Host: Do you remember back in June of 2010, Toronto streets were on fire? Literally. It was the G20 summit and thousands were marching against globalization as part of a wave of worldwide protests. At the time, globalization seemed unstoppable. Transnational trade was booming and economies were tightly linked. But 16 years later, that certainty is gone.

Host: Here's Near Beta, CEO of Bridgewater Associates, an asset management firm at the World Economic Forum in Davos last month. Turning around to what we call at Bridgewwater modern mercerism, which is instead of being focused on globalization and efficiency, being focused on self-sufficiency, national interest.

Host: So, what does this shift mean for Canada and our economy? Welcome to the rundown. Mercantalism might sound like something from a history lesson, but trade wars and tariffs could be pushing it toward a comeback. I sat down with Eric Heliner, professor in the department of political science in the Balsili School of International Affairs at the University of Wateroo, and Drew Fagan, professor at the Monk School of Global Affairs and Public Policy at the University of Toronto to get insight into whether we're living through a modern revival and what that could mean for the global economy.

Host: Before we get into sort of a definition here, let's get an idea of what we're talking about when we talk about mercantalism. Mercantalism dominated European thinking on international economic policy in the 17th and 18th centuries. Mercantalist underlying belief was that international economic policy is primarily a tool of state power. Since power unlike prosperity is relative, mercantalists think of international economic engagement as zero sum. You win, I lose. That was Martin Wolf in the Financial Times earlier this year. Eric, is this an accurate representation of mercantalism?

Eric Heliner: It is. I would add maybe two things. One is that mercantalists have a belief that power and wealth are are deeply interconnected. So if you're trying to promote the power of your state, you're also trying to promote its wealth and they there's a reciprocal relationship there. And the other thing I would add is that uh you know you could be someone who believes in promoting the power and wealth of your state but be a free trader. Uh but in the case of mercantalist the policy prescription that they have is not free trade. It's protectionist policies but strategic protectionist policies. So these are not people who believe in autarchy, self-sufficiency, but rather uh using protectionism and strategic ways to achieve objectives while your state remains in a relatively open world economy.

Eric Heliner: And if I can just add one additional thing, it's not just at the border that they're interested in state activism or state interventionism. It's also within the economy. So subsidies and stateowned enterprises and all kinds of things like that. When we think of mercantalism, I think a lot of people think about maximizing export, minimizing imports. Uh you mentioned a few other uh traits there, but uh what about um tariffs or colonization we when we when we talk about mercantalism?

Eric Heliner: Yeah. So certainly historically uh many mercantalists were imperialists as well, but it's not true of all of them. So there's a huge variety in the mercantalist camp. So I mean one way to think about the mercantalist camp is it's like an intellectual tradition like economic liberalism. So Adam Smith has many followers. There's a similar line of thinkers in the mercantalist tradition and some of them were imperialists but others were anti-imperialists. So there's no consistency on that on that issue.

Drew Fagan: Drew uh when we look around the world we hear of countries making trade deals based on tariffs uh becoming more self-reliant. In your view is this a kind of global political economic shift happening right now?

Drew Fagan: There is a shift going on and from the perspective of the Trump administration the period of free trade which really was part and parcel of the rules-based system after the second world war what became the world trade organization was applying Adam Smith in the sense of trade raised all boats and um and as Eric was saying or you were saying mercantalism is really zero sum. So you've got a whole series of countries around the world as the World Trade Organization becomes less and less powerful that are applying the principles of neo mercantalism if you like. You can see Donald Trump exports and imports and his concern about trade balances. This is a reflection of that. also subsidies, national champions, and governments thinking about their country for themselves. And that puts us, a classic free trader, at an even greater disadvantage up against the much bigger United States, considering that that's where the Trump administration appears to be going.

Host: All right, before we get to Canada, I want to talk about uh the two biggest economies. We already talked about the US, but let's talk about China. Eric, China has been at at at the center of this neoarantalism idea. Uh can you give us some evidence to sort of support this? What have we seen?

Eric Heliner: Yeah. So the China is an interesting case because it has a long tradition of mercantalist or neoarcantalist thought. In fact, the Chinese thinkers in the 19th century who were promoting this idea, you know, would would reach back into the 3rd century BC to the book of Lord Shang who had ideas about power and wealth being interconnected. So this is a deep tradition in Chinese thought. Xi Jinping in the current era, current leader of China is very informed by mercantalist thought. Figures like Syadsen from earlier in the 20th century. uh and the Chinese version of neo mercantalism is a much more interventionist version than um say the history of American neo mercantalist thought which also has deep roots in the in the 19th century. It's just in a less activist less interventionist uh manner. It's also historically been more much more exportoriented. That's a key feature of the the kind of Chinese history of mercantalism. So it's got its distinctive features but certainly since uh Deng Xiaoping came to power in 1978 China has been pursuing neoarangentalist policies.

Host: Drew we tal talked about uh the US here uh Trump's tariffs shift towards protectionism. Does this signal a a full move to mercantalism or is there a mix here when it comes to the US?

Drew Fagan: We don't know really. I mean, it's hard to project predict how far he's going to go down this road, but as of now, he's certainly not pulling back. If anything, he's doubling down. If we think about the relationship with China, for example, the concern he has about the size of the Chinese trade balance, trade surplus, much of that in the form of consumer goods coming to the United States. You know, there's been a long tradition that's changing now in which essentially everybody was a consumer and everybody benefited from low prices. And now we've got a situation in which, and Trump was ahead of this a decade ago, in which much stronger concern about the domestic economy, about workers, about things like manufacturing that have been stripped out to a sizable extent of the US economy. and the balance between being a consumer and being a worker for the economywide changes and he cons continues to emphasize that to some extent it depends the success depends on what sectors he's looking at helping right now it's hard to see manufacturing really taking off in the United States given the size of wages or for something you know cool for example you know

Host: let's talk Canada uh Canada and China strike a deal uh for reduction in tariffs uh on canola seafood products in exchange for a set number of EVs. Would this fall into a category of mercantalism?

Drew Fagan: I in part and in part the special conditions which Canada has in relation to the United States, the government's desire to diversify trade. Um, and what we're seeing in the last few days is the US desire, and this is dangerous for Canada, to limit the ability of Canada to diversify trade. To begin with, 75% of our trade exports to the United States. China is more like 5%. Um, you know, so you got a challenge in terms of diversification. We've tried it many times and haven't been successful. What we may be seeing now is a new offensive mercantalist, I guess you could say, in which the United States, as I was saying, tries to put pressure on Canada by limiting or choosing between the big US market and other markets, in particular, China.

Eric Heliner: Eric, in your view, I is Canada acting within a neo mercantalist system?

Eric Heliner: I mean, in a general sense, anytime you're putting restrictions on imports, you can classify that as as a new mercantalist policy if the goal is to maximize the power and wealth of your state. Um, I think in the Canadian case, you know, we we have a long history of responding to the United States going against free trade. So we used to have a free trade deal in the mid- 19th century that got abandoned and we turned eventually to the national policy in the late 1870s which was a neomarantalist strategy of trying to diversify trade trying to build up a domestic market and it's a response though it's a reactive response to the US turning against free trade we did the same in the great depression when uh the US introduced a smooth holly tariff act you know we turned very quickly to British markets trying to find an alternative when the Nixon shock happened in 1971 you know once Again, we tried to diversify and we tried to build up national markets. So, it's in the Canadian case, it's generally been uh a reactive strategy in response to America itself turning away from free trade.

Host: Help us understand a little bit what makes the trade deals of today different from the trade deals that were happening sort of under the banner of free trade.

Drew Fagan: So in the in the era uh which you can call kind of the high point of free trade 1990s when the World Trade Organization is created you know that's a multilateral set of trade negotiations where it's kind of oneizefits-all and uh many of the countries of the world are involved in that process. What we're in right now is much more of a set of bilateral relationships and I think the United States in particular would like a set of kind of bilateral hub and spoke relationships at which they are the center and that maximizes their power. I think China wants the same thing. You know, it's a it's a kind of tributary model that they had historically where China would make bilateral deals with states around the world and and uh and maximize its power through those bilateral relationships. So it's the difference between that kind of hut and spoke relationship and a more multilateral order in which all all are governed by the same rules.

Drew Fagan: Yeah. So the hub and spoke relationship is a good exa the good example in the North American economy and the structure of NAFTA which became KUSMA the existing free trade agreement in the early 1990s. The United States wanted to negotiate a free trade agreement only with Mexico. We insisted and this is after the bilateral agreement of being part of a trilateral agreement. Now the United States, one of the things they've floated with regard to the continuation of the US MCA is dual bilateral which would get at the same concern with regard to hub and spoke. It's part and parcel I think of US putting greater pressure on Canada um to serve them first but in circumstances where they're not making it easy. They want us to serve them first but in circumstances because of their power to take advantage is simply put. You know I want to make a point. Uh Eric was exactly right with Canadian history. We think of free trade as having been part and parcel of you know the last 40 years and the reorientation towards the United States. There was less of a reorientation than this you know in terms of the statistics but the idea of a national policy tariff wall build manufacturing at home for us that was always a second choice. The United States essentially offered us a binary choice. You can have free trade. This goes back to the 19th century. if you become part of the country, if you don't want to become part of the country, you're not going to have free trade. I'm simplifying hugely, but there's a lot of truth to it. And that balance, especially as Eric said, in the context of the United States itself changing with regard to free trade globally, was always tricky for us to find. Eric, did you want to get in there?

Eric Heliner: I was just going to add, it's a really interesting point that Drew is making and and just to highlight that we've been through this before. So, one of Trump's heroes is McKinley, the president from the late uh late 19th century. And McKinley is well known for something called the McKinley tariff in 1890, which did have the objective of pressuring Canada. And McKinley himself didn't say this, but there were people at the time around McKinley who were trying to pressure United pressure Canada into annexation. And so, this is a long history, and we have to react to it in the ways that we have in the past.

Drew Fagan: Where does Canada fit in all of this then? It's really challenging because there's a few distinct aspects of Canada as a western middle power. We are trade dependent. We are trade dependent on a country that was always you they can be challenging our best friend and they're not and it's changed suddenly. So we have come after free trade and the election of 1988 to be comfortable with this environment and now the environment globally has changed. It's a little bit of a subset of the prime minister's speech in Davos and part of our challenge is we you know are trade dependent like many western countries. The United States, by the way, isn't because its domestic market is so big. They trade within themselves a lot more than any other western country. We're we're on the higher side. But of course, that dependence is on one country. And what the prime minister now is trying to do is shake this off a little bit and go around the world and do deals. The most controversial being China. And we have tried this before and right now we are making some progress but it's not a substitute for the US market that's turning its back on us.

Host: All right, Eric, is this the end of sort of, you know, free markets, minimal government, uh, you know, intervention? Is this the end of neoliberalism?

Eric Heliner: So, uh, at the moment I would say yes. Uh, but it but it's hard to know where we're going. Um I mean the reason I think to argue that that is the situation we're in is that the US uh is returning to a policy that was very common for them you know before 1945 which was I mean people even referred to neoarcantalism in the 19th century as the American system of political economy. So this is a a deeprooted tradition. Drew made reference to uh Carney's important speech in Davos. The speech that was made at the same meeting by Jameson Greer, the US trade representative, invoked this history and said, you know, this is the American history to be protectionist. And so to the extent that that uh that kind of worldview that the US is returning to something that for them is historically normal is a a massive shock to the global system because the US since 1945 has been the leader of promoting a more open world economy. So yeah in that sense but I think the more interesting question in terms of looking forward is does that last? Yeah. So will there be a backlash within the United States to some of the Trump protectionism because the kind of kinds of protectionism he's done have been much more extreme than uh were even done in in the kind of 19th century era that Trump often invokes. Uh and just to give you one example to finish up here, uh you know, the McKinley tariff that I mentioned earlier of 1890 produced a reaction in the United States. And so in the 1892 elections, you know, there was a push back towards free trade. And so this isn't uh this isn't set in stone, but it's certainly a massive shock in the way that Drew, I think, is accurately depicting.

Drew Fagan: All right. Sure. So that period of 1890 to 1892 coincidentally is what we might call peak annexation at least until now. There were significant um there was significant voter support not majority by any means in border areas for annexation. And in the later part of the decade as the west grew, Canada grew more confident in itself economically that disappeared to come up now many years later with very little support in Canada in part because you know it's being offered by Donald Trump in all the circumstances that we're talking about. It's it's a really interesting moment. Let let me give an example of maybe the limits um that Eric was talking about with regard to mercantalism. Let's say that Trump forced Apple to come home. There's a good book in the last year, Apple in China, right? Great book on, you know, uh, their strategy there. How much would an iPhone cost if it was made in the United States? And what's the consumer reaction if that phone doubles or even triples? And what's the reaction of the government in terms of subsidizing American consumers with regard to that? he's not going to bother with subsidizing Canadian consumers, you know, just as one significant product.

Host: Um, in the past and as as you as you mentioned, mercantalism has led to a more fractured world and conflicts. Where are we headed? Um, this time I'll start with Eric and we'll finish with Drew.

Eric Heliner: Yeah. So, quickly, neochendalism does not necessarily need to be a conflictual world. So some of the most famous neo mechanicalist thinkers Frederick List or Henry Kerry there's people believed in international cooperation. So the question is uh is Trump doing what he's trying to do as a temporary strategy to then reach some kind of new international agreement uh and so some of the people around him talk about a new Breton Woods or Jameson Greer has been talking about a new international economic system or is Trump in a mode of kind of endless deal making where there's never any final outcome and if it's the second one we're in a much more conflictual world if it's the first one we're in a kind of a temporary phase where there's an attempt to establish a new equilibri which needs to be negotiated.

Host: Drew, very quickly.

Drew Fagan: I fear Exactly right. I fear it's the second. It's hard to think about the president. He's got smart people around him. Jameson Greer um being one of them thinking medium-term, thinking long term. But of course, it's this administration with all sorts of problems. And we see that with regard to Canada. You know, we've got 40 million people in Canada who buy as much stuff from the United States as 340 million Americans buy from us. How are we taking advantage of them? I mean, if you can't get along with Canada, um, you know, you can't really get along with anybody, which is what I fear right now from the administration, but we'll see.

Host: Gentlemen, we are going to have to leave it there. Eric, Drew, really appreciate your time. Really appreciate your insights. Thank you.

Eric Heliner: Pleasure. Yeah.

Host: On top of his trade wars, Donald Trump has also been putting pressure on the Federal Reserve. So, where does this leave our central bank? I asked Heather Scoffield, who has been analyzing economic policy for 30 years and is now CEO of the Canadian Tax Observatory, about the potential impact this could have here and abroad, and whether we've seen anything like it before.

Host: It's a common view that the central banks in the US in and in Canada are in lock step. How true is that?

Heather Scoffield: It's pretty true. It's not 100% true, but it's pretty true. Um I mean the Canadian economy is so integrated with the United States that it makes sense that when they move their rates, we also move our rates. And over the course of uh I'd say the last 25 years, we've been pretty much in lock step with them except for on a couple of occasions. Early in the 2000s, we went our own way because we had an insurance issue that changed our prices. Um that was a temporary aberration. Um and then during the great financial crisis, um we um also didn't follow them exactly because they got themselves in an awful lot more trouble than we did and so they lowered their rates more than we did. Um but we still moved in parallel to them. We just kept them a little bit higher. And then more recently um in the last the last three years we've been um our rates have been different than theirs. Um and again that's partly because in in in the in in the United States growth is strong. Here it's not as strong. Um and so we've gone our own way and kept rates um lower a little bit lower than theirs. But we have moved every you know we're moving in parallel with them just a little bit lower. Um so there's no doubt um the influence of American rates over Canadian rates is it's it's extremely strong and the ties are extremely strong.

Host: President Donald Trump has been pressuring the current chair of the Federal Reserve, Jerome Powell, to drop interest rates. Help us understand the controversy behind this.

Heather Scoffield: So central banks have made their name over the course of the last generation by being independent. Um and that's the way uh we've been able to keep inflation under control in many rich countries. Um so well I mean it's not been perfect but it's been fairly a fairly good experiment. Um it's because you know people in the public and investors um know that their central banks will act um and use interest rates to control inflation and not to control somebody's political whims. And so when Donald Trump comes along and um tries to put pressure on on Jerome Powell to cut interest rates, um that's uh potentially quite destructive. Um you know, we know in the backs of our minds that a lot of politicians want easy money. They want to keep rates lower than they than they necessarily should be for inflation. Um because they lower rates uh incite investment. they could bring an immediate bump in terms of jobs and growth and that feels good uh for for the for the voting public and it feels good for a politician who wants some credit. It's just that the uh the longer term effects or even the medium-term effects on inflation could be quite devastating and the effects on stability um uh and the investment environment also thrown up into the air. So when Donald Trump is putting pressure on Jerome Powell um and uh then changes, you know, changes the the chairman of the Federal Reserve accordingly. Um there are a lot of questions being asked and a lot of um presumptions among the general public and among the among investors about whether things are going to operate as they've understood them to operate in the past.

Host: Well, let's talk about Jerome Powell's potential replacement, Kevin Worsh. uh he has been named but uh still has to go through Senate. But what has the general reaction been so far?

Heather Scoffield: Well, Mark Carney came out and said it was a fantastic choice and um that was an interesting reaction because I I wouldn't have expected Mark Carney to um respond so quickly um to an announcement of a central banker. I mean obviously um our prime minister used to be a central banker himself and has had many has has a lot of insight into Kevin Marsh and who who he is and so okay yes of course we all want to know what Mark Carney thinks of Kevin Kevin Morris. So um that was an interesting reaction but it's not universal by any means. um you know there are a lot of analysts out there looking at the nominee um and saying okay he's got a history of a hawk meaning he has uh wanted to keep a tight grip on on inflation um which is not not Donald Trump at all so how does that work um and then there's been a lot of interesting um research into into um his worship statements over over the past little while and it seems that there's a there's there's some um willingness on the part of Wars to think about lower interest rates under a Republican president. So, you know, we're interpreting everything that he's done in the past through through politics rather than what he's done through um through monetary policy per se. But there's no doubt he has got monetary policy credentials.

Host: If it is the latter, what does that mean?

Heather Scoffield: Well, if he's got Republican tendencies and or if he's got um some sympathy for for Donald Trump, um he's um we will everybody will be watching for that for sure. He has to persuade uh everybody else um involved in making decisions at the Federal Reserve uh to go his way because it's not just up to him, but um he is extremely he will be extremely influential. Um and over the longer term, you know, if he's doing the pro if he's doing the president's bidding for him, um there's going to be uh some some an awful lot of scrutiny to see what happens to inflation and um borrowing conditions in the bond market, not just in the United States, but around the world. We're already seeing markets move as a result of his his nomination. Um you know, currencies around the world will fluctuate uh based on on what he does, including the Canadian dollar. And so um that influences uh our our borrowing conditions and influences um our economy going forward.

Host: Heather, in our last 30 seconds, if if trade tensions continue and the US and Canadian economies are no longer in that lock step and aren't as integrated, what can we expect from the Bank of Canada's monetary policy?

Heather Scoffield: So the Bank of Canada plays are pretty straight. They are fixated with uh inflation. They um raise and lower rates according to where they think inflation is going to go. And I don't expect that to change. It's just that what happens to inflation is very tied into what happens with the United States. And yes, we hear an awful lot about um you know diverging um our trade away from the United States. But I think the the the fact of the matter is we are still very very integrated with them. Um not just our trade but our more importantly our financial markets and our investment flows. And so I expect we will be moving in lock step maybe not every single time but frequently with the United States for some time to come. In your 30 years of reporting on economic policy, have you seen anything like this before?

Heather Scoffield: I have not. I mean, it's interesting with the Bank of Canada, they came out with their their forecast uh and their their assessment of the Canadian economy last week and um their first paragraph was saying everything is kind of the same over the last few months. And their second paragraph is but it's so unpredictable we have no idea where we're going. And that is very um very rare for them to say that they they can't see into the future at all. So that you know they're basically paralyzed because they can't figure out where things are going next. I mean I've looked at financial crises around the world over the last few decades and seen a lot of disruption but I've never seen anything like this in terms of not having a way forward.

Host: Heather, we're going to leave it there. Thank you so much for your insights. Really appreciate it.

Heather Scoffield: Okay. My pleasure.

Host: We want the Rundown to be your show. Let us know what you want to see next. Head to tvo.org/runddown feedback or leave us a comment on YouTube. Until then, see you tomorrow.