The Retired Investor: Trump's 21st Century Mercantilism

 

Jan. 20 is just around the corner. It is Day One in the tariff wars that our next president is intent on launching. The corporate world is trying to dissuade him from that course of action, with no success. 

 

It is an economic fact that the cost of tariffs is passed on to the consumer. If tariffs are high enough, some imported products simply cease to be available, which can cause supply chain interruptions. At some point, buyers balk at paying higher prices. When that happens, tariff costs hit business profit margins directly. Everyone loses.

 

In the last column, I explained why Donald Trump is adamant that tariffs are the only way to turn around the trade imbalances that have plagued our country as far back as the aftermath of World War II. In his first term, Trump's tariff policies were partially successful but not without a cost. Some countries hit back with their tariffs. Our farmers were hurt so badly that Trump was forced to authorize multibillion dollars in direct aid to keep many farmers afloat. Yet, the MAGA math indicates that whatever harm is done will be worth it in the long run.

 

However, an important element in this equation is being ignored by Trump and many economists. We will use Germany as just one example. As the powerhouse of Europe, Germany has been enjoying large trade surpluses with the U.S. for many years. Back in the heyday of mercantilism (16th-18th centuries), a country would take these trade surpluses and convert them into piles of silver and gold that would sit in their monarch's coffers for years. That is not the case today. 

 

Germany, as well as China, Japan, and most other European nations have much higher savings and investment rates than we do in the U.S. Why should that matter? Because instead of hoarding their cash profits on trade (the modern-day equivalent of precious metals), they have been taking their current account trade surpluses and recycling those capital flows back into the U.S. and other countries. Those flows find their way into building new plants and equipment in the U.S., creating jobs, investing in our technology, and purchasing our stocks and bonds. 

 

This flow of funds allows the American consumer to continue to save less and spend more. The risk is that by raising tariffs, we reverse this process. These offending nations would see their current account trade surplus go down as their exports to the U.S. slowed. That means they would have less capital to invest back in America.

 

I see other differences between the Trump approach and the mercantilists of old. Back in those days of colonial expansion, currencies did not represent the value they do today. Only gold and silver were considered stores of wealth. Today, nations can do more than just raise tariffs in response to a burgeoning tariff war. 

 

Since Trump has already telegraphed his intent to levy tariffs on America's trading partners, exporters have already acted by using their currency to lessen the impact on their trade balance. How — by reducing the value of their currencies against the dollar.

 

If Mexico, for example, is hit with a 10 percent tariff on exports and allows its currency to depreciate versus the dollar by 10 percent, the price to importers remains the same. No harm is done, and it is business as usual. This is why the U.S. dollar has been strengthening against just about every currency all year.

 

Another area where Trump departs from the mercantilist model is government control. He believes in the heavy hand of government as far as trade is concerned, but he is in the opposite camp where rules, regulations, and taxes by the same government are concerned. Unlike the nations of old, he does not believe that wealth is finite, nor should it be measured by the amount of gold, silver, or even crypto that a nation holds.

 

That puts him at odds with the core belief that supported mercantilism. As for acquiring colonies, his policy appears to be both nationalist and anti-imperialistic. Trump has shown himself to be against foreign entanglements and has no interest in acquiring territory (unlike China, Iran, Russia, and other quasi-mercantilist societies). He does not see it as America's role to right every wrong or spend money or American lives on people and causes which he believes has nothing to do with our interests.

 

That does not mean he plans to withdraw America from the global scene as many might fear. The U.S. is just too big an entity to accomplish that. Instead, because of his mercantilist leanings, if other nations want us to intervene then they must be prepared to pay for that privilege. He has made that point with Taiwan, and with the countries that comprise NATO, and will do so at every opportunity, in my opinion. 

 

 Many voters see our new president as a strong leader. They applaud his desire to wield more power and authority than others have done in his office. Given the present populist era where distrust of government and our economic system are at historical highs, this is not surprising.

 

Although he has a soft spot for pomp and circumstance and may envy autocratic leaders, he seems less interested in power for power's sake. Time and again, the mercantilist in him, appears to support one conclusion: if there is an advantage to be had (whether in finance, economics, or policy) by simply cutting a deal, that is what he will do.  

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.