Modern Mercantilism: How Bridgewater's Framework Helps Navigate Today's Economic Shifts by Perplexity AI

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In recent months, Bridgewater Associates, the world's largest hedge fund, has advanced a powerful framework called "Modern Mercantilism" to explain the dramatic economic shifts reshaping our global economy. As nations retreat from decades of globalization toward more protectionist policies, this concept offers valuable insights for investors, businesses, and policymakers. Through examining Bridgewater's analysis, we can better understand how these seismic economic changes might impact global markets and prepare for what could be a fundamentally different economic landscape.

The Emergence of Modern Mercantilism

In May 2025, Greg Jensen, Co-Chief Investment Officer at Bridgewater Associates, articulated that "the previous global consensus around free trade and limited government intervention is hanging by a thread, and a different system—something I call 'modern mercantilism'—is increasingly ascendant". This shift is so significant that the $92 billion hedge fund, in partnership with Global Citizen, launched a global competition called "Forecasting the Future: A Modern Economics Challenge," offering $25,000 and potential employment opportunities to those who can best analyze its implications.

The concept gained further attention when Bridgewater warned that the economic policies being implemented by President Donald Trump's administration could potentially "induce a recession" as part of this broader shift toward modern mercantilist approaches. According to Bridgewater's co-chief investment officers, the world is undergoing a "rapid shift to modern mercantilism" with potentially negative outcomes for the economy.

Defining Modern Mercantilism

Bridgewater defines Modern Mercantilism through four core tenets:

1. The state has a large role in orchestrating the economy to increase national wealth and strength

2. Trade balances are an important determinant of national wealth and strength, and trade deficits should be avoided

3. Industrial policy is used to promote self-reliance and defense

4. National corporate champions are protected

This approach marks a dramatic departure from the free-trade, limited-intervention model that characterized the post-World War II economic order. As described by Bridgewater, modern mercantilism emerged from a perfect storm of disruptions: COVID-19 exposing vulnerabilities in global supply chains, intensifying geopolitical tensions (particularly between the US and China), and technological competition in strategic sectors like artificial intelligence.

Historical Context: From Traditional to Modern Mercantilism

Traditional mercantilism, the economic doctrine that prevailed in Europe from the 16th to 18th centuries, emphasized accumulating wealth through favorable trade balances, state-backed monopolies, and protective tariffs. This system was famously criticized by Adam Smith, David Hume, and other classical economists who argued that trade is not a zero-sum game where one nation must lose for another to gain.

Critics demonstrated that through comparative advantage, both trading partners could benefit—Portugal specializing in wine and England in cloth, for example, would make both nations better off through trade than if each tried to produce everything domestically. The critique highlighted that "by imposing mercantilist import restrictions and tariffs instead, both nations ended up poorer".

What makes Bridgewater's Modern Mercantilism framework particularly insightful is its recognition that while the economic critique remains valid, political considerations are driving a return to mercantilist-style policies regardless. As Greg Jensen puts it, "Capitalists have long worried that socialism would end the Reagan-Thatcher economic system. Instead, modern mercantilism is poised to strike the final blow".

The Utility of the Modern Mercantilism Framework

For Investors

For investment professionals, the framework provides a coherent explanation for seemingly contradictory market movements and policy decisions. It helps anticipate how nations might respond to each other's economic policies, potentially creating cascading effects through global markets. Bridgewater warns of "exceptional risks to US assets, which are dependent on foreign inflows" and suggests that many portfolios are positioned based on past patterns that may not continue.

For Businesses

The shift to Modern Mercantilism has profound implications for corporate strategy. According to Bridgewater's analysis, "government policies will reduce the competitive pressures companies face, as their survival is a matter of national interest and not just the market's process of creative destruction". This creates both opportunities and challenges:

1. Companies in strategic industries may benefit from government protection and subsidies

2. Businesses must navigate increasingly complex and often contradictory regulatory environments

3. Supply chain strategies need rethinking as trade barriers rise

4. Companies may face pressure to align with national interests rather than purely economic considerations

Bridgewater suggests companies develop an "Action Plan" that includes strategies like "leveraging government incentives for exports" and focusing on "supply-chain resilience and domestic sourcing".

For Policymakers

The framework highlights the contagious nature of mercantilist policies. As Bridgewater explains, "The postwar system of free trade relied on America's soft power and the general respect that many nations had for the system. But as countries defected and adopted mercantilist policies, the global system lacked sufficient authority to stop them".

This suggests a prisoner's dilemma for policymakers—even if free trade would be collectively optimal, individual countries have incentives to adopt protectionist measures, especially when others are doing the same. Understanding this dynamic is crucial for designing effective multilateral responses.

The Role of China and the United States

Bridgewater's analysis identifies China's economic rise as a critical catalyst for the shift toward Modern Mercantilism: "While many countries pushed the boundaries before China did, its economic size and the effectiveness of its mercantilist policies broke the pre-existing order".Through currency management, public procurement, state subsidies, and protectionism, China developed leading positions in strategic industries like electric vehicles, solar power, and batteries.

The United States, as the world's largest trade deficit economy, now appears unwilling to continue absorbing these surpluses, particularly under the Trump administration which has implemented significant tariffs. Bridgewater notes that "countries with trade deficits will have the upper hand in trade wars because they will have more imports to tariff than their trading partners", suggesting an evolving power dynamic in international trade negotiations.

Economic Implications and Concerns

Bridgewater's co-chief investment officers have expressed serious concerns about the economic implications of this shift, warning that "we expect a policy-induced slowdown, with rising probability of a recession". They identify several mechanisms through which Modern Mercantilism could hurt economic performance:

1. Reduced productivity growth: By limiting competitive pressures and protecting national champions, mercantilist policies may reduce incentives for innovation and efficiency.

2. Upward pressure on costs: Trade barriers and subsidies can distort resource allocation and raise prices.

3. Market instability: The shift away from the U.S. by foreign investors could destabilize financial markets, as suggested by recent declines in U.S. bonds and the dollar.

4. Tit-for-tat escalation: As countries respond to each other's protectionist measures, the situation could spiral into broader economic conflicts.

Critiques and Limitations of the Framework

Despite its explanatory power, the Modern Mercantilism framework faces several critiques:

First, traditional economic theory still suggests mercantilist policies reduce overall welfare. As one analysis explains, "By fighting to always have the advantage in any trade, the Mercantalist is an obstacle to gaining all the advantage trade has to offer".

Second, mercantilism has historically been associated with colonial exploitation and zero-sum thinking that ultimately proved counterproductive. Critics might argue that modern applications risk repeating these mistakes.

Third, the historical analogy has limitations. Today's world differs fundamentally from the 16th-18th century mercantilist era in its level of economic integration, technological advancement, and institutional structure.

Conclusion: A Valuable Tool for Navigating Economic Uncertainty

Despite these limitations, Bridgewater's Modern Mercantilism framework offers a valuable lens for understanding the complex economic transformations currently underway. The concept provides a coherent explanation for the seemingly contradictory policy decisions we're witnessing globally and helps anticipate how nations might respond to each other's economic moves.

For investors seeking to navigate this uncertain landscape, the framework provides strategic insights into potential winners and losers in this new paradigm. For businesses, it highlights the growing importance of understanding government priorities and developing strategies aligned with national interests. For policymakers, it underscores the challenges of maintaining international cooperation in an increasingly fractured global economy.

As Bridgewater and Global Citizen's competition suggests, understanding Modern Mercantilism may be one of the most critical challenges facing economic thinkers today. Whether this framework ultimately proves prescient remains to be seen, but it undoubtedly offers a compelling narrative for making sense of today's complex and rapidly evolving economic landscape.

Takeaway

In a world increasingly defined by national self-interest rather than global cooperation, Bridgewater's Modern Mercantilism framework provides a valuable tool for understanding economic shifts and their implications. By recognizing the growing role of the state in economic management, the renewed focus on trade balances, the return of industrial policy, and the protection of national champions, we can better prepare for the challenges and opportunities that lie ahead in this new economic era.