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06 June 2018

Zollverein or Customs Union



Sanctions and tariff barriers are amongst the hot topics of the moment. It’s worth re-iterating the difference between them, because although the effects may in some ways be similar, the two issues come from completely different places. Sanctions are punitive; a country, a regime, has in some way offended; sanctions are imposed on its trade or its financial institutions as a punishment for its infringement. They are intended directly to cause difficulties and hardship. Tariffs, on the other hand, are imposed on the import of goods from abroad in order to protect a domestic industry from competition, and thus support domestic employment. To put it another way, sanctions are politically driven, while tariffs - although politics plays a part - are primarily economically motivated. Thus President Trump’s actions towards Russia and Iran, for example, are in a different box from those imposing import duties on steel and aluminium.

My generation grew up with the over-riding idea that free trade was the target we should be aiming for - difficult to achieve, for sure, but nevertheless the goal we should be seeking. There would be bumps along the way; protection needed for nascent industries in developing economies, for example, or anti-dumping duties imposed on some state-run (and subsidised) production facilities. But, overall, the direction should be towards as free and tariff-less an environment as possible.

Now, it seems to me that the European Union kind of faces both ways in this. The single market is indeed a free trade area, but it is an internal issue - free trade between member states. What looks outwards is the customs union, which is not an example of free trade. In fact, to understand the customs union it makes sense to look back two centuries. 

Europe then had just emerged from the long years of the Napoleonic Wars. Germany was not a unified country, it was a confederation of independent states - dukedoms, electorates, free cities, and so on - which had grown out of the break-up of the Holy Roman Empire and the two decades of Napoleonic war. At the time of the establishment of the German Confederation at the Congress of Vienna, goods that moved across the statelets within the Confederation were subject to myriad tariffs and duties, to say nothing of bureaucratic delay. Even within the state of Prussia itself there were a raft of internal transit payments to satisfy. So the Zollverein was created; it was a standardisation of tariffs on goods entering the territories of the states of the German Confederation (and a few others, interestingly amongst them Luxembourg, which remained a member right through the First Word War…). The logical targeting, of course, was against the economic power of the industry of the Austro-Hungarian Empire and the old concern across the Rhine, France. The important point, though, is that it was a protective measure for the domestic industries. The corollary, of course, was that it kept prices higher for consumers than would otherwise have been the case. Incidentally, it was probably the first example of a (partial) economic union without a corresponding political one, because the states of the Confederation were still technically independent; Bismarck saw to that little issue later in the century, of course.

So why talk about this now? Well, it comes up because of the Brexit debate. Now, I’m not arguing one side or the other of that debate here. What I am trying to point out is the duplicity of both sides. It is axiomatic that you cannot be a member of a customs union - or Zollverein, if you prefer the old word - and simultaneously conduct independent trading arrangements. What we are presented with, though, is a fudge from both ends of the political spectrum, claiming to be able to square the circle. This whole promise of unicorns started in the referendum campaign, and the lies (let’s use that word rather than the modish “fake news”) haven’t stopped. Right at the bottom of the barrel - at least, so far - is the fatuous, asinine pretence of “a” customs union, not “the” customs union. 

When are the political class in the United Kingdom going to begin to face the mess the referendum has created and stop posturing and start negotiating? Incidentally, I don’t like - and never have liked - the customs union; it’s a protectionist measure, which may be valid occasionally for short-term reasons, but ultimately protectionism leads to stagnation and inevitably more limited consumer choices. And yes, I do understand the problems that can be created by dumping; hence the potential short-term validity.



There will be no article next week; Lord Copper will be on a boat of the coast of Scotland, with undoubtedly inadequate internet connection.      

     

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