The New Mercantilism

That Germany fails to acknowledge

Mercantilism: a nationalist economic policy designed to maximise the exports and minimise the imports of an economy. It seeks to maximise the accumulation of resources within the country intended to build national power through economic control. It is characterised by bullionism, protectionism, colonialism, and a strong emphasis on a favourable trade balance. While it significantly shaped the early modern world, it was ultimately superseded by more liberal economic theories.

Nothing epitomises Germany’s failure to acknowledge the unravelling of the liberal world order better than these two clips of Christoph Heusgen, the outgoing President of the Munich Security Conference and previously Germany’s representative at the United Nations.

How it Began, 2018 in New York:

How it’s Going, 2025 in Munich:

JD Vance and Defence Secretary Hesgeth made clear in Europe last week that the US election and Donald Trump's second coming signal a tectonic shift from the old globalist world to a new fractured world characterised by strong men projecting power. Germany, which goes to the polls today, has been particularly slow to acknowledge this shift and adapt to its implications. Heusgen's tearful reaction to the US bombshell epitomises Germany’s profound emotional distress and highlights how its political firewalling of the AfD will likely backfire.

For more on the state of Germany today and its sleepwalk into decline, see former FT columnist Wolfgang Munchau’s powerful book Kaput! The End of the German Miracle. Munchau traces Germany’s economic woes to structural issues: an overreliance on traditional industries like automobiles, a rejection of digital transformation, and a political culture that clings to an outdated "competitiveness" mantra. He points to specific missteps, such as the dependence on Russian gas exposed by the Ukraine crisis and the car industry’s slow shift to electric vehicles, as symptoms of a deeper malaise. He critiques leaders like Gerhard Schröder and Angela Merkel for enabling or preserving this flawed system rather than reforming it.

While it is too early to determine the economic or financial consequences of the Trump administration's changes to the world's security structure, it is becoming increasingly apparent that we are rapidly returning to a mercantilist world order. Furthermore, some form of financial and monetary reset, often called a Mar A Lago Accord or a Bretton Woods II agreement, is becoming increasingly inevitable.

The Yalta "Great Power" Accord and the Bretton Woods Conference were forged to reshape the post-WWII world. Eventually, after the Cold War, they produced a period of US unipolar globalism. However, despite delivering high, low-inflationary global growth, this period created imbalances and inequities that Western politicians infrequently acknowledged, let alone dealt with. Geopolitically, this period led to the emergence of China, which threatened US economic and military dominance.

While many blame Trump's election, Brexit, or the rise of the AfD for today's chaos, it is more accurate to see these as symptoms of the accumulated imbalances and inequities born out of the last twenty years' rush to globalise. However, regardless of your analysis, the economic and financial consequences of the shift to mercantilism must be confronted so that their implications might be understood.

Let's examine what form such a settlement might take and how the world economy and trading system might look by the end of the Trump presidency. Consider the people in Trump's cabinet who have key economic, trade, and fiscal responsibilities, as well as their main policy agendas and previously stated prescriptions.

The former macro-hedge fund manager, Treasury Secretary Scott Bessent, burnished his Mercantilist credentials early on, talking about his desire to monetise the asset side of the US balance sheet. More broadly, he articulated a vision that intertwines trade, finance, and security, suggesting a world divided into green, yellow, and red zones based on how nations align with US interests. Countries like Australia, strategically located in the Pacific region cooperating economically and militarily, might enjoy low tariffs and privileged access to US markets and the dollar system. At the same time, those deemed adversarial would face steep trade barriers and financial exclusion.

Intriguingly, Bessent has also floated the notion of "Century Bonds" or "War Bonds"—long-term, zero-interest US debt instruments that allies could be nudged to buy. These bonds would effectively subsidise American fiscal deficits in exchange for security guarantees and dollar liquidity. In other words, they would imply a financial system in which the US leverages its military and monetary dominance to extract tribute-like contributions from allies, reshaping global capital flows.

Investment banker and Trade Secretary Howard Lutnik instinctively supports Trump's tariff agenda. This agenda would bend supply chains back to American shores, with import taxes potentially escalating monthly and forcing companies to relocate production.

Economist Stephan Miran, Chair of Trump's Council of Economic Advisors, provides intellectual cover through his critique of the current order. He maintains that the US provides security and market access without adequate compensation. Miran views the dollar's reserve status as both a boon and a curse—it lowers US borrowing costs but overvalues the currency, hurting exporters. He aligns with Bessent on a new global accord, suggesting he'd support a managed dollar depreciation paired with demands that (green-zone) allies finance US deficits via bond purchases.

Piecing this together, by 2029, the world will become a fractured global economy, with the US at the apex, wielding tariffs and dollar access as carrots and sticks to the world’s premium trading and security bloc. Within this bloc, green-zone nations will buy US debt and align it with American policy, while red-zone outliers like China pivot to alternative systems—perhaps a yuan-led bloc with its own digital currency and trade networks. Green-zone allies will trade intensely in the dollar economy, and red-zone nations will become isolated. The dollar will remain the principal reserve asset but will be strategically weakened to favour the US industry, possibly backed by gold or other collateralised assets. Global institutions like the IMF, World Bank, and WTO will be obsolete.

Europe and its constituent nations will be forced to decide which zone best suits them and the key policy implications of their choice. After years of failing to acknowledge a problem, Germany's choice might be sudden and painful, with powerful consequences throughout Europe and the West.