Trade has always been more than just a matter of swapping goods – it’s a battleground for competing ideas about wealth, power, and national strategy. From the hoarding instincts of mercantilism to Adam Smith’s invisible hand; and from David Ricardo’s elegant theory of comparative advantage to Alexander Hamilton’s industrial patriotism; trade theory has evolved alongside the fortunes of nations.
Today, as the Trump administration boldly embraces tariffs, the post-war consensus on free trade as a source of prosperity is rapidly unravelling. Before we explore the investment implications of this paradigm shift, let’s quickly take a journey through time.
Mercantilism (16th to 18th centuries): The zero-sum mindset
For roughly 250 years following the rise of modern nation-states in the 1500s, wealth was measured not by productivity or innovation but by the accumulation of gold and silver. During this mercantilist era, trade was a ruthless, zero-sum competition. If one country grew richer, another must be getting poorer – or so the thinking went.
To stay on top, nations imposed heavy tariffs to curb imports and lavished subsidies on exports. Empires raced to secure exclusive access to resources and markets, with the state holding power to grant monopolies to trading giants like the British East India Company. For private capital, opportunities were narrow, often confined to risky ventures tied to political favouritism or military conquest.
Adam Smith (1723-1790): Win-win trade
Adam Smith flipped the zero-sum game of mercantilism on its head, arguing that trade isn’t necessarily about one nation’s gain at another’s expense. Instead, trade can be a win-win, where nations can create mutual prosperity by focusing on what they do best.
At the heart of Smith’s revolutionary thinking was the concept of absolute advantage. In his magnum opus, The Wealth of Nations (published in 1776), he urged nations to specialise in producing goods they could make most efficiently and trade for the rest. He laid the groundwork for modern capitalism and the global trade networks we rely on today. Although as we will find out, like all forms of competition, free trade is not a painless panacea; neither the costs of creative destruction nor the benefits of positive-sum trade were evenly shared.
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David Ricardo (1772-1823): Playing to your comparative strengths
Building on Smith’s ideas, David Ricardo, another British economist introduced his concept of comparative advantage in 1817. Ricardo’s insight was deceptively simple but profoundly impactful: even if one nation is better at producing everything, it still makes sense to specialise in what it can produce at the lowest cost and trade for the rest.
Ricardo opened the floodgates for cross-border investments. Investors sought opportunities in industries that aligned with national strengths, such as Britain’s world-leading textiles and America’s agricultural exports in the 19th century.
Alexander Hamilton (1750s-1804): The protector of infant industries
Across the ocean, in the US, as a founding member of a new nation, Alexander Hamilton saw things differently. In 1791, he made a bold case for tariffs and subsidies to shield emerging domestic industries from foreign competition. While they came before Ricardo’s insights outlined above, Hamilton’s ideas took root to become highly influential throughout subsequent decades.
Hamilton’s view was that young industries learn by doing and need support to grow strong enough to compete on the global stage – a strategy now famously known as the 'infant industry' argument. His vision became the cornerstone of US trade policy throughout the 19th century, inspiring nations like Japan and South Korea to use similar protectionist measures in the 20th century.
However, this approach comes with strings attached – protected markets are inherently inefficient, and prone to corruption and rent-seeking. In many cases it is still debatable if protectionism contributed to economic success, or whether the economic success happened despite that protectionism. Successfully producing and exporting goods is not a guarantee that this activity was economically worthwhile – as the experience of long-suffering shareholders in many Chinese export-oriented companies (or their international competitors) will tell you today.
Make America great again
The first Trump administration (2017-2021) shattered decades of free-trade orthodoxy, advocating trade barriers under the banner of 'America First.' President Trump thinks the US trade deficit is evidence of losing a 'trade war,' particularly against China’s surplus. However, this view oversimplifies economic realities.
The US trade deficit is a sign US companies can’t keep up with demand, including from the US government. Fix the government Budget deficit and the trade deficit will likely fix itself. In China, the trade surplus is a sign Chinese companies can’t find buyers at home. Moreover, the US pays China for its imports not in gold, but in dollars, which of course are ultimately recycled back to the US and end up funding both government and consumer borrowing.
Yet Trump’s policies resonated with voters, reflecting deeper discontent. Ricardo’s free-trade model assumes that cheap imports – whether due to Chinese corporate subsidies or comparative advantage – are universally beneficial, but this ignores crucial factors. These are: the strategic importance of certain domestic industries, the social value of work for those in affected industries, and the uneven distribution of trade’s gains and losses. Yes, there might be better ways than tariffs to make everyone feel like a winner from trade, but one way or another, tighter trade policy is coming.
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Investing in a transactional world
Protectionism redistributes gains from consumers to producers. In this case, the latter includes US workers and shareholders of US companies. As the US turns inward, the investment landscape is likely to create many winners and losers. At a high level:
Companies: Multinationals with complex foreign supply chains face pressure, while firms with large domestic markets and simpler operations are more resilient. National champions may see government support, though caution is advised in protected industries. Service companies are also likely to hold up relatively better – tariffs and quotas often hit goods harder than services.
Currencies: The US dollar is likely to strengthen. US exporters will be hurt by an increase in the value of the currency, even in the absence of trade retaliation. Volatility is likely to rise as currency markets will need to act as shock absorbers amid these disruptions. There is a growing risk of a devaluation of the Chinese renminbi which could wreak havoc for emerging markets currencies, the euro, and the yen.
Countries: Those that rely heavily on trade, especially those with large surpluses with the US like Germany, Mexico and Vietnam, are likely to feel the pinch as tariffs and restrictions ramp up. Australia and the UK could sidestep the initial shocks but may still get caught in the crossfire due to their close trading ties with targeted economies. 'Unaligned' economies like India and Singapore may fly under the radar and even step up as middlemen between competing trade blocs.
Gold: This could emerge as a strategic asset despite US growth exceptionalism and Trump’s broader policy agenda. Growing sanctions in a Trump-led world will lead to shifts in financial flows as the search for ‘safe assets’ outside the reach of the US government increases.
Co-operation vs competition
Delving into our textbooks gives us fascinating historical insight into how these great minds have shaped economic thinking throughout the ages. The history of trade between nations has been a long, and sometimes bumpy, path with cycles between co-operation and competition.
In this sense, the protectionism and tariff-based approach under President Trump is nothing new, and with that in mind understanding that the pendulum is once again swinging towards competition underpins our dynamic approach to asset allocation in portfolios today.
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