The New Mercantilism’s Threat to Your Wealth

The classic argument against tariffs often falls on deaf ears because it is abstract and difficult to prove. As expounded by Adam Smith in “The Wealth of Nations,” the idea is that countries should produce goods and services in which they have a “comparative advantage.”

It is hard to show abstractly. Such advantages are revealed by “the market.” You can’t just ask Presidential Counselor Peter Navarro what might seem advantageous on K Street.

The rule is you should invest your efforts and capital in whatever you’re doing well. Whatever you’re not doing well, que sera, sera. Your comparative disadvantages, you should leave alone. Buy what you need from others.

This laissez-faire approach creates a fabric of global interdependence that makes politicians nervous, and the people wealthy and peaceful most of the time. Without government intervention in favor of the established order, new companies and technologies—their value gauged by their surprisal—can spring up and enrich the world.

The “invisible hand” of the market, however, sounds all too passive and mystical, and cuts the visible-handed politicians out of any credit. Can’t have that!

Tariffs also lead directly to mercantilism. This is best understood as an elaborate system of mutual bribes passing back and forth between businessmen and governments. Very quickly, companies that gain most from government favors find that the government wants to jerk them around perversely in return.

In the 1700s and 1800s, the English crown reaped millions from granting monopolies to firms such as the East India company. For his royal monopoly in power, the king reveled in charter fees, annual payments and other revenues such as customs duties, excise taxes and import tariffs. These could mount to a substantial share of government revenues. Supported by the precursor Peter Navarros of Britain, the import tax on tea alone brought in some $3,000,000, as well as helped to spark the American Revolution.

This war was no mere coincidence. By evoking an illusion of “independence” accompanied by simultaneous acute pangs of need, for which foreigners could always be blamed, mercantilism often leads to militarism.

The government’s demands and payoffs could be shockingly blunt. In 1697, the East India company lent the crown more than £1,000,000 to help finance its war against France. In exchange, parliament had to agree to extend the East India company’s monopoly charter.

The practice of protecting a company or industry on the one hand and exacting enormous rents in return goes back to the Middle Ages. For centuries, a leading source of revenue for the English crown was export duties on English cloth. It may seem perverse that governments should levy export taxes on industries they were trying to protect. But the taxes were usually the way of extracting payment for prior favors.

In the United States, the CHIPS act and other attempts to subsidize and protect the American microchip industry have launched a new mercantilist era. Still in its early stages, the New Mercantalism is gaining delusional momentum, as well as fostering a bombastic militarism. Hey, let’s call it the “Department of War.” The Department of Commerce can preen as “The Department of Trade War.”

Not surprisingly, mercantilism entails a great deal of almost comically counterproductive meddling in private markets and companies.

In 2024, government banned the export of Nvidia’s (NASDAQ: NVDA) “dumbed down” H20 chip to China, even though the chip had been foolishly designed at the government’s insistence to mitigate national security concerns. After Nvidia invested some $5 billion in the project, the U.S. government turned around and banned the chip anyway.

The ban was eventually reversed, but at a considerable price. The U.S. government now gets a 10% (or greater) rake off on every sale of the H20 to a Chinese firm. But what of national security? As with off-track betting, banned supposedly for moral reasons, the government quickly discovered that moral prohibitions erode if the government gets the revenue.

The national security argument against exporting the H20 was always ridiculous; overcoming it took only a modest bribe. Meanwhile, the Chinese at Huawei quickly contrived a competitive chip. So, the Chinese are no longer going to buy H20s and Huawei is emerging as a global player. After all, the vast majority of the world’s chip engineers are still Chinese, even in U.S. companies and universities, despite the depredations of ICE (U.S. Immigration and Enforcement).

Meanwhile, back at home, in return for as much as $7.8 billion in direct funding from CHIPS, a 25% investment tax credit and multi-billion-dollar defense orders, the government now owns just short of 10% of Intel’s (NASDAQ: INTC) stock. Given Intel’s difficulties in recent years, 10% of that company may not seem like a bonanza. But the current stars in the microchip business all have trillion-dollar valuations. NVIDIA has been worth as much as $4 trillion. Under the CHIPS act, what a huge incentive the government now has to lift Intel into that exalted circle.

In the “chip war” against China, Intel is becoming a leading U.S. “weapon,” despite its 10,000 or more employees of Chinese descent, including its new CEO Lip-Bu Tan, a Chinaman from Singapore. In a comic moment, the administration actually ordered Intel to fire Lip-Bu, apparently for looking too Chinese, though he had already built up the leading U.S. chip design equipment company Cadence Design Systems, a key source of Nvidia AI chip technology that the U.S. claims to want to protect.

The irony is that with multiple labs and a leading waferfab at Kiryat Gat, Intel is more an Israeli-based company than a Chinese one. But mercantilism will jeopardize all these foreign assets at the heart of the United States’ still commanding global lead in information technology overall.

Already many of the most important American electronics companies have been caught up in the mercantilist web: Micron (NASDAQ: MU), AMD (NASDAQ: AMD), and even foreign firms imported to America such as TSMC (NYSE: TSM) and Samsung (KRX: 005930). All are angling for multibillion dollar favors from the government and lay themselves open to its rent seeking rake offs, while tying U.S. companies in suboptimal supply chains snaking through Arizona and Texas as they attempt to lure mostly Asian waferfab engineers to America, even as officials from ICE attempt to deport them en masse as potential spies.

The fruits of all these anti-Chinese machinations may be kindly described as mixed. In the last year, Chinese wafer fab companies have increased their worldwide sales by some 30 percent, to 16% of the global total in rough estimates, while U.S. waferfabs are now down to around 12% of global output despite some half of their employees being of Chinese extraction.

Cerebras, Silicon Valley’s pioneer in the coming epoch of wafer scale computing and thus potentially the most important firm in the world, is at the U.S. government’s beck and call for approval of its long-denied IPO. Cerebras’s efforts to raise money in the United States have been repeatedly balked—could you guess?—because of supposed possible links to China at its present lead funder G-42 from Abu Dhabi. Meanwhile, many billions of U.S. investment dollars for scale production and marketing hang in the balance.

At the same time, Chinese students, in a once world-leading graphene-based wafer-scale project at Georgia Tech, have been mostly ICED back to China. There they were greeted with some $350 million in venture capital. Meanwhile, their pioneering Professor Walt de Heer back in Georgia has been rewarded for his world-beating creativity by harassment from the FBI.

The idea of the U.S. government running the U.S. semiconductor industry as a weapon against China would be laughable at every level if it did not seriously jeopardize the U.S. lead in microchip design and information tools in the new epoch of artificial intelligence. At every hand, visible and invisible, we are subsidizing obsolete technology, while penalizing real U.S. innovation and pushing it to China.

Mercantilism is legalized bribery. Its enthusiastic embrace is the greatest risk now facing our most important companies and potentially blunting the greatest era of wealth creation ever known to man. Not for nothing did Adam Smith entitle his book against such mercantilism “An Inquiry into the Nature and Causes of The Wealth of Nations.” Even Peter Navarro should be able to grasp that.