Reagan did impose tariffs on Japanese motorcycles, electronics, and other products. But while these penalties could be seen by some as a precursor to Trump’s recent decisions, there are some critical differences. Reagan’s actions were more targeted, and he also promoted some free-trade policies alongside them, including proposing a North American common market. Perhaps more important is the fact that, according to a recent study, it wasn’t really the tariffs, but another policy altogether, that helped U.S. businesses compete in a global economy: Reagan’s change to the tax code in 1981, establishing the federal Research and Experimentation Tax Credit to subsidize innovation.
Businesses can claim the tax credit if they are working to develop new, improved, or technologically advanced products or trade processes. Created as a temporary incentive for two years, the credit was extended repeatedly by Congress until it became permanent in 2015. (The credit was briefly in jeopardy during the tax-bill negotiations last year, but the final version preserved its benefits.) Most U.S. states, too, now offer tax incentives for research and development.
In the 1980s, this stimulus induced companies to innovate and catch up to their foreign competitors, according to the economists who co-authored the recent study: Ufuk Akcigit of the University of Chicago, Sina T. Ates of the Federal Reserve Board of Governors, and Giammario Impullitti of the University of Nottingham. They describe how, in the second half of the 1970s, U.S. manufacturing productivity was lagging behind that of other advanced economies, and technological competition from Japan, Germany, and France was increasing. While U.S. residents filed 70 percent of patent applications in the United States in 1975, that share had fallen to closer to 60 percent by 1981.
Then, as now, “there was concern that the U.S. was losing leadership,” Akcigit told me. It could have just isolated itself from the world economy. “But instead, the U.S. decided to subsidize its industries quite strongly.” International competition, according to Akcigit and his colleagues, has two playing fields: a company’s home market and its foreign markets. In open economies, companies first have to push hard to improve their productivity and quality of goods, or they will be vulnerable to foreign competitors encroaching on their turf. Second, large businesses can gain share in foreign markets.
In the absence of tariffs, research and development subsidies will encourage companies to make long-term investments to improve their competitive position at home and abroad, the researchers find. After the creation of the federal and state R&D tax credits, U.S. businesses began to catch up to their foreign counterparts; the intensity of their research spending increased, and, after continuing to fall for a few more years, their share of patent applications rebounded by the mid-1990s to above 60 percent.