Donald Trump's Views On The World Trading-system

Friday, 21 March 2025, 11:28 am
Opinion: Keith Rankin

There is a name for Donald Trump's understanding of international trade: 'mercantilism'. While he is an unreconstructed mercantilist, in some ways the deeper 'reconstructed' mercantilism of miserly politicians like Angela Merkel and Olaf Scholz – and of the global financial industry – is more problematic. But it's Trump's understandings that I'm looking at here, and the problems those understandings foreshadow.

Mercantilism, in its purest form, sees international trade as a zero-sum-game – a game of winnings and losses – and, counterintuitively, it classifies the losers as winners. Mercantilism is a somewhat bizarre narrative, not well-understood by educators, and that well-taught economists believe was euthanised by Adam Smith in 1776 as pseudo-economics. Mercantilism could be characterised as 'gold-love'; or love of money for its own sake rather than for the utility that money gives us.

US Secretary of State Marco Rubio, said at the G7 foreign ministers' gathering in Canada last weekend:

"The goal that the President has made very clear is that he wants to reset the baseline for international trade, which he believes – and I agree – is unfair to the United States. This is not meant as a hostile move against Japan or Germany or anybody else; this is about balancing and fairness and trade. Once that baseline is reset, then you can enter into bilateral negotiations between countries about changes that can be made to our bilateral trade. That is fair for both sides; that's his goal".

(See U.S. Department of State's post, and Rubio says US could engage in new trade deals after tariffs imposed, Reuters, 17 March 2025; also Trump threatens 25% tariffs on EU, claims bloc was formed to "screw" US, Al Jazeera, 27 Feb 2025.)

Trade Advantage?

Donald Trump believes that imports are a 'cost', and that exports are a 'benefit'. And, secondly, he seems to believe that tariffs are a tax paid by foreign exporters to the governments of importers. The first belief is actually very widespread, and commonsense tells us that it is dead wrong.

The second belief is very uncommon, and is rarely true; though – in an extreme case – it can be true. If a government places a 25% tariff on imported butter (for example), the money is handed to the government by the importer, and the price of butter in that country goes up. However, the government of the exporting country may choose to pay an equivalent subsidy to butter exporters, to ensure that the butter is not placed at a 'competitive disadvantage' in the importing country; in this case that subsidy is effectively redeemed by the importing government as a foreign-paid tax.

On the commonsense matter, clearly (indeed by definition) what we get is a benefit, and what we give up is a cost. We get imports, and give up exports. It's that simple. But too many of us – including some economists – get into the strange mercantilist narrative that reverses this basic truth.

In Economics 101, unless it is taught badly, students learn that imports are what we get from international trade. Students go through simple examples to demonstrate the principle of comparative advantage, which shows how – through specialisation and trade – we can get more imports for a given cost in exports. Students also learn about the terms of trade, which is about how, if import prices increase at a lower rate than export prices, then we can get more imported goodies when we give up a given amount of exports.

But then the Economics 101 story gets twisted. We get in the habit of talking about a 'favourable balance of trade', which we are told means that the monetary value of exports exceeds the monetary value of imports. This 'favourable balance' is indeed an example of unbalanced trade. So, what is balanced trade, and which sort of trade is better (and for whom): balanced or unbalanced?

Balanced International Trade

To give a simple example of balanced multilateral trade, we may consider the world as made up of three trading 'countries': US, EU and UK+. 'UK+' means that I'm placing the 'rest of the world' into the UK group, while still imagining it as the United Kingdom.

In this scaled-back version of the world, let's say for last year: US has a trade surplus of $10b with UK+, UK+ has a $10b trade surplus with EU, and EU has a trade surplus of $10b with US. Or, put another way: US has a trade deficit of $10b with EU, EU has a $10b trade deficit with UK+, and UK+ has a trade deficit of $10b with US.

While a massive simplification of the actual world, the essence of this picture is a plausible representation of the truth (it's a 'stylised fact'). This simplification enables us to see the forest rather than just trees (to use a popular metaphor). To simplify even further, let's treat this as a triangular trade ecosystem, with US shipping wheat to UK+, UK+ shipping oil to EU, and EU shipping wine to US.

In this trading world, each of the three trading partners is 'in balance', meaning that each has a multilateral trade balance of zero. All countries' trade is in balance despite each bilateral balance being non-zero; the United States has a trade surplus with UK+ and an offsetting trade deficit with EU.

Bring in Donald Trump

Mr Trump sees balanced trade as being a balance of zero with respect to each trade partner. So, in his view, balanced trade would mean a trade balance of zero with UK+ and a trade balance of zero with EU. For the 'reset' trade system to be in balance, that would require a trade balance of zero also between UK+ and EU. To achieve a balance with EU, the Trump administration might put a 25% tariff on EU wine. UK imports would be left untariffed. As he sees it, EU is screwing US, and US is screwing UK.

At this point, and assuming the policy had been effective, the US trade deficit with the EU will have disappeared to zero. But world trade would now be out of balance: US would be running an overall surplus of $10b, EU would be running an overall trade deficit of $10b.

EU would now be getting more than it was giving up, and EU would be getting the message to produce less wine and more of something domestic EU consumers would like more of. EU consumers would become better off. (Yes, the EU citizenry would be incurring a future debt; we may look to economic history to see how most countries' trade debits have vanished over time.)

However, the mercantilist Trump and the mercantilist bureaucrat Von de Leyen would present this as a 'win' to the US and as a loss to the EU: they would say that the balance of trade was now favouring the US, because the US would be building up trade credits while the EU was incurring trade debits. While trade credits may or may not be realised (in the form of future imports), the fact would be that the US was now shipping out stuff ($10b wheat to the UK, in our example) without getting anything in return; previously it had gained European wine in return for the exported wheat.

Unbalanced Trade

In the real-world trading system, trade is not balanced, and for two reasons.

The first reason is that countries with mercantilist-minded elites seek to, in perpetuity, export more than they import. They look at the accumulation of (nominal) trade credits as a measure of their economic success. (In the literally 'golden' age of mercantilism – 1500 to 1750 CE – they would be measuring their 'success' as an accumulation of gold in their respective Treasuries; the other countries got the imported goodies, the successful mercantilists got the gold. Gold hoards were the ultimate unspent trade credits.)

The second reason is that the global trading system has worked – in the past – by one economically powerful country acting as consumer-of-last-resort. Since 1945 that has been the United States. Before 1914, that country was the United Kingdom (or, more strictly, the British Empire). In the 'liberal mercantilist' 1920s, no country was willing to get more than it gave up; the Great Depression of the 1930s was the result.

In the 2020s, the whole global trading and financial systems depend on one thing (especially given the long-standing mercantilist predilection of some countries, especially those in northern Europe and eastern Asia). They depended on the trade deficits of the United States of America. It was the trade credits – 'global liquidity' – 'printed' by and paid by the United States (the flipside being the abundance of unpaid-for imports, American consumerism [necessary]; and American warmongering [unfortunate]) which kept the unbalanced global economy solvent and drove world economic growth.

Donald Trump is in the process of treating the under-recognised global solution into both a national problem and an international problem.

There is one solution, for the global economy; one chance to snatch global prosperity from mercantilist calamity. The United States may pass the mantle over to China, with China to become the new fulcrum of the global economy. (The European Union is another potential mantle-holder, but it shows no sign of being interested.) We must note, though, that it took the United States 31 very difficult years (1914-1945) to properly accept that mantle from the United Kingdom. There are some signs that China's elites understand the need for China to become the next global financial superpower, and China has the resources – accumulated trade credits – to run perpetual trade deficits from now on; though China's financially conservative consumers will take much goading, and China faces a demographic cliff – especially after 2050 – which will weaken its ability to continue to play that role.

A balanced trade solution?

Another solution would be to have global financial institutions which would facilitate a mixture of global balanced trade, balanced finance, and equitable prosperity. The world's greatest famous-economist ever – John Maynard Keynes – pushed very hard for the achievement of this goal, from 1944. (Unfortunately, his efforts expedited his death at age 62.) But Keynes was British, and in 1946 the Americans 'held all the cards'. The historic opportunity to move away from 1920s'-style liberal mercantilism was lost. (Hint: to achieve such a solution, the new institutions would have to learn a critical lesson from the board game 'Monopoly'. That game only works because participants collect a dividend - £200 in my old version of the game – each time they pas 'Go'.)

To achieve balanced trade in a capitalist world, at minimum the world needs a system of floating exchange rates whereby countries with trade surpluses have appreciating exchange rates and countries with trade deficits have depreciating exchange rates. The fixed-exchange-rate systems which prevailed before 1914 and (until the 1970s) after 1945 created the seeds of their own demise; countries with trade surpluses were required to have higher domestic price inflation than trade-deficit countries in order to make the system work. This was a step too far for economically powerful countries; although in recent years we have seen, under the EU's Euro-common-currency system, some southern European economies – eg Italy – have had lower inflation rates than their supposedly stronger northern counterparts.

Opportunism in the world economy: 1980 to 2025

A world in which so-called responsible leaders have believed that it has been advantageous for countries to run trade surpluses, and to pursue policies towards that end, there are opportunities for some small countries to thrive – much as the consumerist United States has also thrived – by running perpetual trade deficits. Indeed, for some countries to succeed in running perpetual trade surpluses, other countries must run offsetting perpetual trade deficits. If some countries habitually export more than they import, this is only possible if other countries habitually import more than they export.

The perpetual trade deficit strategy is tantamount to a national Ponzi scheme. The United States 'Ponzi scheme' has been one that the capitalist world has utterly depended on. Could the United States make good on all the trade debits that it has accumulated in the last fifty years or so? I doubt it; for example, it has labour supply constraints, made worse by the expulsion of immigrant labour. And the United States doesn't need to; those debits have been inflated away, and the countries with trade credits have been reluctant to spend them.

Aotearoa New Zealand has probably been running the world's most successful opportunistic Ponzi scheme of this type. In New Zealand the scheme started early, 4 March 1985, when Roger Douglas both floated the New Zealand dollar and led a monetary policy that would push interest rates up to record high levels. (New Zealand forgot to commemorate its 40th anniversary of that NZD float.)

The result was that New Zealand was able to continue importing more than it exported, in perpetuity. New Zealand has a long history of such trade success, getting lots of imported goodies without having paid for them through exports. (New Zealand has paid for most, but not for many, of its imports.) This is what has supported New Zealand's still high standard of living, and what makes New Zealand a still-attractive country for international migrants.

For the most part the New Zealand strategy has worked through a monetary policy whereby sufficiently high interest rates attract foreign 'investment'; so far, the scheme has worked to the benefit of both foreign 'investors' (who've got highish returns, relatively risk-free) and high-end consumers who have enjoyed the so-far-unpaid-for imports (one of which is foreign travel, an imported service). The prosaic name of the game is the carry trade. (Investopedia currently says: "Until recently, one of the most popular carry trades involved trading the low-yielding or even negatively yielding Japanese yen against currencies like the Australian dollar or the New Zealand dollar.")

The New Zealand carry trade is struggling a bit at the moment, thanks to the stubborn insistence of the American Federal Reserve Bank to keep US interest rates high. The New Zealand government is responding by facilitating forms of 'foreign investment' that are driven by sweeteners other than highish interest rates. Any national Ponzi scheme – including an opportunistic scheme as durable as New Zealand's – depends on cash inflow, which is equivalent to an accumulation of additional trade debits.

New Zealand pays out its 'investors' by taking on more new 'investments'. New Zealand's scheme is hiding in plain sight. It's easy for some countries to stockpile trade debits when other (overtly mercantilist) countries are choosing to stockpile trade credits; indeed small-country Ponzi schemes do their little bit to stabilise a world economy in which too many players are still behaving as too many players were in the 1920s.

New Zealand has been additionally lucky, in that since the scheme began, New Zealand has benefited for the most part by improving terms of trade; that represents a turnaround from the period 1950-1980 in which the terms of trade were for the most part deteriorating.

In 2024, New Zealand recorded an annual current account deficit of $NZ 26.4 billion (6.2% of GDP); this represents the amount of imports New Zealand enjoyed but did not pay for in 2024. The record was $NZ 35.6 billion in 2022 (9.2% of GDP). The last year that New Zealand actually paid for all of its imports was 1973, though 1974 to 1984 was understandable due to record low terms of trade; those were years when New Zealand at least tried to reduce imports (remember Think Big).

What New Zealand has done has accumulated lots of trade debits, and benefited as those debits were either whittled down (ie partially written off) by inflation, and reduced as a percentage of GDP as GDP increased (albeit with slower economic growth than in most countries). New Zealand has 'screwed' the rest of the world by running trade deficits, not by running trade surpluses..

Conclusion

Messers Trump and Rubio want to stop Americans (including the American defence industry) from 'enjoying' the many imports that each year are not being paid for. This, for them, will be the ultimate killing of the 'golden goose' that has enabled world capitalism to create prosperity for at least eighty years. (Herbert Hoover's administration tried a similar self-undermining trick in 1930 to reduce imports – the Smoot-Hawley tariff; that tariff was the trigger which converted a financial crisis into a global Depression, and a world Depression into a World War.)

The problem is the 'mercantilist' way of thinking; a way of thought that is widespread amongst the world's elites. It is the pattern of thought that treats imports (what a country gets) as a cost instead of a benefit, and treats exports (what a country gives up) as a benefit instead of a cost.

Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.

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Keith Rankin

Political Economist, Scoop Columnist

Keith Rankin taught economics at Unitec in Mt Albert since 1999. An economic historian by training, his research has included an analysis of labour supply in the Great Depression of the 1930s, and has included estimates of New Zealand's GNP going back to the 1850s.

Keith believes that many of the economic issues that beguile us cannot be understood by relying on the orthodox interpretations of our social science disciplines. Keith favours a critical approach that emphasises new perspectives rather than simply opposing those practices and policies that we don't like.

Keith retired in 2020 and lives with his family in Glen Eden, Auckland.

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