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Europe Faces the Customs Union

ISSUE:  Summer 1931

The Austro-German customs union project has two meanings which tend to become confused with each other. On the one hand it is an episode in the long-drawn-out duel between France and Germany; on the other hand it offers a pattern to which Europe may or may not wish to conform in developing its economic system.

Both French and German nationalists are chiefly interested in the political aspect of the proposal. The French see in it the threat of the Anschluss, the incorporation of Austria with Germany, or of its extension into the whole Danube territory to reconstruct a Mitteleuropa. The German nationalists see it as a gesture of independence toward the victor states, which may lead to revision of the treaties.

Europe has before it three other proposals of economic reorganization: the Economic Committee of the League is trying to secure a stabilization of tariffs, the Financial Committee is working on the problem of agricultural credits for Eastern Europe, and the proposal for an economic Pan-Europe is being worked up on the principle that each state will regulate imports or exports under some kind of a quota system. Along with the proposals relating to tariffs, credits, and quotas, it is now necessary to take into account the idea of the customs union. The economic significance of the Austro-German scheme must be measured by its relation to the other proposals which it offers to supplement or replace. What is there latent in the idea of a customs union, and how does it fit into the pattern of Europe’s unfolding institutional development?


In appraising the customs union of today the mind reaches back naturally to examine the customs union of a hundred years ago, created between 1829 and 1834 by Prussian statesmanship. It was the harbinger of a free trade movement which captured England in the ‘forties and France in the ‘sixties, and of which the greatest triumph was the Cobden treaty between England and France in 1860. It was in this period that the unconditional most favored nation clause became a customary addition to commercial treaties. It was in this period that the Declaration of Paris marked the high point of renunciation of belligerent rights against commerce in time of war. Free trade in Victorian politics became more than a commercial policy; it became an ethical system. As an ethical system it opposed itself to the idea of nationalist politics and war.

The historians have never been quite clear in their interpretation of the free trade movement of the mid-nineteenth century. On the one hand they have recognized its international implications, and on the other hand they have taught that it was an agency, of national unification. They have taught that Prussian leadership in the Zollverein prepared the way for Prussian leadership in the reconstruction of Germany, forgetting that in the critical war of 1866 Prussia’s Zollverein colleagues fought against her. They have taught that the railway age imposed upon the petty states of Germany and Italy a need for union, when the railway was in fact an indifferent instrument which could serve just as well to unite an Italian province to Austria as to join it to Piedmont. By looking at the tariff policies and doctrines of the mid-century through the glasses of the nationalist historians, we have become accustomed to think of customs union as the corollary or precursor of political union, when in fact it could more accurately be interpreted as the expression of the opposite principle.

The customs unions did not create unified national states; Germany and Italy were created by war, not by trade. The customs union, by. satisfying the requirements of trade without going the length of political union, made political union less needful than it would otherwise have been. The antagonism between the principles of nationalism and war on the one hand, and free trade on the other, was confirmed when the new nationalist states adopted protective tariff policies within a few years of their establishment.

The period of protective tariffs began in the ‘seventies and has continued down to the present time. In the first two decades of protectionism, tariff schedules were generally adopted in direct response to the pressure of agricultural or industrial interests, without much regard to the tariffs of other countries. Then came the era of bargaining tariffs. Schedules were boosted beyond the point which national interest demanded in order to have a trading margin to be used in securing concessions. The tariff treaties that became standard after this period were like inverted Cobden treaties; they were international agreements to maintain protective rates rather than to get away from protection. Two kinds of bargaining policies were followed. Some powers adopted double schedules, a maximum rate for imports from states which would make no concessions, and a minimum rate for imports from states which would contract favorable commercial treaties. France uses this method. It leaves in the hands of the government complete control over all rates at all times. The alternative method is to establish a conventional tariff schedule, which binds a government not to change a particular rate during the life of an agreement. European tariff systems were constructed on this basis prior to the war,

Wilson struck at this system in the third of his Fourteen Points, in which he made it an American war aim to demand “the removal, so far as possible, of all economic barriers and the establishment of an equality of trade conditions among all the nations consenting to the peace and associating themselves for its maintenance.” The idea in Wilson’s mind was not alone his democratic predilection for free trade but also his opposition to the schemes for a post-war boycott of Germany, which had been developing in Allied circles.

This point was elaborated in the memorandum which Lippmann and Cobb prepared for Colonel House at the time of the Anmistice negotiations:

The proposal applies only to those nations which accept the responsibilities of membership in the League of Nations. It means the destruction of all special commercial agreements, each nation putting the trade of every other nation in the League on the same basis, the most favored nation clause applying automatically to all members of the League of Nations.

Thus a nation . . . could not discriminate as between its partners in the League.

The only concrete result which emerged in the Peace Treaties from this point was the unilateral obligation imposed on the defeated powers to give most favored nation treatment to victors. In 1920 an Economic and Financial Commission of the League of Nations was created as the heir of the Supreme Economic Council which had administered such things as blockade and famine relief during the transition from war to peace. In 1927 the Economic Committee took up the thread of the free trade movement in the World Economic Conference of that year.

In the meantime the tariff practices of the European states had gone from bad to worse. Europe with its twenty-four states and its fifty thousand miles of customs frontiers was repeatedly advised to look across the Atlantic to admire the great republic whose vast area of unrestricted trade gave it a guarantee of perpetual prosperity. But the states of Europe obdurately continued their tariff policies, using the bargaining methods inherited from pre-war days, but proceeding under far greater difficulties because of the narrowness of their economic bases and the general uncertainty which overhung them. All the new states had to pass through their currency inflation troubles, and only in 1927 were they sufficiently stabilized economically to begin to plan in more than hand to mouth terms. Under the leadership of the Economic Committee of the League they recognized that their prosperity required that they should imitate the United States by, having a broad and unrestricted market. While they found it impracticable to consider reducing their tariffs, they at least entertained the suggestion that they should stop raising them. This proposal resulted in the Tariff Truce Conference of 1929, which began its sessions at the very time when the American Congress was beginning its wholesale upward revision of the American schedules, and ended in November, 1930, when it had been demonstrated to an incredulous world that the American economic colossus had feet of clay, and that even its continental trading area could not save it from industrial depression and misery.

In the meantime, it had appeared that none of the European countries were willing to freeze their schedules at the level then existing. Some of their rates were bargaining rates not intended to be permanent, others were experimental and intended to be transitory. As a substitute measure it was then suggested that the powers should refrain for a time from denouncing existing treaties. Only those tariffs already fixed by treaty would be frozen in place. This could be the starting point of stabilization, and the first step toward a truce and a general policy of reduction. An agreement in this sense was drafted in November, 1930, to go into effect in April, 1931, but failed of sufficient ratification. Upon the announcement of this failure, the German-Austrian customs union project was notified to the world.


Under the terms of this proposed treaty Germany and Austria undertake to adopt a common tariff and to abolish the customs line on their common frontier, and to share the revenue produced by the tariff levied on all goods entering the union from outside. It is exactly, the same arrangement as that established in the 1830’s, and in exactly the same way it is far from implying the assimilation of Austria by Germany. If it does result in annexation to Germany, this result will follow, not from the customs union itself, but from the nationalist sentiment which favors equally both customs union and Anschluss. To the extent that it tends toward political assimilation, the idea of customs union loses its significance as a general remedy for European ills. It leaves European economy exactly as it finds it except for the few million people of Austria who are directly affected.

The economic program for Europe which is inherent in the customs union idea is contained in that article of the project which invites the adherence of other states to the convention which Germany and Austria have signed. This article points toward the formation of a Danubian customs union. The Austro-German area is principally industrial, the lower Danubian countries chiefly agrarian. The farmers of Rumania, Bulgaria, Hungary, and Jugoslavia are in need of privileged markets where they, will not have to compete against Russian, American, and Argentine wheat growers. They have more to gain than Austria herself from a customs union with Germany, for Austria is uniting with a competitor, while all the lower Danube countries would be uniting with a customer. While economic interest would draw them toward such a union, political interest would restrain them, for they have organized their international relations on the basis of French hegemony. And the creation of such a Mitteleuropa would not only deal a death blow to French leadership, but would also put an end to any more general plans for European economic cooperation. France, for instance, could never enter it, not only for reasons of national sentiment, but also because such action would destroy the marvelous equilibrium of her economic system.


The chief alternative to the idea of customs union is the principle of controlled importation and exportation. Tariffs are only one of the ways in which countries can control the flow of goods. A method of limiting and controlling export and import of goods was worked out before the war in thirty or forty industries which organized international cartels. These cartels worked without government cooperation, or even against government opposition. Their object was to stabilize industry by restricting competition and preventing overproduction. They, would farm out export markets among a number of producing nations, and sometimes centralize all orders in a central sales agency.

The stress of war administration forced the governments into a similar effort to control production and to distribute quotas of goods among the different nations which required them. The Allies built up huge purchasing agencies which handled the interests of the consuming countries as the prewar cartels had handled the interests of the producing firms. In post-war days the principle of the cartel and of government control of export was made the subject of several experiments, notably the Coffee Valorization Plan in Brazil and the Stephenson Plan for controlling the rubber market. Both these schemes were piratical in nature, because they aimed at stabilization of profiteering prices. Another application of the principle occurred in the French and Luxemburg steel industry The Treaty of Versailles provided that a certain quota of steel from these regions should be allowed free exportation into Germany for five years, to give the industry a chance to accommodate itself to the separation from the German customs system. At the expiration of these five years the steel men of the three countries worked out among themselves a rationing agreement which virtually continued the right of the French and Luxemburg steel to enjoy a share of the German market. This private arrangement was then confirmed in a Franco-German commercial treaty. The most recent and the most extensive arrangement of this nature is the Chadbourne sugar control plan, under which seven sugar-exporting countries will aid in stabilizing market conditions by controlling the volume of exports on a quota basis. The United States and Canada have both been pressed by their farming population into efforts to stabilize agricultural prices by, undertaking the role of an exalted middleman, with the result that the decision to give or withhold wheat from the world market has become a matter of government policy. So far as present despatches indicate, Briand’s economic program for Pan-Europe will be in line with this economic trend. The industrial countries of Europe will offer to the agricultural countries a privileged market for a certain quota of food, in exchange for which the agricultural countries will receive a proportionate quota of manufactured goods. The quotas will be set at such a level that the new industries in eastern Europe will be able to survive the competition of the west, and the west-em farmer to hold his own against the eastern peasantry. This will involve a continuous intervention by the State in all economic affairs. It is a step that goes further from the doctrine of liberalism and laissez-faire than the protective tariff at its worst. Therefore the issue of Mitteleuropa versus Pan-Europe is not merely the issue of French versus German leadership, but also the issue of old-fashioned liberalism in economics as against modern state control.


From this standpoint the most significant quality of the Mitteleuropa customs union as a pattern for general European adoption is the element of political abdication which it contains. To create a great area of free trade over the territories of a number of independent states would be to leave the governments helpless in the presence of the great international corporations. A European customs union at its best would still differ from the American Union in that there would be no general government to control the great corporations operating in the area. The great modern super-corporation did not exist in the days when free trade was the pinnacle of enlightened statecraft. The free trade age did not have the problem of “rationalization” and control which the modern corporation and cartel seek to solve. In the ‘fifties and ‘sixties the limited liability company as a form of ownership had just begun to enter the industrial field; its potentialities were unknown. The sufficient object of all industrial enterprise was then production rather than discipline, progress rather than stabilization. The principle of the customs union is in contradiction with the modern trend because it is a step toward greater anarchy in production. It is based upon an analogy doubly false—an analogy with the productive conditions of Europe in the middle of the nineteenth century and with the political conditions of the United States today. Since the depression came to America, it has ceased to be possible to regard the principle of the customs union as a panacea for Europe’s economic ills. The need is rather for more enlightened cooperation of government and business in the field of planning. This is the road along which Briand seeks to go, while the Germans and Austrians are moving in the opposite direction.


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