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

27 April 2019 Comments 1 Comment

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 Alliance, explains 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”

Richard Langworth says:
28 April 2019 at 12:42
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.