Churchill and Free Trade: That was Then, This is Now

Churchill and Free Trade: That was Then, This is Now

On Free Trade and tariffs

The Hud­son Insti­tute  econ­o­mist Irwin Stelz­er penned an inter­est­ing arti­cle on trade: “Trump girds for War with EU.” I sent it around to col­leagues, prais­ing it for prop­er­ly attribut­ing an alleged Churchill quote:

No one doubts that Trump is gear­ing up to launch a tar­iff bat­tle with the Euro­pean Union. For one thing, he is set to sign a deal end­ing the trade bat­tle with Chi­na, and would not be fight­ing a two-front war should he take on Europe which, he tweet­ed last week, “has tak­en advan­tage of the U.S. on trade for many years. It will soon stop”…. If the EU nego­tia­tors think they can use jaw jaw to pre­vent or delay war war (to bor­row Harold Macmillan’s take-off on Churchill’s “Meet­ing jaw to jaw is bet­ter than war”), they are mis­read­ing the Pres­i­dent…. Trump demon­strates his igno­rance of the eco­nom­ics of trade by focus­ing on bilat­er­al trade deficits. But he demon­strates his New York street smarts by select­ing oppo­nents who are rel­a­tive­ly weak, as Chi­na was when he launched a bat­tle to end its preda­to­ry trade prac­tices. Now it’s Europe’s turn.

It’s not too often that Churchill is so care­ful­ly ref­er­enced. Dr. Stelz­er also high­light­ed my book of quo­ta­tions, Churchill by Him­self, as his rec­om­mend­ed read­ing in that col­umn. So I sent his col­umn to col­leagues, say­ing, “It sweet­ens his kind ges­ture by the fact that I agree with him.”

Challenge and riposte

This cost a remon­strance over my Churchillian cre­den­tials. A friend wrote:

Tar­iffs are a tax on domes­tic con­sumers, not for­eign exporters. It’s crony cap­i­tal­ism for those domes­tic indus­tries being “pro­tect­ed.” Churchill’s ear­ly men­tor, Bourke Cock­ran, under­stood that; so did his pro­tégé. So sad that some­one oth­er­wise so knowl­edge­able about WSC as you still doesn’t get it! Per­haps a re-read of For Free Trade might help you regain our hero’s wis­dom? “Wise words, Sir, stand the test of time.” I saw that in a movie some­where. [He refers to Young Win­ston.]

Uh-oh. My day in the bar­rel? But “nev­er give in, except to con­vic­tions of hon­our and good sense”:

When I said I agreed with Dr. Stelz­er, it was most­ly with his pin­point accu­ra­cy on the dichoto­my of Don­ald Trump: often mean­ing well, whose poli­cies often pay off, accom­pa­nied by the foulest, rud­est and crud­est behav­ior, jux­ta­posed with fun chum­my stuff with sup­port­ers (and appar­ent­ly, when among friends, a prince of good fel­lows). But how should I know? And after all, on the mat­ter of Pres­i­dent Trump, have any Amer­i­cans by now not made up their minds?
On trade, Irwin Stelzer’s col­umn recount­ed Trump’s moves and options, and dis­played Trump’s knack of pick­ing the soft­est tar­gets (in this case the EU). Trump’s first impuls­es are often the right ones. You may recall him sug­gest­ing to a meet­ing the G7 nations: “Why don’t we drop all tar­iffs against each oth­er?” The dear gen­tleper­sons around the table all looked like they had bad cas­es of indi­ges­tion, and changed the subject.

Churchill wrote For Free Trade…

…in an age long before glob­al­ized indus­try mak­ing the same prod­ucts, and gov­ern­ment reg­u­la­tion of economies. The Egyp­tians sent Britain cot­ton and Britain sent them shirts, and Free Trade ben­e­fit­ed all. There were few retal­ia­to­ry tar­iffs because they made no sense. There were no run­ning jokes on Britain, like EU cars taxed at 5% here, vs. our cars at 25% over there. Japan might say, “Ah, but our tar­iffs are more com­pa­ra­ble.” Which is true, except that the same Toy­ota cost­ing $35k in Japan sells for $30k here because of the government’s Export Sub­sidy Pro­gram, which has the same effect.
But Churchill also learned from expe­ri­ence. In 1932 he endorsed the Impe­r­i­al Pref­er­ence he had argued so pas­sion­ate­ly against in For Free Trade. Why? Because there was an unprece­dent­ed Depres­sion (itself large­ly brought on by tar­iffs). Empire goods were being sub­ject to increas­ing tar­iffs by oth­er coun­tries try­ing to pre­serve their indus­tries. Thus Churchill declared:
As Con­ser­v­a­tives we are con­vinced that an effec­tive mea­sure of pro­tec­tion for British indus­try and British agri­cul­ture must hold a lead­ing place in any scheme of nation­al self-regen­er­a­tion.… Only by walk­ing in com­pa­ny togeth­er can the races and states of the British Empire pre­serve their glo­ry and their livelihood.

On to the End

Churchill stuck to Impe­r­i­al Pref­er­ence through 1944, when at Dun­bar­ton Oaks and Bret­ton Woods his dear friends the Amer­i­cans demand­ed it end, lest Amer­i­can exports suf­fer (with the hard­est cur­ren­cy in the world, after the Swiss franc). A nice thank-you for the ally that had stood alone until “those who had hith­er­to been half blind were half ready.”
John Charmley’s sec­ond Churchill book, Churchill’s Grand Allianceexplains how the British were treat­ed. Andrew Roberts’ Walk­ing with Des­tiny (Chap­ter 15, “The Clat­ter­ing Train”) explains the rea­son­ing behind our hero’s volte-face in 1932. It’s always impor­tant to know the whole story.

Irwin Stelzer comments

In ask­ing per­mis­sion to quote him, I showed Dr. Stelz­er my words above and asked what he thought. He replied:

You’ve got it right. After all, Trump did not ini­ti­ate trade wars; they were in place for years. It’s just that Amer­i­ca was a non-com­bat­ant vic­tim, eschew­ing Adam Smith’s advice.* If Trump is telling the truth—that his tar­iffs are a means of get­ting those in vio­la­tion of world trad­ing rules to the table so that trade will end up freer and fairer—they are unob­jec­tion­able. His insis­tence that oth­er coun­tries are pay­ing the tar­iffs is either stu­pid­i­ty or a lie. I pre­fer to believe it is the latter.

There is an addi­tion­al prob­lem you might con­sid­er. Free traders con­cen­trate on effi­cien­cy and max­i­miz­ing growth. They ignore the dis­tri­b­u­tion­al con­se­quences: there are win­ners and losers. The lit­tle old lady sewing sneak­ers in a south­ern fac­to­ry is the loser—collateral dam­age. The Amer­i­can con­sumer is the win­ner, at least until forced to pay tax­es to sup­port the losers. Since the aver­age unskilled work­er sub­ject to com­pe­ti­tion from cheap labor is prob­a­bly poor­er than the aver­age con­sumer, free trade involves an income trans­fer from poor­er to rich­er. Tar­iffs are a crude way of pre­vent­ing that regres­sive trans­fer. Bet­ter to allow it to occur and spend tax mon­ey retrain­ing and/or sup­port­ing the inno­cent losers.

*Adam Smith’s advice

…It may some­times be a mat­ter of delib­er­a­tion how far it is prop­er to con­tin­ue the free impor­ta­tion of cer­tain for­eign goods … when some for­eign nation restrains  by high duties or pro­hi­bi­tions the impor­ta­tion of some of our man­u­fac­tures into their coun­try. Revenge in this case nat­u­ral­ly dic­tates retal­i­a­tion … when there is a prob­a­bil­i­ty that they will pro­cure the repeal of the high duties or pro­hi­bi­tions com­plained of. —The Wealth of Nations IV, ii.

One thought on “Churchill and Free Trade: That was Then, This is Now

  1. Read­ers please note: The orig­i­nal first sub­head was “The Hud­son Insti­tute econ­o­mist Irwin Stelz­er…” For tech­ni­cal rea­sons I changed it to “On Free Trade and Tar­iffs” but for­got to put the orig­i­nal six words into the text. Fixed now.

    Steve G writes: “First, my own guess is that Trump went after Chi­na not because they were weak but because they were the biggest part of the prob­lem. Sec­ond, I also think there is a trade­off in terms of the cost of tar­iffs. Pure free-traders, includ­ing WSC in his ear­ly days, based their argu­ments on the fact that tar­iffs raised the price of goods to the peo­ple and thus were a sort of tax on them. I think that’s still true, but what has changed is that in return for low­er prices on con­sumer goods we “export­ed” our man­u­fac­tur­ing jobs to places like Chi­na. So while the gen­er­al pub­lic ben­e­fit­ted from low­er prices, a seg­ment of soci­ety payed a heavy price and lost all hope of ever mak­ing a good liv­ing. In addi­tion, the wages of indus­tri­al work­ers in oth­er coun­tries have risen and this low­ers the loss to busi­ness of using more expen­sive Amer­i­can labor. Over­all, it can be argued that the tar­iffs and the return of man­u­fac­tur­ing jobs may be a net ben­e­fit even at the cost of increased prices on some con­sumer goods.”

    (1) True, but Dr. Stelzer’s point was that if you’re street smart you pick vul­ner­a­ble tar­gets, one at a time.​ He went after Chi­na only after their econ­o­my start­ed slow­ing. (2) I think Dr. Stelz­er makes this point in his com­ment, as did Adam Smith him­self. Per­fect answer to my crit­ic, who was say­ing I hadn’t read my Adam Smith.

    ​Thanks for reading.

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