Why We Need a Little Ronald Reagan-Style Protectionism

A few months ago, the Japanese automobile maker Toyota announced that it would be building a new plant in Canada. According to the Canadian Broadcasting Corporation, even though several states were prepared to offer larger financial incentives to Toyota to locate in America, the car company built in Canada anyway:

[Gerry Fedchun, president of the Automotive Parts Manufacturers’ Association] said Nissan and Honda have encountered difficulties getting new plants up to full production in recent years in Mississippi and Alabama due to an untrained - and often illiterate - workforce. In Alabama, trainers had to use "pictorials" to teach some illiterate workers how to use high-tech plant equipment.

"The educational level and the skill level of the people down there is so much lower than it is in Ontario," Fedchun said.

In addition to lower training costs, Canadian workers are also $4 to $5 cheaper to employ partly thanks to the taxpayer-funded health-care system in Canada, said federal Industry Minister David Emmerson.

But this essay is not about education or healthcare. I wish the American education system could train better workers and I believe that nationalizing at least part of the American healthcare system is worth considering. However, absent these two changes it still might have been possible to get that new Toyota plant built in the United States if only this country did not adhere to the principles of free trade in such a self-destructive manner.

To illustrate what I mean, consider the way that Ronald Reagan treated foreign automobile manufacturers. As the Car Connection.com explained shortly after his death last year:

Reagan also was a free trader and generally turned his bad ear on the demands from unions and Detroit executives such as Iacocca about imposing tough restrictions on Japanese imports. Reagan, however, was also a pragmatic politician and during the heat of the Presidential campaign in 1980, he agreed to support quotas on Japanese autos imports. The quotas were imposed but the end result was that it pushed the Japanese Big Three, Toyota, Honda and Nissan, to expedite the construction of new plants in the United States. Honda already had made plans to open a plant in the U.S. but the plant quickly expanded. The competition ultimately helped make American and foreign cars better.

Indeed, there is a 1988 essay by Sheldon Richman published by the Ludwig von Mises Institute entitled, “Ronald Reagan: Protectionist,” that is still available on its web site which details many other violations of the principles of free trade which the Reagan administration adopted as policy.

Perhaps the best way to look at Reagan’s actions is to compare trade quotas or tariffs to the relationships between trade unions and strikes. A successful union does not want to strike because if it does both its members and the employers those workers depend upon might face significant financial losses. However, a successful union has to be prepared to strike in order to have employers take it seriously. Recent administrations, Democratic and Republican alike, have telegraphed their willingness to allow corporations to walk all over them so that companies no longer fear any kind of political retaliation for taking American markets for granted.

Consider one corporation that has been all over the news lately for many reasons, including its effect on U.S. trade deficit: Wal-Mart Stores, Inc. As Business Week explains, about 70 percent of Wal-Mart’s products sold in the U.S. are made in China (obviously, that figure must exclude food). In contrast, go to the web site of Wal-Mart in China and you will see that 95 percent of the products in Chinese Wal-Marts are procured locally. That’s a great deal for the Chinese, but what are we thinking? As former Wal-Mart CEO David Glass explained to the journalist Tom Friedman, “One of my concerns is that, with the manufacturing out of this country, one day we'll all be selling hamburgers to each other.”

The reason this situation exists is that George W. Bush is no Ronald Reagan. While Bush was willing to raise tariffs on some kinds of imported steel in order to court Rust Belt votes for his re-election, on the whole his administration has introduced a trade policy of unilateral disarmament. Companies like Wal-Mart destroy American jobs coming and going, yet there is not a peep out of the president or the Republicans who control Congress in support of the workers who are being hurt by globalization.

Granted, the Clinton Administration was no better in this regard. It was Bill Clinton who shepherded the North American Free Trade Agreement, the granddaddy of all job outsourcing arrangements, through Congress without the support of many in his own party. Even today, liberals who support free trade try to change the subject when the conversation turns to the effects of that trade on their own political base. The Princeton economist and former Federal Reserve Vice-Chair during the Clinton administration, Alan Blinder, titled a post at the liberal web site TPM Cafe, “Let’s Abandon the Circular Firing Squad”:

[I]nternational trade is not the most important economic issue facing our nation today.

In fact, the areas about which we agree vastly outstrip the areas in which we disagree, both in numbers and in importance.

That’s easy for him to write. Princeton is unlikely to be outsourcing economics professors any time soon.

Lest you think otherwise, I am not suggesting that protectionism is the solution to our problems. Free trade that runs in both directions is beneficial to all countries that participate in it. What I believe is that by taking protectionism completely off the table, this country is being taken advantage of by firms like Toyota that know they can build plants in Canada and still have completely unfettered access to the U.S. market.

My solution is to run trade more like Ronald Reagan did. Love the free market, but remember that a country can’t prosper with a trade policy that is all carrot and no stick.