The threat of continuous war coupled with the economic poverty of post war Europe forced European state leaders to look at newer methods of increasing wealth and guaranteeing political stability over the continent. The result was the European Union, an economic block without barriers to trade and capital, dispelling the ethnocentricity of the past and replacing it with cooperation. However, the removal of protectionism within Europe was not smooth, with states having to dramatically alter their economic and political processes in order to benefit from the reforms and save their industries from the tidal wave of free trade. However, protectionism does still exist, albeit with other trading blocks. National preferences also exist, and affect how Europe negotiates trade agreements with other nations.
Protectionism grew as a result of centralised governmental authority eroding the freedom and profitability of international traders. This peak of governments’ cross border dominance was the sixteenth century use of mercantilism, the belief that a country’s wealth increases through acquiring as much gold as possible through high import tariffs and export subsidies. This helped to protect domestic trade from a mercantilist neighbouring country, although this would be reciprocated by other government’s retaliating through raising their import tariffs and subsidising their exporters so that their country could improve its level of trade. Although mercantilist practices have declined over the following centuries as a result of academic criticism and political events its ideas still lived on, with European states having a history of preferring to open up new markets across the world using military means to establish colonies, rather than trade with each other.
The most significant catalyst for the weakening of this protectionist attitude emerged from the First and Second World Wars. The years of devastation and bloodshed forced world leaders to re-examine their visions of how it was possible to increase economic wealth and guarantee economic stability. As a result politicians opened their doors to business and academics creating new, unprecedented economic, political and social models.
One of the most significant and obvious examples of this is the European Union. The Economic Coal and Steal Community in 1951, whereby France and Germany sharing their coal and steel resources in order to guarantee political and economic interdependence became a blueprint for future political and economic cooperation. This culminated in the Maastricht Treaty of 1993, creating the European Union, which removed all internal barriers to trade and free movement of capital. Europe has now become the greatest experiment into the possibilities of economic cooperation through its open markets and a model for other continents such as the Pacific region, which is making tentative steps to examine the possibilities of economic integration as a result of the evident benefits of increasing international business through one larger trade block.
However, this has not been without costs. Protectionism is one of the most valuable tools that a government can potentially employ. The removal of these economic aids revealed gaps in European members’ economic policies. For example, France had experienced successful post war growth as a result of its dirigiste economic model of planned investment in heavy industry in order to create ‘national champions’ that could carry “the banner of France into world markets,”.
However, following the gradual reduction of trade barriers after the Treaty of Rome in 1957 France was left “saddled with huge coal, steel, shipbuilding and automobile companies that were absorbing public funds but which had substantial overcapacity and could not produce as cheaply overseas.” A hangover of misallocation resulted in France not having enough medium sized and small companies to compete effectively enough with more dynamic European traders. The French model, which had been the guardian of traditional industry and the backbone of French social security was abandoned in 1983 by the Socialist Mitterrand Government, as “their policy was unsustainable economically” The political instabilities created as a result in economic shifts from removing protection may also help explain France’s reluctance to allow for the EU’s tariffs on agricultural goods to be reduced, as France considers its agriculture to be the rock of French culture.
The Member States of the EU share a common tariff to external countries. Although limiting autonomy of individual countries, such as the UK in its attempts to retain stronger trade links with its former colonies there are obvious benefits to a unified policy. The combined economic size of $12,918,581m makes it more effective at negotiating with foreign countries and achieving more acceptable conditions, albeit possibly at the expense of other nations.
As a trading block the EU is keen to maximise its interests. Although seeing the principle of free trade as important and worth promoting measures are in place with specific barriers to encourage FDI within the EU. For example, the import tariff for automobiles is sufficiently high to force American and Japanese car manufacturers, who would otherwise have a cost advantage to relocate many of their production facilities within the EU. This is because policy leaders consider that the benefits of maintaining a car manufacturing presence in Europe whether foreign or European owned outweigh the economic effects of higher costs and reduced supply for European consumers.
The problem for EU policymakers is how to work out when they should and when they shouldn’t use protective measures to save European industry. A contemporary problem is whether or not the EU should erect barriers to protect the European shoe making industry. European shoe manufacturers have had their profits eroded as a result of cheaper imports coming from Asia making it difficult to trade, with some companies struggling to break even. Some manufacturers have accused countries such as China of ‘dumping’ their goods on European markets through selling their goods below manufacturing costs in order to wipe out competition in the long run. This particularly affects the Southern European countries, where most of the factories are located.
However, as many have pointed out textiles are not a priority of China and it is highly unlikely that they would bother coordinating a strategy for such a mature market. The Danish Minister for Economic and Business Affairs highlighted the lack of real proof and highlighted how the domestic market was attempting to ‘capture’ EU regulators. He cited that with a 40% tariff on shoes the average cost of shoes would rise from €67 to €87, a 25% increase. He also felt that the fact that the European traders would gain €100m a year whereas European consumers would lose around €975m, a year as a result of higher shoe costs and consequentially it was not in Europe’s interests for there to be a tariff, despite the fact that this could result in a decline of shoemaking in the EU.
Even though Europe does not have trade barriers to encourage free trade and movement in capital it would be churlish to assume that protectionism is dead in Europe. Protection and national interests still exist but the scope has become narrower for policymakers. Government leaders can not influence their own protection barriers but countries such as France will still endeavour to put agriculture first and Southern European countries will still lobby for tariffs on shoes, despite knowing that it will be to the detriment of most Europeans. However, the absence of trade barriers has created an unprecedented period of peace in Europe, as countries are given more incentives to cooperate rather than compete with each other.
This report was written by Jonathan McHugh in April 2006
Financial Times, February 20, 2006
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