Mercantilism increases provincial trade power (i.e. the amount of trade power you get from owning territory in a trade node) meaning it's effects are most profound in nodes your homeland is in. It also increases how effective your embargoes are. The only negative effect I could find is that high values of it can increase the Liberty Desire of your colonial nations, but IIRC Liberty Desire has no effect on your vassal's contributions until it's over 50%.
More likely that sudden drop comes from something else that happened at the same time. Denmark's Center of trade starts in Lubeck, and also has a major presence in the North Sea, which can have it's trade value sent into Lubeck. Both of those can become the playthings of England, who usually becomes the dominant trader of North Sea once it takes over Scotland, and can siphon a lot of wealth from there and Lubeck into the English Channel, thanks to starting with a Mercantilism of 25 and having a massive bonus to the effectiveness of their embargoes from their starting traditions.
Also, if you are still the junior of a Personal Union with Denmark, they can *make* you embargo their rivals, which IIRC will drop your trade income unless they are also your rival... which they can't be, because as a subject you can't have rivals.
Finally, if you are far enough into the game where New World colonies are popping up (and if you can dump 200 papal influence in one go to raise mercantilism as Denmark, you probably are) your competitors in the new world might have just finished settling a new colonial nation either at or downstream from the St. Lawrence trade node that goes into the North Sea and starting directing trade to their homeland instead.
