In the spring of 1930, more than a thousand American economists urged President Herbert Hoover to veto the Smoot-Hawley Tariff Act. He signed it anyway. Trading partners from Canada to Europe retaliated, and a global downturn hardened into a contest of mutual exclusion that the international economy took decades to unwind.

Nearly a century later, the instincts behind Smoot-Hawley are shaping policy again. Washington has embraced tariffs and large industrial subsidies. Beijing pursues self-reliance in critical technologies. Brussels speaks of open strategic autonomy, while New Delhi promotes Atmanirbhar Bharat, or self-reliant India. The language varies, but the direction is strikingly consistent across very different political systems.

It is tempting to dismiss all this as populist irrationality, a failure to grasp the gains from trade. That reading misses something important. Economic nationalism has a strategic logic of its own, rooted in concerns about power, security, and who bears the costs of openness. Understanding that logic is essential to anticipating where the global economy is heading.

Economic nationalism rarely takes root in prosperous, stable times. It tends to grow from a recognizable set of conditions, and the first is distributional shock. Trade liberalization produces aggregate gains that are diffuse and losses that are concentrated. Research by David Autor, David Dorn, and Gordon Hanson on the China shock showed that import competition hollowed out specific American communities, with effects on employment and wages that persisted for years. Compensation programs were modest, and the political memory proved long.

The second condition is a shift in relative power. Robert Gilpin argued that interdependence looks very different depending on who is rising and who is declining. Late nineteenth-century Britain, watching German and American industry overtake its own, produced Joseph Chamberlain's campaign for imperial tariff reform. Dependence on a trading partner feels benign when that partner is an ally or a junior. It begins to feel like vulnerability when the partner becomes a rival.

The third is crisis that exposes fragility. Pandemic-era shortages of masks and semiconductors, and Europe's scramble after Russian gas flows were cut in 2022, reframed efficient supply chains as strategic liabilities. Governments rediscovered that the cheapest supplier is not always the safest one, and that just-in-time logistics can become just-too-late in an emergency.

Conditions alone, however, do not produce policy. Political entrepreneurs translate grievance into program. Alexander Hamilton's 1791 Report on Manufactures and Friedrich List's case for protecting young industries supplied intellectual frameworks that still echo today. Modern leaders on both left and right do similar work, recasting trade as a question of sovereignty, dignity, and security rather than consumer prices. That reframing matters: once trade is understood as security, the usual cost-benefit arithmetic loses much of its persuasive force.

Takeaway

Economic nationalism is less a rejection of economics than a disagreement about what the economy is for. Where liberals see a machine for efficiency, nationalists see a foundation of power and security.

In trade policy, economic nationalism is most visible through tariffs, but the toolkit is far broader. In 2018 the United States invoked national security under Section 232 to impose tariffs on steel and aluminum, including imports from close allies. Export restrictions are increasingly common too. Indonesia's 2020 ban on nickel ore exports forced processing onshore and drew billions in smelter investment, much of it, notably, from Chinese firms.

Investment policy has shifted just as sharply. The US expanded its foreign investment review powers through the 2018 FIRRMA legislation, and the European Union's investment screening framework became operational in 2020. More striking is the return of industrial subsidies on a scale not seen in decades: China's Made in China 2025 plan, America's CHIPS and Science Act and Inflation Reduction Act, and Europe's responses to both. Controls on outbound investment in sensitive technologies have followed.

Currency and finance form the third arena. The competitive devaluations of the 1930s remain the classic case of monetary beggar-thy-neighbor policy. Today the pattern is subtler: managed exchange rates, capital controls, and efforts to build alternatives to dollar-based payments, such as China's CIPS and Russia's SPFS systems. Financial nationalism is often less about gaining commercial advantage than about reducing exposure to sanctions.

Context determines meaning. For developing economies, nationalist tools have often served catch-up strategies. South Korea and Taiwan protected and subsidized industries but disciplined them through export performance targets, climbing the value chain within a generation. For established powers, the same tools tend to be defensive: preserving technological leadership or denying rivals access to critical inputs. A tariff is a tariff on paper, yet its purpose and consequences differ dramatically depending on who wields it and why.

Takeaway

Watch the theory behind a policy, not just the tool. A tariff meant to nurture a future industry and a tariff meant to deny a rival look identical on paper but behave very differently in practice.

The postwar economic order rested on a bargain John Ruggie called embedded liberalism: governments would open their economies to trade while retaining room to cushion domestic disruption. Successive GATT rounds drove industrial tariffs down dramatically, and the 1995 creation of the World Trade Organization added binding dispute settlement. That bargain assumed national governments would manage the domestic costs of openness. Economic nationalism is, in part, a verdict that they did not.

Nationalist policies also spread through a dynamic resembling the security dilemma. When one major economy subsidizes strategic industries, others fear losing investment and capability, so they respond in kind. Europe's Green Deal Industrial Plan emerged partly as an answer to American clean-energy subsidies. Each move is defensively rational on its own terms. Collectively, they produce subsidy races, duplicated capacity, and mounting fiscal costs.

Global governance erodes in the process. The WTO's Appellate Body has been unable to hear appeals since December 2019, and governments invoke national security exceptions with growing frequency. Gilpin and Charles Kindleberger argued that an open economy requires a stabilizing power willing to supply public goods and absorb short-term costs. The pressing question is what happens when the leading power itself turns toward economic nationalism.

The result so far is less collapse than fragmentation. Cooperation persists, but in narrower forms: plurilateral agreements such as the CPTPP and RCEP, friend-shoring among allies, and workaround arrangements for settling trade disputes. The costs are real. IMF staff have estimated that severe geoeconomic fragmentation could reduce global output by as much as 7 percent. Nations are increasingly willing to pay a price of that kind in exchange for greater control over their economic destinies.

Takeaway

The question is no longer whether the world economy will be open or closed, but whose rules govern which spaces, and how much efficiency nations are willing to trade for control.

Economic nationalism is not an aberration from economic logic. It reflects a different ranking of priorities, placing security, autonomy, and distribution ahead of aggregate efficiency.

Its drivers are recognizable: concentrated losses, shifting power, exposed vulnerabilities, and leaders who give those grievances a narrative. Its tools range from tariffs and subsidies to investment screening and alternative payment systems. And its spread follows a competitive logic that individual governments find difficult to resist, even when they recognize the collective costs.

The deeper question is whether a fragmented system can still produce the cooperation that global challenges demand. History offers a warning in the 1930s and a partial answer in the postwar settlement, which showed that openness endures when its domestic costs are taken seriously. The next settlement will likely need to learn that lesson again.