Trade War

Dick "The Retaliator" Gephardt vs. "Sir" Winston Churchill in a 10-round battle to the death over protectionism.

The bellicose language in the debate on trade has changed little in the past 90 years.

In 1902, William Humble Ward, the Earl of Dudley, wrote to his friend Winston Churchill, "Free trade notwithstanding, we are gradually but surely being beaten [in world markets], and the defenseless position that our present system leaves us in, makes us powerless to arrest the downward tendency. A commercial war is being hotly waged against us and yet because we are cowards we refuse to avail ourselves of arms to combat our enemies. We are afraid of the temporary consequences of touching our free-trade policy and we therefore allow our enemies to ravage our territories unchecked."

Echoing Ward, Rep. Richard Gephardt (D–Mo.) proclaimed in a 1989 speech, "Our past reluctance to use retaliation has left us without a credible deterrent. The limited and judicious use of retaliation will keep our trading partners convinced that we mean business. Too many analysts have reacted to a raised voice at the bargaining table as if it were the last step before a trade war. If we adopted that same posture across the board we would have lost out long ago."

Now as then, those who oppose free trade claim they are for "fair trade." Many deny being protectionists and claim their calls for "retaliation" are really meant to further free trade by opening foreign markets.

As today's most prominent protectionist, Gephardt claims to want only to protect American industry from "unfair" competition: "We must forge a new trade policy that guarantees to our workers and business that if they make a good product at a competitive price, they will have the opportunity to sell it in foreign markets as freely as we allow those countries to sell their products in our markets. We must have free and fair trade."

Free traders, on the other hand, have long had the welfare of consumers at the core of their beliefs and rejected nationalistic slogans about foreigners "taking advantage of us."

"Our free-trade plan is quite simple. We say that every [citizen] shall have the right to buy whatever he wants, wherever he chooses, at his own good pleasure, without restriction or discouragement from the State. That is our plan.…In pursuit of this simple plan there came last year into [our country], from every land and people under the sun, millions' worth of merchandise, so marvelously varied in its character that a whole volume could scarcely describe it. Why did it come? Was it to crush us, or to conquer us, or to starve us, or was it to nourish and enrich our country? It is a sober fact that every single item, however inconsiderable, in all that vast catalogue of commodities came to our shores because some [citizen] desired it, paid for it, and meant to turn it to his comfort or his profit."

These words were spoken by a 28-year-old politician and war hero, a journalist and best-selling author of five books, son of a prominent New York socialite, grandson of the founder of the Rochester Democrat and Chronicle, self-educated in economics, and, at the time, a first-term legislator. The year was 1903. The country was Great Britain, and the speaker was Winston Churchill.

At the time, Great Britain was the world's preeminent economic power. Although its economy continued to grow, the economies of the United States and Germany were growing faster. As a result, Britain's share of world industrial production and world manufactured exports decreased, and the share of the United States and Germany increased. In other words, Great Britain's economic position at the turn of the century was strikingly similar to that of the United States today. And, then as now, many politicians blamed free trade.

So why not let Gephardt speak for himself and bring back that young free trader Winston Churchill to oppose him in a debate on free trade?

At first glance, Gephardt has the advantage. In the prime of his career, the former Eagle Scout has run once for his party's nomination for president and finished first in the Iowa caucus. He is the majority leader of the U.S. House of Representatives and is recognized as the chief spokesman for severe retaliatory tariffs and quotas against our trading partners. Widely respected by his congressional colleagues, he is still prominently mentioned as a future president.

By contrast, Churchill was only in his first term in Parliament in 1903. While his political career looked promising and he had achieved notoriety at an early age through his books and career as a journalist—including a daring escape from a Boer prison camp in South Africa—he was best known as the son of Lord Randolph Churchill, who had served briefly as Chancellor of the Exchequer and Leader of the House of Commons in 1886.

In 1904, Churchill resigned from the Conservative Party of his father and "crossed the floor" to join the Liberal Party. He switched parties because the Conservatives had abandoned their commitment to free trade. Leaving the Conservative Party hurt Churchill's reputation. As C.P. Snow observed in his biographical essay on Churchill in Variety of Men, "He entered Parliament at the age of twenty-seven, and within a remarkably short space of time became the most-hated politician in the country, with the honorable exception of Lloyd George."

Gephardt's views on protectionism and free trade are well-known from his presidential campaign, interviews, and speeches. But despite all evidence to the contrary, Gephardt rejects the "protectionist" label. He made this clear in a January 1988 interview with David Frost.

Q: "Isn't your trade amendment a form of protectionism?"

A: "It isn't. My approach says: Find the countries that have a pattern of unfair trade practices against the U.S. and dispatch the president to negotiate with them to get rid of those practices. If they won't do it, then give the president the power to begin penalizing their products coming here."

But 90 years ago, Churchill saw that free trade benefits consumers while "fair trade" benefits special interests. "Protection is, in the first instance, undoubtedly beneficial to the protected trade whatever it may be. It is secured from foreign competition.…This advantage is however obtained at the expense of the general consumer, who, being deprived of his right to buy in the cheapest market, has to pay rather more for homemade goods, and, in the second place, the quality of the goods is apt to deteriorate.…Therefore the consumer will pay more for the articles which he uses and will perhaps not get such good articles in the end. His loss will be more or less severe in proportion to the amount of protection given and to the number of industries protected.…We do not deny that industries may be made to flourish by artificial means in the power of the State to administer, but we contend that the Government must look to the well being of the country as a whole, not to that of any particular class or section."

Gephardt says little about what impact his trade policies would have on consumers. In February 1987, Gephardt appeared on "Meet The Press." When the questions turned to the harsh penalties contained in a trade bill he had authored and to the American consumers who would be hurt by it, Gephardt quickly tried to change the subject.

Robert Novak: "Let's talk about American consumers. Aren't you saying that the American consumer, that he is going to have limitations if he wants to buy a Japanese car because he thinks it's a better car?"

Gephardt: "Bob, do you think American consumers are helped by having foreign markets closed? Do you think ultimately the consumer, the voter, the constituent, the person in this country is helped when foreign countries treat us unfairly? I don't think so. If we're to have economic growth in this society, which I think is the most important goal we have to have, we've got to be on a level playing field. We aren't on one today, and the only way we're going to get it is to stand up for the rights of the people."

To Gephardt, standing up for the rights of the people" means retaliation or its threat. Gephardt contends there will be no casualties in the global trade war he proposes and that no one will really be hurt.

"It will never happen, because the minute we get tough, the other countries will finally change their behavior. And just look in the last year. We finally got tough with the Japanese on microchips, and they sat down and did a treaty with us. We got tough with the Europeans on agricultural products, and at the last minute they finally opened their market the way we had asked them to do it. We simply haven't been tough enough. This president stands up to the Soviets; he needs to stand up to the Europeans, the Japanese and our other trading partners and say: open your markets."

Indeed, far from a global trade war, Gephardt suggests his tough attitude on trade is no different from how he treats his wife, as he told Andrea Mitchell three years later on another visit to "Meet the Press."

Mitchell: "You think a trade war would be good for the United States?"

Gephardt: "We're not going to have a trade war. This I think is a misnomer. We have a marriage with Japan. We are interdependent. We cannot afford to go on opposite, independent courses. We have to get along. And this negotiation needs to be carried on in a way that we don't break up or have a problem. I said when I was in Japan a year ago that this is like a marriage. I often have disagreements with my wife, Jane. But we don't allow those disagreements to have us lose our respect for one another or our affection for one another. That's the kind of negotiation and the kind of relationship that we have with the Japanese, and I think we can do this without a trade war."

Taken aback, Mitchell attempted to allow Gephardt to portray a more benign picture of his domestic life, if not his attitude toward Japan.

Mitchell: "Congressman, I have to tell you, I'm confused by something you said earlier. You're in favor of imposing tariffs—punishment. Yet you said you don't want a trade war. Imposing tariffs on Japan is creating a trade war. I mean, you compared it to a marriage, and a disagreement in a marriage; you don't punish a spouse with tariffs. That's pretty tough action."

Gephardt: "But sometimes, even with someone you respect and is your friend, you have to take an action in your own self-interest in order to get a level playing field."

Churchill, however, openly criticized the theory that punishing foreigners with retaliatory tariffs would cause them to see the light. "There is a feeling that England has only to retaliate, and foreign tariff walls will immediately collapse. Well, but all the great nations of the world are Protectionist; they have been for 100 years past, and perhaps for many years before that, endeavoring by every dodge of reciprocity or negotiation to force each other to reduce their tariffs in each other's respective interests. Where have they come to? Have they reached Free Trade? On the contrary, their tariffs have risen higher and higher, and at this moment Free-trade England, which does nothing, Free-trade England, with masterly inactivity, occupies in regard to the nations of the world so far as tariffs are concerned, a position of advantage to which few of the Protectionist countries have attained and which none of them have surpassed."

Gephardt has often said that he does not really want to use retaliation. He simply wants to negotiate on a bilateral basis with a tariff club in his hand. "Right now our trade negotiators are questioning if we should take retaliatory steps that we abhor and urge other countries to abhor. Our fear is that if we don't continue to reject retaliation we will lose our capacity to lead on these issues. I believe we must establish a new trade strategy and policy that contains the ability for necessary, albeit limited, retaliation to be used as a method of enforcement.…With highly industrialized competitors like East Asia and Europe, we must look to the practicality of bilateral—wholesale—agreements that solve as many complex disputes as possible at the same time."

Churchill did not believe negotiations with protectionist countries would be any more successful than retaliation. "Now, do not let us imagine…that there is very much to be gained in trade by any negotiatory proceedings with foreign countries.…What is the object of Protection? Gentlemen, the object of Protection is to protect. France adopts a system of Protection to protect France—to protect the French market—and what foreign nations desire to secure by their tariff systems is the practical and virtual monopoly of their home markets in regard to their special products. I think they are wrong; but I am not now arguing that point: I am discussing retaliation. It is very natural that they should be loath to change their policy. After all, if a lot of hothouse industries reared up under artificial conditions, are suddenly exposed on equal terms to the competition of our hardy out-of-door plants, widespread ruin must occur. In a country whose complicated trade and industry has grown up on the basis of Protection any sudden change could not fail to be disastrous, and would be resisted inch by inch by all the great interests concerned.

"The political parties in foreign countries are arranged for the very purpose of making sure that no sudden reduction of the tariff shall take place which will deprive their great organized vested interests of the monopoly of the home market."

Gephardt talks a good game about opening closed foreign markets to American exports, but a careful review of his record demonstrates that protecting selected American industries and their employees at the expense of American consumers is his real concern.

Gephardt came close to admitting this in 1987. "Meanwhile, more automobile workers have been laid off; more farm equipment businesses have closed down; more high-technology manufacturers and agricultural producers have found foreign markets closed by unfair trade practices.

"This situation has a fundamental impact on our national security, our economic future, and our self-image as a nation. We have watched America transformed from the world's largest international lender to its largest debtor; we have watched American workers turned out of factories and into jobs in fast-food restaurants; we have watched Americans begin to doubt their ability to meet foreign competition."

But Churchill had little patience for such special interest pleading. "The finished product of one trade is the raw material of another. By placing taxes on any of these commodities to raise their price you may indeed for a time help this trade or that trade, but it will only be at the expense of this or that other trade and to the impoverishment of the general consumer. No one can tell whose enterprise will be hindered or whose it will be that will be undermined. You may, by the arbitrary and sterile act of Government—for remember, Governments create nothing and have nothing to give but what they have first taken away—you may put money in the pocket of one set of Englishmen, but it will be money taken from the pockets of another set of Englishmen, and then the greater part will be spilled on the way. Every vote given for Protection is a vote to give Governments the right of robbing Peter to pay Paul, and charging the public a handsome commission on the job.

"To say that Protection means greater development of wealth is unspeakable humbug. The Democratic Party in America and the Socialist Party in Germany are made up of the poorest and least fortunate of these countries; and have they not learned by their bitter experience that high protective tariffs, whatever profits they may confer on capital, whatever privileges they may bring to certain of the higher ranks of labour, are to the poor and to the poorest of the poor an accursed engine of robbery and oppression?"

Churchill was sympathetic to domestic industries, but he firmly believed open competition was in their best interests just as it was for consumers. "We Free Traders are often told that we should consider the producer more, and not think so much about the consumer. The great manufacturers are the largest producers in the country, but they are also by far the largest consumers. The more they produce, the more they have to consume. The bigger the mill, the more it costs to run. The manufacturer, therefore, wants one thing dear—the thing he sells—and a hundred things cheap which he uses. Now let anybody who is familiar with the working of some big mill—I don't care what kind of mill—think how much the cost of production would be increased if everything used in that mill cost 10 percent more. If the machinery cost more, and the oil, and the lamps by which the mill was lighted, and the building, and all the materials out of which it was made, and the paper on which the accounts were kept, and the glass in the spectacles of the senior partner—and so on."

Gephardt has much less faith in the market's ability to serve consumers. His recent comments on the Japanese purchase of a substantial minority interest in Titanium Metals Corporation of America reveal much about his thinking.

TIMET accounts for about half of all U.S. titanium production. Two other companies produce the rest. Together, the three U.S. companies account for roughly 25 percent of world production while Japanese companies account for another 22 percent. Gephardt railed against the Japanese involvement with TIMET. "I remain concerned about the extent to which the US. Department of Defense is and will continue to be reliant on TIMET for its titanium needs. The increasing amount of foreign acquisitions of U.S. technology in our high tech companies is alarming."

But why would Japan, if it could, stop TIMET from trading with the biggest market in the world? And if it did, why does Gephardt assume that the other two U.S. manufacturers of titanium alloy would not expand their manufacturing capacity to meet demand, or that companies from other countries would refuse to sell to the United States?

Churchill addressed just this sort of thinking in a 1903 speech. "I think it was Burke who said of the French Revolutionists, that they forgot every set of circumstances. So it is with the fair traders. They watch the river flowing to the sea, and they wonder how long it will be before the land is parched and drained of all its water. They do not observe the fertilizing showers by which, in the marvelous economy of nature, the water is restored to the land."

Gephardt once suggested on "Meet the Press" that tariffs be imposed on all foreign goods to help balance the budget. "If we're going to bring in revenue, there are two sources we ought to look at: one is energy taxes, either a gasoline tax or an oil import fee; and, I would like to look at an across-the-board import fee on all products in order to bring in some revenue to help the deficit."

Churchill did not believe this was a path to prosperity: "The theory of Protection is either right or wrong. The doctrines that by keeping out foreign goods, more wealth, and consequently more employment, will be created at home, are either true or they are not true. We contend that they are not true. We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle."

Gephardt views international trade as a battlefield, a zero-sum game where there are winners who prevail only at the expense of the losers. "The issue is not just trade or international competitiveness. That sounds like some kind of a game. What we have to talk about is what's happening to the fabric of the economy of this country. What's happening to the loss of jobs, the loss of wages, the declining standard of living. Our position, compared with the Japanese and the Germans and the others, we're losing the trade battle. And we're losing it not just because the trade rules aren't fair, we're losing it because we aren't preparing the people of this country to meet that competition.…The American people want to know how we're going to win this competition and how we're going to hold our standard of living."

Churchill faced identical arguments from xenophobes in 1903. His prescient response demonstrates a grasp of peace and free markets that will forever elude Gephardt. "Free-traders declare that both the selling and the buying of these things were profitable to us; that what we sold, we sold at a good profit, for a natural and sufficient return; that what we bought, we bought because we thought it worth our while to buy, and thought we could turn it to advantage. And in this way commerce is utterly different from war, so that the ideas and the phraseology of the one should never be applied to the other; for in war both sides lose whoever wins the victory, but the transactions of trade, like the quality of mercy, are twice blessed, and confer a benefit on both parties. Furthermore, the fact that this great trade exists between nations binds them together in spite of themselves, and has in the last thirty years done more to preserve the peace of the world than all the Ambassadors, Prime Ministers, and Foreign Secretaries and Colonial Secretaries put together."

The Democratic Party has turned from its historic support of free trade and has made fair trade and protectionism a pillar of its program. And it has done so in the face of uncontested economic evidence that the post–World War II international economic order based on free-trade principles ushered in an unparalleled world prosperity from which the United States clearly received the greatest benefit.

A recent International Monetary Fund report demonstrates in practical terms just how prosperous the United States is in relation to other countries. The U.S. has 572 automobiles, 650 telephones, and 621 televisions for every 1,000 citizens. No one else is close. West Germany, for example, has only 446 automobiles, 641 telephones, and 377 televisions for every 1,000 persons. And Japan fares even worse: 235 automobiles, 535 telephones, and 250 televisions.

What is really going on here? Why have Gephardt and the Democrats spurned free trade in favor of protectionism and retaliation? In 1904, Churchill already had the answer. "Frankly, I believe that retaliation as now put forward is, from a commercial point of view, humbug. I do not believe that it is put forward from commercial motives, to benefit the trade of the country. I believe it has been put forward from political motives to suit the convenience of a party."

Thank you, Mr. Churchill. Thank you, Mr. Gephardt.

Contributing Editor Michael McMenamin is a lawyer in Cleveland. A portion of this article was written in Kent, England, a few miles from Chartwell, Churchill's country home.