Irwin Stelzer Archives - Richard M. Langworth

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

Richard M. Langworth — Sat, 27 Apr 2019 21:59:26 +0000

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.

Brexit: Britannia Waives the Rules

Richard M. Langworth — Fri, 24 Jun 2016 17:26:12 +0000

Brexit aftermath, June 2016: In voting to leave the European Union, Britain has opted to become another Norway. One of the most prosperous and contented countries in the world, Norway does fine with its own laws, currency, and trade agreements, including a good one with the EU. It is hardly a bad model.

Short-term troubles

The gnashing of teeth over the upset Brexit victory resounds around the world. For awhile, chaos will attend financial markets, and the pound will take a dip (boosting British exports).

The Scots voted against Brexit, though not in the numbers predicted. Many voted “Remain” because they feared Brexit would mean another Scottish independence fracas. Others will complain and demand more autonomy. They would be mistaken to support independence given current oil prices. And they receive a great deal from being part of the UK. The Scots also need to fish. They will come to appreciate regaining control of their own conservation policies.

Nannies and minders

The New Yorker predicted defeat for Brexit and UK Independence Party leader Nigel Farage, whom they compared to Donald Trump. Farage leads a party with one seat in Parliament. He will not be prime minister. Trump believes (improbably) that he will be president, and his party (if it is his party) holds majorities in Congress. Farage is far more articulate and silver tongued, though the Trumpeters are trying to polish their very rough diamond.

Never mind, the Evening Standard assured its readers, the vote may mean nothing. Brexit will require an Act of Parliament. The EU will have something to say about that. Few MPs are likely to vote against a referendum with the highest turnout in thirty years. The EU bullied the Dutch, Irish and Danes when they showed signs of independence. It is less apt to bully the fifth largest economy. It needs Britain too, after all.

In the end, the argument over Brexit came down to statists vs. libertarians. Statists think the state must regulate every aspect of people’s lives. The proles are too dumb to know what’s best for them. After the vote, the Establishment and the BBC forecast apocalypse: surprise. In 1992, Britain opted out of the Eurozone. The same people predicted a recession and the end of the City of London as a financial mecca. You don’t hear a peep about adopting the euro today. Predicting disaster if they don’t get their way is a common tactic among our respective national nannies.

Using Churchill

Winston Churchill, whose quotations were bent out of all context in the debate, is still being used to lecture Britons. American lectures began with President Obama. (He caused a blip in Brexit polling when he said an independent Britain would go “to the back of the queue.” As the historian Andrew Roberts pointed out, Britain wasn’t at the back of the queue in 1940, or 9/11.Britons bled alongside Americans and others in places like Afghanistan and Kuwait.)

One critique trotted out Churchill’s “Europe Unite” speeches of the early postwar years to lament how the great man’s wisdom was ignored by voters. But isolated quotations, from a time when Churchill saw Franco-German rapprochement as the main need, are not dispositive now.

Churchill’s view

A fair-minded person is obliged to consider: Why, after so many inspiring speeches supporting the concept of European unity in opposition during 1945-50, did Churchill as prime minister (1951-55) prevent British involvement in the European Coal and Steel Community, the European Army, and other projects which led to the European Economic Community, and ultimately the EU?

A clue to what Churchill thought then was his message to his cabinet in 1951. It concerned the Schuman Plan, a single authority to control the production of steel and coal in France and West Germany. On the invitation for Britain to join, Churchill said:

Our attitude towards further economic developments on the Schuman lines resembles that which we adopt about the European Army. We help, we dedicate, we play a part, but we are not merged with and do not forfeit our insular or commonwealth character. Our first object is the unity and consolidation of the British Commonwealth. Our second, “the fraternal association” of the English-speaking world. And third, United Europe, to which we are a separate closely-and specially-related ally and friend…. —National Archives, CAB 129/48C(51)32. To read more click here.

Churchill’s envisiooned a sovereign Britain linked first to the Commonwealth, second to the Atlantic community (U.S. and Canada), and third to Europe. But that was then, this is now. Churchill never had to contemplate anything like the EU of 2016. Unfair use should not be made of his words.

Wise advice

As a British investor friend said to me, “after the thing matures everything will be fine for the UK.” A Canadian active in business for four decades said, “this is really Britain’s opportunity.” Along those lines I recommend economist Irwin M. Stelzer’s article “Nothing to fear” (Hudson Institute).

“You need six things for a successful economy,” Stelzer wrote his British friends. Whichever way the vote went, he explained, Britain would still have them:

1) A large economy. Britain’s is the world’s fifth largest.

2) The rule of law. “…so that no Vladimir Putin can snatch the fruits of your labour or profits from risk-taking investment.” (Putin approved Brexit, which may not be altogether settling; but that is another story.)

3) The English language in world business.

4) A time zone. “…that allows you to work 24/7 with economies around the world.”

5) World-class businesses in the growing services sector. “Your design firms, law firms, insurers, music businesses are among the world’s best, beating my country’s rivals in many cases.”

6) A vibrant, exciting culture “that attracts the best and the brightest employees of foreign firms. Offer a young investment banker the option of London or Frankfurt, of educating his children at Britain’s fine schools and colleges or having them attend class anywhere else in the EU, and guess where he will choose.”

“All will come right”

After Munich in 1938, Churchill warned “of a bitter cup which will be proffered to us year by year unless, by a supreme recovery of moral health and martial vigour, we arise again and take our stand for freedom as in the olden time.” On 23 June 2016, such a stand was taken.

I’ve visited the UK thirty times since 1974, logging 100,000 miles. Land’s End to the Orkneys, the Hebrides to East Anglia. It has an ability to produce prosperity and contentment in a large, concentrated population. The improvement was palpable after the advent of Margaret Thatcher. I have no doubt that in the end, as Churchill said, “all will come right.”