When Donald Trump threatens to slap massive tariffs on China, economic textbooks want to self-destruct like the smoky opening scene in a Mission Impossible movie. After all, free trade drives down prices while offering consumers more choices. In the 1960s a mom and dad would save for weeks to buy their child a back-to-school coat. Today Walmart solves that challenge without skipping a meal.
Nonetheless, Trump has tapped into something real. He has persuaded millions of anxious Americans that foreign goods, capital, and people can undermine a sense of national identity and can devastate company towns. Our prosperity comes with a price. Too often those of us who own Adam Smith neckties tout the benefits of trade while skipping over its victims. The free market is not a pain-free market.
Ronald Reagan taught us how to handle the following paradox: We need trade to stay prosperous, yet we need a national identity to remain a country. Americans once took pride in MADE IN USA, but nearly half of Millennials now say the American dream is dead. In 2015 President Obama visited Nike’s headquarters in Oregon to plug the Trans-Pacific Partnership. If Obama looked down at his shoes he probably would not have seen MADE IN USA. American companies manufacture less than 10 percent of the shoes sold here. We’ve moved from MADE IN USA to MADE IN WHEREVER’S CHEAPER.
When Ronald Reagan took office, Japan seemed to be taking over the world, amid double-digit U.S. inflation, rising joblessness, and a perfidious OPEC price squeeze. Toyota, Honda and Nissan were ripping into Detroit’s market share (burdened with slipshod designs and intractable unions); television icons like RCA and Zenith were fading to black; and Japan concocted ludicrous trade barriers. Japan’s trade ministry explained to Colorado ski-makers that Japanese snow could not handle American skis.
Reagan responded with strong leadership, but he was not a purist. With lower taxes and deregulation he convinced more foreign firms to open up offices here. Though he signed free trade agreements with friends like Canada and Israel, he “suggested” voluntary import restraints for Japanese autos — an offer they couldn’t refuse. Though critics warned that his policies would ignite an explosive trade war, the economy and relations with Japan got better. At G7 gatherings, Japanese Prime Minister Nakasone always elbowed his way into the photo whenever Reagan strode by. Reagan’s actions led Japan, not to warlike bombing but to photo-bombing.
Based on the lessons of the 1980s, I would propose four priorities for Mr. Trump:
First, cut foolish import barriers that hurt Americans. A timely example: Americans who suffer from illnesses cannot use medicine approved by the European Medicines Agency unless the FDA slogs through its own expensive protocol. In 2014 a lethal meningitis outbreak spread through Princeton University dorms. Princeton had to beg the CDC to beg the FDA to allow it to buy a vaccine made by Novartis in Switzerland. Why can’t the FDA permit reciprocity with other advanced countries? Are European veins different from ours?
Second, fight intellectual thievery. Here we are in battle with Confucius, who said “to steal a book is an elegant offense.” But it is not an elegant thing if you are Apple, Qualcomm, or Pfizer and have invested billions to develop nifty, and sometimes life-saving inventions. Obama’s trade office has named China to its “Notorious Markets” list, but that is a badge of honor among iniquitous IP thieves. The next President must say to China: if you don’t protect our software from theft, we won’t protect your gadgets when they arrive on our docks.
Third, use a crowbar to open promising sectors in foreign markets. Let me suggest a natural fit for Mr. Trump: construction. Gaining approval to build Trump Tower on Fifth Avenue demonstrated a black belt in bureaucratic infighting. It required negotiating with historical commissions, plumbers unions, doormen unions, fire inspectors, not to mention shoppers at nearby Tiffanys, who worried they’d miss their view of the 287-carat diamond worn by Audrey Hepburn at breakfast. A President Trump should fight against Chinese regulations that discriminate against American engineers, designers, and builders. Sure there are cultural barriers, but anyone who has mastered CAD/CAM can learn feng shui. World-class engineering firms like Jacobs, Fluor and Bechtel pay high salaries and form the nexus of human, financial and physical capital.
Fourth, recognize that trade is foreign policy, too. Convinced that the Soviet Union was teetering, Reagan denied them advanced technology, and kept the Soviet war machine a generation behind. As Beijing sends it first aircraft carrier sailing past disputed artificial islands built in the South China Sea, the U.S. must keep a technological edge.
A tough trade policy accompanied by too much bluster could backfire for a President Trump. Americans could end up facing higher prices, shoddier goods, and angrier foreign neighbors. But we’ll have to take some risks to save the country. Is Mr. Trump ready to roll the dice in order to win at trade diplomacy?