that, but he brings in some weavers from Avalon to teach the people of Camelot how to weave.
Pretty soon, Camelot has its own thriving weaving industry (and the urban, industrial population that comes with it), which benefits from relatively cheap wool. At the same time, Avalon’s weaving industry is dying out, since Camelot’s wool is too expensive due to the taxes.
Eventually, Camelot replaces Avalon as the weaving capital, exporting its cloth abroad—Camelot grows richer and more powerful relative to Avalon (which declines).
Seeing the success of the weaving industry, King Arthur decides to try similar tactics with other industries.
The end result is that Camelot imports only raw materials (or exotic stuff that it can’t get domestically), and exports only advanced, refined products (like cloth).
This does a few things:
- It ensures that Camelot’s economy is diverse, since it no longer specializes in only exporting wool, but now refines and weaves the wool as well.
- Camelot’s economy is bigger than it would otherwise be, because it’s making stuff both for itself and for export. This ensures everyone has jobs, and that most of those jobs are in value-added industries (weaving is more lucrative than shepherding).
- Camelot no longer depends on Avalon for its sweaters, and can therefore act independently.
That’s how mercantilism operates.
This example may seem contrived, but it’s not. It’s actually exactly what England did to Flanders, beginning with the reign of King Edward III (r. 1327-1377) and continuing until the Tudors—England was Camelot, Flanders was Avalon.
Is Economic Nationalism Justified? Did It Work Historically?
That’s the big-ticket question: does economic nationalism work? This question is often linked to a second one: how did economic nationalism affect trade in the world historically?
First, yes. Economic nationalism is the tried and true historical method for getting rich—economic nationalism works.
Second, it concentrated power in mercantile nations, as opposed to free traders.
History gives us lots of great examples, from many different times and places. Chief among them being Venice, Great Britain, and China.
But given the contextual nature of history, my explanation of how they got rich wouldn’t make sense without first explaining their historical backgrounds (which is time-consuming, and beyond the scope of this article).
In the interests of brevity, I’ll just link you to articles I’ve written on the history of economic nationalism that you can browse at your leisure, or you can take me at my word.
1. Venice & the Advent of Mercantilism
Medieval Venice pioneered the mercantile system by aggressively pursuing national monopolies in the spice and pilgrim trade, and cultivating economic autarky (independence) via import bans—Venice imported only raw materials, it made everything it needed.
Because of these policies, Venice remained one of Europe’s richest cities for nearly 500 years (c. 1200-1700).
2. Great Britain & Economic Nationalism
Many economists wrongly claim that Britain was the home of free trade, and it was this economic freedom which spawned the Industrial Revolution—that couldn’t be further from the truth.
In reality, Britain was Europe’s most ardent mercantilist nation: it imposed 50% tariffs on manufactured imports from its rivals, banned foreign companies from operating in its empire, and made it a crime to export technology and machinery.
Early Victorian Britain was the apotheosis of economic nationalism—and it paid off big time. Britain became the richest nation the world had ever seen, ushered in the modern era, and conquered a quarter of the planet. It owed all this to its dynamic economy.
3. China & the Canton System
China evolved the mercantile trade system separately from Europe (the Canton System), which speaks to its robustness.
The greatest test of anything is the test of time: the longer it lasts, the more useful it is. The only thing that could possibly sweeten this deal are examples of the phenomena evolving multiple times—this would really speak to its success. Mercantilism fits this bill.
Not only did economic nationalism in the mercantile paradigm last for centuries (Venice began practicing it in the 1200s, Britain abandoned it in the 1840s), but it evolved both in Europe and East Asia.
The theme linking these 3 very different countries, separated by thousands of miles and hundreds of years, is the fact that all 3 got rich by implementing mercantile policies: they were economic nationalists.
The history of economic nationalism is one of success.
How Can Economic Nationalism Help Our Economy Here In America?
Economic Globalism & Trade Asymmetry Distorts America’s Free Markets
America’s trade policy does the opposite of what an economic nationalist recommends, thereby destroying America’s middle class.
For example, instead of balancing the books, America runs a chronic trade deficit, which has resulted in the offshoring of her industries.
This is all too clear when looking at the data:
But why is a trade deficit bad?
Aside from the fact that America’s running a deficit in advanced products, and a surplus in raw materials (we’re a net exporter of unrefined products, and a net importer of manufactured goods), the deficit’s bad because it causes offshoring.
Offshoring hurts the economy in the long run, and I urge you to read about offshoring in detail here, but the basics are as follows:
An American company hires a foreign company to make something for it in the foreign country, and then imports the product to America (the same applies to services).
Companies do this because it’s cheaper for them to make their product in the foreign country (the other country’s poor, or they get subsidies to move there), which increases their profit margins; consumers also get cheaper goods.
Win win, right?
Wrong. In the short term it’s good, but in the long run it undermines the nation’s economic growth by causing high unemployment, high income inequality, and a loss of technical facility.
Because companies move their labor-intensive jobs abroad to somewhere cheaper, but retain the capital-intensive industries. For example, Apple offshores iPhone assembly factories, but retains the designers in America.
However, there are many more industrial workers than knowledge-workers (Apple may fire 10 factory workers, and only hire 1 new designer).
This means that most Americans lose out.
Furthermore, although the imported stuff is nominally cheaper, the only people who actually benefit are those at the top—for everyone who loses their jobs, or don’t get a raise because there’s more competition in the labor market, the stuff isn’t cheaper.
Case-in-point: for most Americans, the real cost of goods (its price vs how much you earn) has actually increased.
Here’s what that looks like when it comes to our standard of living:
As you can see, although average discretionary spending (spending on wants, as opposed to needs, like food, clothing, shelter) stayed the same, median spending declined proportionally—this means most people got the shaft.
Economic Nationalism Would Help Fix America’s Economy
Economic nationalism would help America’s economy by ending the cycle of offshoring by making it prohibitively expensive for companies to relocate production abroad—they would have to make their products here, creating jobs for Americans.
This is important, because it recognizes how economic growth actually works: economies grow when they make more stuff, not when they consume more. By pursuing consumption via cheap imports, all we’re doing is creating a bubble that’s primed to burst—we need to get back to policies that are grounded in reality.
Economic nationalism would also make America more powerful relative to its rivals (particularly China)—by cutting them off from America’s market, we would undermine the viability of their economic model.
The world is safest during times of uni-polar hegemonies (ie. where one country is so much stronger than the rest that conflict is moot). Consider the times of the Pax Romana, Pax Britannica, and Pax Americana.
By empowering other countries by trading with them (since they gain proportionally more than us), we’re moving the world into a multi-polar age—these have historically been violent times, think of the Warring States period in China, or Early Modern Europe.
The world’s safer if America’s by far the most powerful nation—economic nationalism will help keep the US economically and politically strong.
Prosperity is bigger than economics, it’s about politics too—that’s why free trade doesn’t always work.
Economic nationalism is one of the keys to fixing America’s economy, but there are others like reducing taxes, getting illegal immigration under control, and reducing America’s debt load (read about them in the linked articles).
The Significance Of Economic Nationalism In A Globalizing World
The election of Donald Trump was a game-changer. It’s shown people that globalization can be reversed, that there’s still a place for the sovereign nation state—both politically and economically.
I hope this article has given you some perspective: economic globalization is not the historical norm, nor is it the most successful model for us to follow—just look at the historical parallels between the decline of Great Britain and contemporary America.
We should learn from the past and apply it to the future: that’s the golden ticket.
A final note.
It might surprise you to learn that for most of its history, America actually embraced economic nationalism, particularly during the 19th century. Not so coincidentally, this was the period where America’s economic growth was at its apex.
Frankly, Donald Trump’s economic nationalism is nothing more than a retrenchment of historical norms.
Economic nationalism made America great before, and it will make America great again.
History always repeats itself.
Further Reading On Economic Nationalism:
Bobbins, Not Gold, by Spencer P Morrison (your humble columnist).
The Black Swan, Nassim Taleb.