In 1979, Governor Ronald Reagan was preparing for his third presidential campaign, having belatedly challenged Nixon in 1968 and directly challenged Ford in 1976. The reality at the time was that American manufacturing was under pressure, struggling to adapt to a changing global economy. To make matters worse, high inflation and the recent episode of stagflation left the economy in shambles. By this point in his career, Reagan was a fervent advocate of free enterprise, limited government, and free trade, the hallmarks that would later 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 would not bear fruit.
However, he also understood that understanding the economic realities of trade and translating them into a compelling political position are two very different tasks. Reagan's campaign addressed the issue of trade head-on. In their report “Reagan and Bush on the Issues,” they outlined a way to address the challenges facing U.S. manufacturing through market reforms. This approach is worth revisiting in light of President Donald Trump's second term and his embrace of protectionism, particularly tariffs, as a means of revitalizing U.S. industry.
Reagan's free-market approach began with an acknowledgment of the successes that free trade had brought to the US, something that is conspicuously absent from the current political debate. The campaign insisted (see below) that “international trade has increased substantially over the past two decades, contributing to improved living standards for all of our trading partners.” Trade provided “many of the luxuries we now enjoy and many of the necessities we need.” They recognized the importance of manufacturing for export, noting that “U.S. exports generate approximately one-sixth of our private-sector jobs.” Furthermore, they emphasized that “one of our best ways to promote economic growth in the future is to continue expanding our trade with other nations.”
Despite all the prosperity that trade expansion had brought to the United States, the Reagan campaign demanded that “free trade must be fair.” Like the current administration, they condemned other nations that imposed “barriers to our exports and unfairly subsidized their own industries.” Similarly, the Reagan campaign insisted that they would “work to prevent such unfair trade practices.” However, unlike the current administration, they insisted that the answer was entrepreneurship, tax cuts, and deregulation, not protectionism. The campaign noted that “Governor Reagan believes it is far more beneficial to our own interests and those of the world to aggressively seek a reduction in foreign nations' trade barriers rather than erecting more barriers of our own.” In short, Reagan recognized that tariffs (and other trade restrictions) would hurt American consumers by raising prices and hurt American manufacturers by increasing costs and reducing innovation, making us less competitive on the global stage, not more.
To achieve this, the campaign presented a multifaceted plan. Reagan's initiatives included making changes to the regulatory code and current tax laws to increase the efficiency and competitiveness of American industry. This involved deregulation and a reduction in the tax burden. The campaign promised that the Reagan administration would review all government regulation that negatively affects our international competitiveness, modifying necessary regulations to make them less costly and eliminating unnecessary and overly burdensome regulations entirely. In addition, the Reagan team planned to increase the competitiveness of American industry by supporting the acceleration of our long-term depreciation programs, which would significantly increase the capital available for modernization and re-equipment of our industry. Furthermore, the campaign emphasized Reagan's support for a stable dollar, considered an important factor in promoting trade with the United States. Finally, the campaign promised that Reagan would promote exports by imposing a review of all “internally imposed barriers to US trade, such as the transnational application of regulations and delays in the granting of licenses, in order to maximize the ability of US companies to sell abroad, whenever possible.”
Together, these initiatives constitute a free-market agenda to make US industry more competitive, adaptable, and innovative. Unlike more popular protectionist policies, tariffs, and varying degrees of industrial policy, they are also free from the potential for rent-seeking and corruption that often arises when governments attempt to manage and guide economies.
Consider the difference between Reagan's approach and that of current President Donald Trump. Rather than risking a trade war by imposing reciprocal tariffs, Reagan encouraged domestic production by doing everything possible to facilitate the importation of our manufactured goods into other countries. Today we see the opposite: President Donald Trump seeks to make it more difficult for other countries to export to the United States in the hope that they will change their stance on trade policies against the United States. This is not the first time that tariffs have been used as a negotiating tool, and their track record in this regard is, at best, mixed.
Of course, we know that Reagan managed to negotiate multiple trade agreements and lay the groundwork for NAFTA. The reduction of trade barriers resulted in a massive expansion of international economic activity, which contributed to the reduction of global absolute poverty from 40% to 9% today. This is an incredible achievement.
At the same time, US manufacturing has declined in terms of the number of people employed, falling from approximately 19.5 million in 1979 to approximately 12.8 million, according to the latest figures. However, the loss of jobs was due almost exclusively to increases in productivity and technological change, not to increased or unfair foreign competition. In fact, according to Sam Gregg, “manufacturing's contribution to US GDP actually increased between 1997 and 2016, while real manufacturing output grew by 180 percent between 1972 and 2007.” Alarmists will point to China's rise as the world's manufacturing superpower as evidence that US manufacturing has declined. These fears are unfounded.
First, China, as a country, faces the constant fear of economic collapse due to its unsustainable and heavily centralized party-state capitalism economic system. Second, while it is true that China's manufacturing output is three times that of the US, it is also true that its population is six times larger than ours and that its manufacturing sector accounts for a much larger share of its workforce. Frankly, the fact that a command-and-control economy with several times more (and much cheaper) workers employed in manufacturing only produces three times as much shows that we have nothing to worry about from “Chinese manufacturing” as an economic threat. The American worker remains the envy of the world precisely because of our incredible productivity. There is no indication that this will change anytime soon.
As President Trump attempts to manage and manipulate the US economy to promote US manufacturing, it is important to review alternative approaches. This applies especially to approaches that made us freer, more prosperous, and more respected globally.
David Hebert and Marcus M. Witcher, The Daily Economy