Reagan Knew the Art of the Trade Deal Better
In 1979, Governor Ronald Reagan was getting ready for his third presidential campaign, having mounted a late challenge to Nixon in 1968 and directly challenging Ford in 1976. The reality then was that American manufacturing had been strained, struggling to adapt to a changing global economy. Making matters worse was the high inflation and the recent bout of stagflation, leaving an economy mired in disaster. By this point in his career, Reagan was an avid advocate for free enterprise, limited government, and free trade — the hallmarks that would later come to define his presidential legacy. He had read Friedman and Hayek and was a regular reader of Hazlitt and The Freeman. He clearly understood that protectionism wouldn’t pay.
However, he also appreciated the fact that understanding the economic realities of trade and translating them into a persuasive political position are two very different tasks. The Reagan campaign addressed the issue of trade head-on. In its Reagan and Bush on the Issues, they mapped out a way to address the challenges facing American manufacturing through market reforms. This approach is worth revisiting in the wake of President Donald Trump’s second term and his embrace of protectionism, particularly tariffs, as a means of reviving American industry.
Reagan’s free market approach began with an acknowledgment of the successes that free trade had brought America—something sorely missing from today’s political discussion. The campaign insisted (see below) that “international trade has increased substantially over the past two decades, helping to improve the standard of living of all trading partners.” Trade provided “many of the luxuries that we now enjoy and many of the necessities that we need.” They recognized the importance of manufacturing for export, noting that “American exports provide about one-sixth of our private-sector jobs.” Further, they emphasized that “one of our best ways to promote economic growth in the future is to continue to expand our trade with other nations.”
For all the prosperity that expanded trade had brought the US, the Reagan campaign did demand that “free trade must be fair trade.” Much like today’s administration, they condemned other nations that were imposing “barriers to our exports and unfairly [subsidizing] their own industries.” Similarly, the Reagan campaign insisted that they would “work to prevent such unfair trade practices.” Unlike the current administration, however, they insisted that the answer was entrepreneurship, lower taxes, and deregulation, not protectionism. The campaign noted that “Governor Reagan believes that it far better serves our own interests, and those of the world, to aggressively pursue a reduction in foreign nations’ trade barriers rather than erect more barriers of our own.” In short, Reagan recognized that tariffs (and other trade restrictions) would harm American consumers by raising prices and harm American manufacturers through higher costs and stifled innovation, making us less competitive on the global stage, not more.
To accomplish this, the campaign laid out a multi-faceted plan. Reagan’s initiatives included making “changes in present regulatory code and tax laws that make US industry more efficient and competitive.” This meant deregulation and an easing of the tax burden. The campaign promised that the Reagan administration would “review all government regulation that adversely affects our international competitiveness, revising necessary regulations to make them less costly and eliminating unnecessary and overly burdensome regulations altogether.” Going further, the Reagan team envisioned making American industry more competitive by supporting the “acceleration of our overly long depreciation schedules, which would greatly increase the amount of capital available to our industry for modernization and retooling.” Additionally, the campaign emphasized Reagan’s support of a “stable dollar” which they viewed as “an important factor in promoting US trade.” Finally, the campaign promised that Reagan would promote exports by imposing a review of all “domestically imposed barriers to US trade, such as extranational application of regulations and delays in granting licenses, in order to maximize the ability of US firms to sell overseas, whenever possible.”
Taken together, these initiatives amount to a free-market agenda to make American industry more competitive, adaptable, and innovative. Unlike the most popular protectionist policies, tariffs and various degrees of industrial policy, they are also free of the potential for rent-seeking and corruption that often occurs when governments attempt to manage and guide economies.
Notice the difference between Reagan’s approach and the current approach of President Donald Trump. Rather than risk starting a trade war by imposing “reciprocal tariffs,” Reagan encouraged domestic manufacturing by doing everything he could to make it easier for other countries to import our manufactured goods. Today, we see the opposite, with President Donald Trump seeking to make it harder for other countries to export to the United States in the hopes that they will change their tune vis-à-vis trade policies against the US. This is not the first time that tariffs have been used as a “negotiating tool” and their history in this capacity is mixed at best.
Of course, we know that Reagan was successful in negotiating multiple trade deals and setting the stage for NAFTA. The reduction of barriers to trade resulted in a massive expansion of international economic activity which contributed to a reduction in global absolute poverty from forty percent to around nine percent today. This is an incredible achievement.
At the same time, American manufacturing has become leaner in terms of the number of people employed, falling from about 19.5 million in 1979 to about 12.8 million, according to the latest figures. However, the jobs lost were due almost exclusively to increases in productivity and technological change, not due to increased or unfair foreign competition. In fact, according to Sam Gregg, “manufacturing’s contribution to America’s GDP actually increased between 1997 and 2016, while real manufacturing production grew by 180 percent between 1972 and 2007.” Alarmists will point to the rise of China as the world’s manufacturing superpower as evidence that US manufacturing has declined. These fears are misplaced.
First, China as a country faces constant fears of economic collapse due to their unsustainable and heavily centralized economic system of party-state capitalism. Second, while it is true that China’s manufacturing output is three times that of the US, it is also true that their population is six times ours and their manufacturing sector comprises a much larger share of their labor force than ours. Frankly, that a command-and-control economy with several times as many (and far cheaper) workers employed in manufacturing is only producing three times as much output stands as evidence that we have nothing to worry about “Chinese manufacturing” as an economic threat. The American worker remains the envy of the world precisely because of our incredible productivity. There is no evidence that this is changing anytime soon.
As President Trump tries to manage and manipulate the US economy to promote American manufacturing, it’s important to revisit alternative approaches. This is especially true of approaches that made us more free, more prosperous, and better respected on the world stage.
[Editor’s Note: The images above are courtesy of Reagan and Bush on the Issues, Paul Manafort files, Box 382, Subseries XI: Regional Political Files, Ronald Reagan 1980 Presidential Campaign Paper, 1964-1980, Ronald Reagan Presidential Library]