“I am a Tariff Man.”
— President Donald J. Trump, December 4, 2018
“We should beware of the demagogues who are ready to declare a trade war against our friends—weakening our economy, our national security, and the entire free world—all while cynically waving the American flag.”
— President Ronald Reagan, November 26, 1988
Although despised by many on the left, Ronald Reagan was overall a popular president whose administration coincided with the beginning of an economic boom reflected in everything from the stock market and interest rates to unemployment and women’s wages. President Reagan is also famous for his eloquent defenses of free international trade and the deregulation of domestic markets.
Some key members of the Reagan administration are now working in the Trump administration. President Reagan’s first Deputy Trade Representative Robert Lighthizer is now serving one position higher as President Trump’s Trade Representative, administering tariffs, and negotiating trade agreements with Mexico, China, and other countries. President Reagan’s Associate Director for Economics and Planning at the Office of Management and Budget (OMB) was Larry Kudlow. Larry is now President Trump’s Director of the National Economic Council (NEC), a cabinet-level position. Anthony Dolan served eight years as a speechwriter for President Reagan, reaching the position of Deputy Assistant to the President and Director of Speechwriting. Tony is working in the Trump White House too, now as a Special Assistant to the President and Advisor for Planning, especially mentoring President Trump’s speechwriters. Elaine Chao was Chairwoman of the Federal Maritime Commission at the end of the Reagan administration and is now Secretary of Transportation. The purpose of this excerpt from You’re Hired! is to compare the two presidents in terms of two policy areas important to both: international trade and the deregulation of domestic markets.
What is the Opposite of a Trade War?
One of the best ways to appreciate the virtues of free international trade is to listen to one of Ronald Reagan’s speeches. In addition to his eloquent warning cited in the beginning of this chapter, Ronald Reagan also described “open trade policy” as “one of the key factors behind our nation’s prosperity.” He said that free international trade has “proven itself in the real world where we have seen free trading nations prosper while protectionist countries fall behind.”
We all agree that Mr. Trump does not talk this way about international trade. But we should also agree to put aside any love or hate for these men while we look at their policy records. Both Reagan and Trump were television entertainers before they were politicians, so their rhetoric may not necessarily reflect actual policies.
Let’s consider a domestic producer, such as a steel manufacturer in Pennsylvania, which competes with foreign companies for sales to American consumers. If an obstacle could be put in the way of foreign competitors, then the domestic producers could sell more, charge more, or do both. Either way, the trade obstacle should increase domestic producers’ profits and workers’ employment and wages. If domestic producers were running the government, most would certainly erect such obstacles, known as “protectionism.”
Protectionism comes in three principle types: import prohibitions, tariffs, and import quotas. An outright prohibition of foreign products (“import prohibition”) places American consumers captive to domestic producers, who would have the power to overcharge significantly for their products. For a century, prohibition and overcharging by factors of five to eight has occurred, for example, in the U.S. coastal shipping services market (Chapter 11 of You’re Hired!).
An outright import prohibition is particularly harmful to consumers. Consumers themselves may be businesses and go bankrupt due to import prohibitions on products they use in production. Foreign producers, also upset by our import prohibition, might urge their own governments to retaliate by prohibiting American products. Wanting their customers to stay solvent, even domestic producers might prefer milder forms of protectionism over import prohibitions.
Two potentially milder forms are import quotas and tariffs. A tariff is simply a tax on imports, with the revenue going to the U.S. treasury. It raises the prices and profits of domestic producers, while reducing the U.S. profits and sales of foreign producers. Among other tariffs, the Trump administration placed a 25 percent tariff on steel imported from most countries.
Naturally, foreign producers do not like it when the U.S. collects tariffs. They ask their own governments to put tariffs on American products. Although in 2018 Peter Navarro (President Trump’s Director of Trade and Manufacturing Policy) confidently told the President that no country would dare retaliate against U.S. tariffs, tariff retaliation is exactly what happened in response to the Trump administration’s tariffs. The Trump administration started a trade war.
In contrast to tariffs, import quotas can (and did) offer protectionism without a trade war. An import quota is an upper limit on the number of imports allowed (an import prohibition is the special case when the quota is set to zero). To circumvent international law, import quotas are sometimes euphemistically named “voluntary export restraints,” referring to how foreign governments were “helping” us by limiting the amount of their U.S. exports. Instead of implementing a steel tariff, President Reagan used a steel import quota, limiting steel imports to 20 percent of the U.S. market. While better for consumers than an outright import prohibition, Reagan’s import quotas did hike steel prices because at the lower prices consumers wanted to import more than the quota allowed (prices were driven up by customer competition for a limited supply of imports). Through higher prices, Reagan’s various import quotas therefore harmed Americans buying autos, sugar, semiconductors, textiles, machine tools, and clothespins. While foreign producers of these products sell fewer units, they often have greater profits because Americans are paying them higher prices on lower supply. And as the Reagan administration acknowledged, American consumers may not understand that they pay more through quotas as they would with an announced tariff, which has obvious political advantages.
Enriching foreign and domestic producers by restricting supply and driving up prices, Reagan’s import quotas avoided a trade war that might have resulted if tariffs were used instead. Unlike tariffs that, as taxes, require foreign producers to share part of their revenue with the U.S. treasury, import quotas do not bring any revenue to our government. The quotas allow the foreign producers to keep the extra profits they obtain from charging higher prices. From an economic perspective, the Reagan administration used U.S. taxpayer money to bribe in effect foreign countries to stay out of a trade war. Perhaps Japan could have “retaliated” against Reagan’s quotas by setting quotas on their U.S. imports, but that would have been a funny kind of war in which Japan took money from their own consumers and sent it to our companies.
To put it yet another way, if we had a trade war in the 1980s and used all of our tariff revenue to bribe foreigners to stop retaliating, the end result would be Reagan’s international trade policy (Milton Friedman articulated this conclusion in an April 1987 Wall Street Journal article). As protectionism goes, import quotas are the ugly alternative to a trade war. Tariffs instead are the “America first” type of protectionism.
The reality is somewhat more complex. Table 1 (below) shows that the Trump administration has relaxed an important quota and reduced a tariff, which the Reagan administration did not do. Also note that, as part of the “rules of origin” provisions of the United States Mexico Canada Agreement (USMCA), the Trump administration expanded the economic boundaries of existing tariffs. The Reagan administration increased some tariffs too, such as raising the tariff rate for Japanese motorcycles by 45 percentage points; imposing a 100 percent tariff on imports of Japanese computers, televisions, and power tools; and putting a 15 percent tariff on Canadian lumber. But unlike the Reagan administration, the Trump administration uses import quotas sparingly (limited to steel and aluminum from three countries). As discussed in Chapter 10, the Trump administration relaxed a significant quota on high-emissions/low-MPG vehicles, which is not specific to imports but disproportionately constrains European manufacturers.
Although ignored by experts, the Trump administration uses a hybrid of tariffs and quotas, known as “tariff quotas.” Like an import quota, the hybrids allow the foreign companies to make tariff-free sales (at an elevated price) to American consumers, but they also allow the U.S. treasury to receive tariff revenue.
Despite the additional complexity, the overall conclusions remain. President Trump is the tariff man that he says he is, while President Reagan was a quota man. President Reagan did not always practice the free trade that he preached. As Reagan CEA member William Niskanen put it, the Reagan administration “was on both sides of [trade issues], articulating a policy of free trade and implementing an extensive set of new import quotas.” Another Reagan CEA economist Steve Hanke added “the share of American imports covered by some sort of trade restriction soared under ‘free-trader’ Reagan, moving from only 8 percent in 1975 to 21 percent by 1984.” The Trump administration also has key elements of protectionism, but unlike Reagan has so far mostly avoided protecting domestic producers in ways that profit foreign companies.