Asad Jamal presents an alternative history that captures the long-term effects of American mercantilism

By Asad Jamal*

Marco Polo, the famous thirteenth-century Venetian merchant, was one of the first Europeans to trade with China. Now imagine that, after a while, the Venetian state became concerned that Polo was purchasing too many silks and spices from China to sell at a profit in Europe. The “trade deficit” he was creating, the authorities worry, would deplete the stock of gold in Venice, while creating jobs for Chinese, rather than for Venetians.

In this imaginary history, Venice assembles a council of experts to decide whether the risks posed by the trade deficit merit retaliation in the form of tariffs, quotas, or potentially even a ban on trade with China. As the council deliberates, two competing theories emerge.

One group – the “mercantilists” – argue that it is up to the state to maximize gold holdings and protect domestic manufacturing employment, by imposing tariffs, restricting the use of gold for imports, and forcing China to buy the same amount of goods from Venice that Venice buys from China. If China refuses to do so, Polo’s purchases will have to be restricted.

The second group, led by Adamo Fabbro, subscribes to the laissez-faire argument that the state should avoid intervening in markets. By buying goods from China, Polo was promoting economic wellbeing in Venice: consumers benefited from goods they could not acquire domestically – at least not at such a low cost – and merchants were profiting by re-selling Chinese imports at a markup. While manufacturing jobs might be lost, retail jobs were gained, and spending – not just on Chinese goods, but also on local products and investments – rose.

As for the depletion of Venice’s stores of gold, Fabbro offers an ingenious solution: a paper currency, the Venetian dollar (V$), which other countries could be compelled to accept, because Venice was the world’s top trading power. China would receive no more Venetian gold, and it could use the V$ to purchase goods from Venice, thereby boosting local manufacturing. In order to preserve the value – and thus the credibility – of the V$, Fabbro proposes establishing a central bank to manage the money supply, thereby preventing excessive inflation.

Venice’s leaders are convinced. They implement Fabbro’s recommendations, and, as he had predicted, Venice becomes the world’s leading power, thanks to burgeoning trade, rapid economic growth, and broad prosperity – all enabled by free markets.

One large Venetian merchant, Walmartius, is buying V$50 billion worth of Chinese goods each year to sell for profit locally, an endeavor that supports the creation of thousands of local retail jobs and lowers costs for Venetian consumers. Another merchant, Appleos, designs high-tech goods in Venice and manufactures them in China, enabling the company to achieve a market valuation of V$1 trillion.

Trade deficits do swell, but they cost Venice nothing, because they are denominated in Venice’s own currency, in exchange for which other countries freely provide goods. In fact, before long, all international trade is conducted in V$, which is universally accepted as a surrogate for gold.

Thanks to the Venetian central bank’s reliable prevention of V$ depreciation, confidence in the currency continues to grow, creating a virtuous cycle. Soon, every country in the world purchases V$ bonds to hold in their foreign-exchange reserves, thereby effectively financing Venice’s large budget deficits. All of this enables Venice to fund large public programs and maintain the world’s largest military, deepening its international clout as it leads the way in enforcing global trade rules and securing sea lanes.

This happy state of affairs continues for a few centuries. Though lower-value-added jobs in sectors like manufacturing shift to China, where labor costs are lower, jobs in higher-value-added sectors – such as technology, finance, media, and retail – flourish. Venice remains the world’s largest economy and leading trade power, enjoying a secure position at the top of global value chains.

Sometimes in history, one can pinpoint the precise moment when things take a turn for the worse. In this story, that moment comes with the emergence of Donaldo Trumpi as the ruler of Venice.

Trumpi understands little about economics. He is more performer than policymaker, eager to win votes however he can. He sees that a subset of Venetians are upset about the loss of manufacturing jobs – they lacked the skills or flexibility to move to higher-value-added sectors – and he capitalises on it. He likens trade deficits to economic losses – almost to theft – and declares China the enemy.

Some of Trumpi’s advisers try to explain to him how trade deficits work in an economy that benefits enormously from having the world’s leading reserve currency. Challenging the trade deficit, they tell him, can imperil the V$’s reserve-currency status. Moreover, the Venetian deficit amounts to just 3.4% of Venice’s massive GDP. They explain that a return to mercantilism could spur others to do the same, potentially by creating an alternative reserve currency through a global institution. Only then would Venice’s trade deficits become a problem, they tell him. The government would be forced to reduce spending, including on the military, throwing the economy into recession and eroding Venice’s international influence.

But Trumpi refuses to listen. Centuries after mercantilism was abandoned in favor of highly successful laissez-faire policies, he decides to embrace it, imposing tariffs on Venice’s trade partners, beginning with China. And it ends about as well as his advisers thought it would.

Trumpi’s approach erodes the rules-based global economic order that had served the world – and Venice – so well. Eventually, the rest of the world reverts to mercantilist policies as well, imposing trade barriers and refusing to use the V$ for international trade. An institution the Venetians helped establish and once led, the International Monetary Fund, creates a new reserve currency, based on gold convertibility. Over the subsequent century, Venice watches helplessly as its economic and military power dwindles.

Unfortunately, this imaginary past is now threatening to become our real future. If it does, it will be a major turning point in world history – and all the more remarkable because, unlike most such shifts, there will be no doubt about where the blame lies.

Asad Jamal is the founder and chairman of ePlanet Capital, a Silicon Valley venture firm.  Copyright: Project Syndicate, 2018, published here with permission.

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Brillant. The first part of this should be used tin schools to teach about World trade, deficits etc.
As to the end , I think that is exactly what will happen . Keep an eye on the % of world trade conducted in USD.

If only...

At some point, Trumpi will increase the tariffs to match the tariffs and non-trade barriers that China has erected to inhibit sales of goods from US to China.

If only China (and the EU) subscribed to laissez-faire trade rules, then there wouldn't be a developing trade war.

My silly opinion is that the US turn for the worse started with the advent of the ever increasing deficit finance, which becomes a beggar thy neighbor approach that also borrows from the future to finance the present.

This turn became rather marked when the rule of law lapsed and Bernanke embraced the "money from helicopters" approach and ignored the moral hazard issues involved. Even with all of the significant violations of law from the "too big to fail" banks, there were no real prosecutions, just wet bus ticket slaps... Without rule of law, you have a lawless society where justice is purchased instead of served.

Pure virtue signalling nonsense. Trump is confronting the militarism of China. The CCP are intent on world domination and the US would be stupid to watch and not confront the Chinese Communist Party. The US always put strategic (the current word for military) matters first. They cannot allow China to continue stealing US military technology. The Chinese takeover of the South China Sea and the development of an aircraft carrier battle fleet is no small matter. The rest is smoke and mirrors. This is why Trump wants to make up with Russia in order to allow the "pivot to Asia" (as the current policy was called under Obama).


On what evidence do you base your assertion that the CCP want 'world dominance'? They most certainly want regional dominance,as evidenced by their aggressive military build-up in the S China Sea. In this,they are simply following a a path well-trod by previous empire builders. However,nothing I have read shows evidence that they want,or are capable of,projecting that power globally. try reading The China Challenge by Thomas Christensen, or Asia's Cauldron by Robert Kaplan.
Furthermore,I think that their debt problems are much bigger than many suppose. There is an interesting new book on this; China's Great Wall of Debt,by Dinny McMahon.
Until a few years ago,Trump leveraged every deal to the max. and often,beyond.He dealt in debt,but thenhe started paying cash,as he did with Turnberry and has since ploughed a lot more cash into it. It runs at a significant loss. Ever wondered where all this cash came from>

Roger, how is China "stealing US military technology"?
I also think that the tariffs will isolate the US more as other countries will turn to each other in lieu of trading with tariff imposing USA (we are already seeing this between Europe and China). This would rather reinforce China's power, exactly what the US doesn't want.

There's a much more nuanced view here from Asia Times, than relying on the SV elite who are, in many respects, strangers in their own land. As US-based common taters like to say about articles such as this one:

"You want more Trump? This is how you Get more Trump"......

I wish just once some so called analysis would reconginse what Trump does over what he says - Trump is using these tarrifs to force China to follow the rules and stop cheating. I think the US will succeed and then we all be very thankful to Trump.

NoFax, what do you mean by "Trump does over what he says" ?
Also, how is China "cheating" ?

Currency Manipulation, for a start.
Theft of intellectual property.
State subsides to exporters.

Trump Derangement Syndrome is alive and well at - pathetic !!

History will remember Trump as the man who united the world..... against the USA

The man who destroyed the goodwill toward America was called Bush.

Sad! article.

Why Zach?

If Trump was the leader of Venice the Venetians would be great again.

This is an article / opinion about economics and the consequences of econoimic policy choices, usimg the lessons of economic history. Comments should focus on that.

The worst of the dog-whistle responses and off-topic comments have been removed. (That may also have deleted others in those threads.)


I agree that it is an opinion article. It uses a fairy tale approach to deliver a message. It should be filed under Opinion, not Business as it isn't a news report and isn't a factual analysis. At best, one could call it allegory. It certainly isn't news.

I would like to see the allegory also capture the prior one-sided tariffs and non-tariff business barriers. The allegory makes the assumption that the rest of the world is laissez-faire in its approach, with only the evil Trumpi having a tariff tantrum. He may be having a tantrum, but the underlying lack of fairness in the market has been in place for a while due to protectionist tariffs from China and even the EU, along with considerable chinese non-tariff barriers.

It seems to present a highly simplistic depiction of Venice and reads like a children's story. It may be better if it was a made up place like that kingdom in the Princess Diaries.

Venice was a major maritime power and a seat of an empire. It became rich for a multitude of reasons. It conquered a lot of the surrounding territories and coastlines. It eliminated opposition by military force. Indeed warfare was viewed as a tool of commerce. It made a lot of money supplying mercenaries.It was particularly well positioned to withstand prolonged sieges with the attackers often perishing in the disease ridden swamps that surrounded it. It was an important staging area for the Crusades.

It was the gateway between East and West and benefited from the protection of the Byzantines, a huge and relatively friendly empire that held the armies from the East at bay and even acquired a lot of wealth from the looting of Constantinople. It practically had a monopoly on the land route trade with the East and acted as a middleman.

Venice declined primarily because the Spanish and Portuguese mastered ocean going transport with large sail ships opening up a route to the East around Africa. Tariffs or no tariffs, it wouldn't have made much difference, as advanced sailing ships beat large rowing boats and Spain and Portugal controlled the only exit to the Mediterranean.

I find that this article ignores some "trade" basics. He talks about Marco Polo importing silk and spices. How was he costing jobs in Europe? Were these things even manufactured in Europe? Could they have been? A more appropriate response would be to ask what is manufactured in Europe that could be sold to the Chinese? The "trade imbalance" and depletion of gold stocks is because of short sighted and narrow focused officials not because of anything that Marco Polo was doing.

And this is the problem with globalisation. Large corporations do not respect the contribution industry provides to communities and countries unless they can somehow profit from it. They simply seek to dominate the market. The impact is that companies are bought out and their manufacturing is moved elsewhere. The argument often used is that it can be done more efficiently somewhere else, but in reality the cost to the country that loses the manufacturing is far larger than any gain that might be made by the sale. This pursuit of 'profit' comes at a huge cost for communities, and makes the point that regulation and control is required.

Many of the points that Trump makes are correct, but the cost of correcting the damage caused by the free market policies and globalisation will be huge. That economists are wilfully blind to these basics and persist in trying to argue for some form of Utopian ideal that can never exist, suggests that they should be ignored.