President Trump is happily overstepping the naivete that informs so much economic commentary. While the experts continue to look to the Federal Reserve to bring down prices via the tweaking of interest rates, Trump wisely chose to provide reciprocal tariff relief for so-called “unavailable natural resources,” e.g., agricultural products that cannot be grown at commercial scale in the U.S. (tropical fruit, coffee, tea, spices).
About the steps taken by the President, true nirvana would be the White House decreeing Americans free to trade with whomever they want, without regard to country origin. But since politics is the art of the possible as opposed to the ideal, Trump’s executive order is a positive step in the right direction.
It implies that underlying his “con job” rhetoric about affordability, Trump quietly recognizes the extraordinary importance Americans attach to getting the most in return for their dollars. Better yet, it moves us beyond absurdist PhD mysticism suggesting central bankers are capable of engineering affordability from the Commanding Heights.
Instead, simplicity will happily win the day. In this case, lower prices will be enjoyed by Americans as goods are allowed into the U.S. that as previously mentioned aren’t and cannot be grown at commercial scale.
Translated, the prices of certain agricultural products are soon to come down thanks to barriers to their entry into the U.S. being shrunken. Which only tells part of the lower price story.
While tariffs most certainly raise the costs of the imports being taxed, the negative price implications of the tax aren’t solely an effect of the tax. That’s because work divided is quite literally the path to prices that are in constant decline. Americans know this truth well from the early part of the 20th century.
When it began, automobiles were rarer than millionaires, and millionaires were very rare. Enter Henry Ford. Against long odds, he set out to make cars affordable.
About Ford’s vision, it can’t be said enough that his “affordability” agenda for cars was rooted in his observation that “[t]here are a lot more poor people than wealthy people.” Subsequent to Ford’s strategy conveyed, a Ford Motor advertising campaign vivified the entrepreneur’s plan. His company would raise “the automobile out of the list of luxuries,” thus “bringing it to the point where the average American may own and enjoy his automobile.” As readers well know, Ford achieved his aims. What requires stress is that Ford’s success in moving “the automobile out of the list of luxuries” was a certain effect of him dividing up work among tens of thousands of specialized workers.
Fast forward to the present, the work divided among autoworkers over 100 years ago in Dearborn loses none of its vitality when those dividing tasks reside in different countries, and for that matter different continents. What matters when it comes to bringing down prices is individuals combining what they do best with others doing the same.
Which means Trump’s actions won’t just bring down the prices of specific agricultural products categorized as “unavailable natural resources,” rather the work divided will ultimately have a broad effect on all prices. That’s why we should cheer the steps being taken.
Say it repeatedly that the freer the trade, the lower the costs of the goods being traded. So, while the ideal trade regime would be unfettered freedom to trade, we can cheer the Trump administration’s step in the right direction ahead of hopefully much bigger steps born of an acknowledgement of what drives lower prices, a Supreme Court block of the Trump administration’s imposition of tariffs as unconstitutional, or both.
Originally posted to Real Clear Markets.
