Commentary Type

Trump Plays Reagan's Game on Tariffs and Taxes


President Donald Trump's attacks on trade agreements are generally depicted as a departure from mainstream Republican orthodoxy over many decades. The party's leadership in Congress still embraces free trade. Most GOP members have favored nearly all the recent trade accords, going back to the North American Free Trade Agreement (NAFTA) of the early 1990s—a deal negotiated by President George H.W. Bush.

But the idea that Republicans in the modern era have always practiced free trade is a myth. As president, Ronald Reagan claimed to be a free trader. But he also denounced imports as harmful to US industry. While his messaging was often contradictory, Reagan's actions proved him to be an assertive protectionist for most of his term. 

Running for president in 1980, he labeled Japan a big problem for the American auto industry. When he got into office, he persuaded the Japanese to voluntarily restrict the number of autos they could export to the United States. Under pressure from American industry, Reagan also placed punitive tariffs on Japanese electronics products and motorcycles. He invoked a variety of US laws to restrict trade in industries such as steel, footwear, lumber and sugar.

Reagan sold these "America First" policies as protecting domestic manufacturing jobs, a stance that pleased organized labor. These policies served as a smokescreen for his much bigger priority, which was to cut taxes, mainly for the wealthy. Top marginal tax rates were slashed from 70 percent to 28 percent, while bottom rates were reduced from 14 percent to 11 percent. The corporate tax rate was cut from 48 to 34 percent. 

Trump's economic plans are drawn in the image of Reagan's. But like most sequels, they recycle and magnify old gimmicks, while missing the clear plot line of the original. 

There are fundamental differences that make Trump’s trade and tax cocktail far more dangerous than Reagan’s.

With a campaign slogan that echoed Reagan's "Let's Make America Great Again," Trump began his term with an even grimmer portrayal of the US economy than Reagan had used. Reagan's "idle industries" became Trump's "rusted-out factories." Where Reagan saw "human misery," Trump witnessed "American carnage."

While Reagan's economic nemesis was Japan, Trump's is China.

In the name of the working class, Trump ended the Trans-Pacific Partnership (TPP), threatened to scrap NAFTA, and began a process that would allow him to place hefty tariffs on imports of steel and solar panels. A case was initiated against China for unfair trade practices on its technology-transfer policies, under the same law that Reagan used against Japan on semiconductors, which were the high-tech good of the 1980s. Again, the auto sector looms large, with the Trump administration seeking 50 percent US content in auto imports from Mexico and Canada. 

For a second time, the real prize is tax policy. Trump is proposing tax breaks that will be "the biggest in the history of our country" and that largely serve the wealthy. The tax package reduces corporate rates from 35 percent to 21 percent, cuts top tax rates from 39.6 percent to 37 percent, and doubles the estate-tax exemption, so that couples can leave $22 million to heirs and pay no federal estate or gift tax. Like Reagan's 1981 cut, the reductions are largely unfunded.  

Although the rhetoric is familiar, there are fundamental differences that make Trump's trade and tax cocktail far more dangerous than Reagan's.

On trade, Trump's talk is more extreme in a world that is more economically integrated. American consumers reap huge benefits from expanding international commerce. In real terms, China's economy is already as big as the US economy and continues to grow rapidly. US businesses increasingly depend on China's and other large and fast-growing markets for revenue. As global supply chains have developed, protectionism now has more far-reaching effects than it did under Reagan. 

During Reagan's presidency, there was a grand vision for American global economic leadership that is missing now. 

Another difference is that during Reagan's presidency, there was a grand vision for American global economic leadership that is missing now. Despite his protectionist policies, Reagan negotiated a free trade agreement with Canada and initiated a fresh round of global trade negotiations before leaving office. He also visualized a future common market for the United States, Canada, and Mexico. Trump's departure from the Trans-Pacific Partnership and his broader hostility to trade make it difficult to imagine such a path unfolding.

On taxes, the economic rationale for stimulative tax policy that existed in 1981 is absent now. Reagan faced an economy in recession, with little public debt. Boosting demand to stimulate growth made economic sense. With Trump's economy operating at full employment, and with federal debt held by the public constituting 75 percent of GDP, tax cuts will irresponsibly make the debt grow, crowding out private investment and stealing ammunition from the next downturn.

Finally, Reagan's policies took effect after an extended period in which income inequality had moderated, while the economy under Trump faces a ballooning gap between the haves and have-nots. The share of income going to bottom half of the population has fallen by more than one third since Reagan was elected, with a disproportionate share of the rise in income going to the top 1 percent.

For economic and political stability, tax policies should be aimed at reversing this trend, not accelerating it.

Follow @CarolineFreund on Twitter.

More From

More on This Topic