Op-ed: “President Trump’s tariffs could lead to less trade and higher prices – or more trade and lower prices”

The trade tariffs proposed by the Trump 2.0 administration will affect the innovation and entrepreneurship climate both in the United States and around the world. That’s the view of two prominent US economists who write on the topic in this Op-ed.

President Donald Trump is by nature an entrepreneur. He took a fairly small family business and turned it into an international brand across a number of different businesses. Trump has also tried and failed in some businesses and reinvented himself many times over. His life experience with its many ups and downs may inspire current and future entrepreneurs to be both creative and persistent.

The Trump 2.0 Administration is part of a broader context of today’s environment of extremely rapid change. Innovators and entrepreneurs should always be thinking about what they want and the requirements that they need. Artificial Intelligence (AI) now enables entrepreneurs to obtain extensive information and recommends an answer in a few seconds by simply asking: “What is the optimum environment that is best for (my specified business), and which jurisdictions provide it?”

Innovators and entrepreneurs should always think about what they want and the requirements that they need.

Countries and other jurisdictions increasingly compete in this global market. Countries have always sought a comparative advantage, but as communication and transportation has become both cheaper and faster, the size of the market for almost any good or service greatly expands. Even places without natural resources have found ways to create a comparative advantage. For example, a few decades ago the Cayman Islands made a decision to be a leader in the fund industry. To that end, they built an extremely efficient and speedy regulatory system which over time enabled fund creators to do all of the necessary paperwork by electronic means, far earlier than competing jurisdictions.

Looking to reduce regulation

In the Trump 2.0 Administration, there is a big shift in many policies – some already enacted with many more to come. Most were promises from the campaign trail. The language and details of many of these policies came from some think tanks.

One example is the pledge that “whenever an agency promulgates a new rule, regulation or guidance, at least 10 existing rules, regulations, or guidance must be repealed.” This order is more ambitious than the first Trump Administration’s guidance of removing two rules, regulations, or guidance for every new regulation issued, which led to about 5 ½ regulations being eliminated for every new rule.

President Trump’s economic policies will affect all industries in some way. Despite the costs involved in adapting to a new regulatory regime, most US business leaders and entrepreneurs are energized by the new agenda.

President Trump’s economic policies will affect all industries in some way.

One might ask whether President Trump’s agenda will affect the climate for innovation and entrepreneurship outside the US? We know that, as with labor, capital, and natural resources, countries compete through regulatory and legal regimes. A more competitive US will force other countries to become more competitive too or lose market share. For years, many think tanks outside the US that have promoted more business-friendly policies will now be given a second chance to make their case.

Tariffs have different impacts in different countries

Adam Smith (the famous18th century economist) argued that tariffs were harmful in that they reduced the extent of the market for any good or service. He used the example of building canals in England. The competition really changed the competitive dynamics from competing within 10 miles (16 km) with horse-drawn buggies to 50 miles (80 km)with canals. In today’s world, the competition is truly global.

In this new information age, tariffs may provide a bigger advantage to smaller firms.

The impact of tariffs depends on the country. For example, getting rid of tariffs is important to Singapore, but not so important for the US because the US has a large enough market to produce almost everything. When David Ricardo (English economist behind the thinking on comparative advantages) and others were writing about the importance of getting rid of tariffs, they were living in an era of significantly smaller population, and much higher transportation costs.

In this new information age, tariffs may provide a bigger advantage to smaller firms. One reason that larger firms exist, other than physical economies of scale, is that there are information economies of scale. But in a world of AI, those information economies of scale have become a whole lot smaller and, in some cases, down to the individual entrepreneur.

Businesses outside the US will be affected by these new policies. As an example, Siri (one of the Op-ed authors, editor’s note) has a cousin in Canada who has run a quite successful furnishings store outside Toronto for over thirty years. Although her cousin really likes Trump’s policies, he has shared that the tariffs will affect him as some products come through the US on their way to Canada.

Heading into uncharted waters

But, it is likely that the Trump 2.0 Administration will scale back its proposed tariffs. As an example, Richard (one of the Op-ed authors, editor’s note) delivered a paper in 1982 at a Mont Pelerin Society meeting in Berlin on some of the history of tariffs. He had been given some letters between JB Say (the noted French economist in the early eighteen hundreds), and Thomas Jefferson (the third President of the United States) on the “optimum tariff.” Both Say and Jefferson realized that the tariff rate could get too high and then smugglers would take over or trade would cease, providing no revenue to government.

It is likely that the Trump 2.0 administration will scale back its proposed tariffs.

The Trump 2.0 Administration is entering some uncharted waters with its proposed tariff policies, which could lead to a world with less trade and higher prices. Or it could lead to a world where competitive pressures lead to a world-wide lowering of tariff rates, with more trade and lower prices. The jury is out – place your bets!

Siri Terjesen (PhD) is Associate Dean, Research & External Relations, founding Executive Director of the Madden Center for Value Creation, and Phil Smith Professor of Entrepreneurship at Florida Atlantic University College of Business.

Richard W. Rahn (PhD) was previously a senior fellow at several leading free market policy organizations and chief economist of the U.S. Chamber of Commerce during the Reagan administration, syndicated columnist, and entrepreneur.