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Block integration I: the West

Block integration I: the West. World Trade in 1945. The multilateral system of world trade had collapsed into blocs already bfore WW2, in addition there was a network of bilateral treaties

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Block integration I: the West

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  1. Block integration I: the West The University of Warwick

  2. World Trade in 1945 • The multilateral system of world trade had collapsed into blocs already bfore WW2, in addition there was a network of bilateral treaties • From 1940 onwards the German Reich started to replace its network of bilateral clearing treaties with a multilateral system (Deutsche Verrechnungskasse Berlin) • Aim was plundering with system: eg Germany accumulated 8.5 billion RM clearing debt with France The University of Warwick

  3. World Trade in 1945 • Already during war efforts to rebuild a world trading order: 44 states signed at end of 1944 the agreement of Bretton Woods for a new world monetary system (aim of stable exchange rates with some room for monetary policy and liberal multilateral trade system) • The US emerged as the dominant power after WW2 not only in terms of warfare, but also politically because • Europeans accumulated huge war debts with the US • Europeans were short of dollars and other foreign exchange and competitive export products to pay for necessary imports from the US; Germany as the pre 1929-main supplier of machinery etc. was unable to deliver The University of Warwick

  4. The beginnings of GATT • In 1947 the US proposed the creation of an International Trading Organisation (ITO) based on free trade and multilateralism, but the Europeans refused the terms due to their weak foreign trade position • Still, first steps towards liberalisation at Int. Trade conference at Havanna 1947, incl. several agreements with „mfn“ clauses • Some principles (incl. mfn) were fixed in a General Agreement on Tariffs and Trade (GATT) and agreed i 1948 by 23 states in a Protocol of Provisional Application The University of Warwick

  5. The beginnings of GATT • The GATT developed its own dynamics without the creation of an ITO (WTO founded in 1994) • GATT Office in Geneva • Principle of most favoured nation • Exception rules for free trade areas and balance of payment problems • 5 GATT conferences until 1962, increasing # of members • From 1963-67 (Kennedy round) discussion of separate products replaced by general tariff agreements, from 1973-80 (Tokyo) discussion about NTBs The University of Warwick

  6. Cold War and “Marshall-plan” • At Potsdam conference 1945 first clash over Germany-policy (organisation of allied control, deindustrialisation, Berlin) • Issue of how to fill the central European power vacuum: German neutrality or zones of influence? • After Japan‘s capitulation similar issues in East Asia • 1947 open conflict between USA and USSR: president Truman announces new strategy in 12 March 1947: „containment“ The University of Warwick

  7. Cold War and “Marshall-plan” • At the same time, economic development forces new strategy for reconstruction: • Europe in huge necessity of mineral resources (coal) and machinery • After 1945 USA as only supply source, but Europeans unable to pay (Dollar-Gap, weak export industries) • Problems sharpened by poor European harvest 1947 leading to additional food imports from US and first signs of capacity limits in the US •  US with double interest in Europe‘s and Germany‘s reconstruction The University of Warwick

  8. Cold War and “Marshall-plan” • George Kennan‘s double strategy: • Gain credit and support from Europe through quick aid in crucial domains of the economy to help the „containment“ of the USSR • Reconstruct the European division of labour to help a self-sustaining growth of Europe and limit the economic burden on the USA • Germany was key to both The University of Warwick

  9. Cold War and “Marshall-plan” Ad 1: Marshall-plan as confidence-creation • 5 June 1947 US secretary of state G. Marshall outlined at Harvard University a plan to reconstruct Europe (known as „Marshall-Plan“) • Moratorium on principles of multilateral trade for 4 years • Reconstruct infrastructure asap • Increase productivity, esp. in power supply • Rationalise industry and agriculture to increase competitiveness • Create sound foundations for monetary and fiscal stability • Implied deficits of European balance of payment financed by credits of World Bank and USA and by donations The University of Warwick

  10. Cold War and “Marshall-plan” • Marshall-Plan offered to all European states, visible part of „containment“ strategy • USSR refused and forced all states under her influence to refuse as well: 5 October 1947 foundation of Cominform as tool for common USSR led foreign policy • Presentation of a Molotov-plan for reconstruction of Eastern Europe • Special effect of Marshall-Plan in Germany as totally in contrast to Nazi-Propaganda at last days of war • Last doubts removed during the Berlin Blockade and airlift June 48-May 49 (278228 flights to Berlin to serve the western part of Berlin with 2.3 million tons of food, coal, textiles, etc.: replacement of the real bomber by the „raisin bomber“ in Germany‘s common memory) The University of Warwick

  11. Cold War and “Marshall-plan” • 16 European states accepted the planned signed the Paris convention (April 1947) to create the Organisation for European Economic Cooperation (OEEC) to design state-specific aid schemes • Both relative to other aid programmes and to the size of the European economies the Marshall-Plan was obviously no more than a limited start-up aid and designed to boost confidence, eg Germany: The University of Warwick

  12. Cold War and “Marshall-plan” Aid/ Recovery Programmes for Western Sectors of Germany to 1946-52, Million US$ Source: Berger und Ritschl (1994) The University of Warwick

  13. Cold War and “Marshall-plan” • Less the size of the programmes but the focus on „bottlenecks“ and the signal of it was important • Buchheim/ Borchardt (1991) show for German textile industry that 1948 only ERP-supplies to solve the critical bottleneck of cotton input • Moreover large funs from ERP reinvested in infrastructure, critical for the reconstruction of West-German stock of fixed capital: 1949: 21.8%, 1950: 14.5%, 1951: 7% (Baumgart 1961) •  did the Marshall-Plan “cause” Europe’s economic miracle? We come back to that The University of Warwick

  14. Cold War and “Marshall-plan” Ad 2: second aspect was creation of structures for self-sustaining growth • Germany with a twin role: only Germany could substitute US as source of high quality hard-coal and machinery (its former role in Europe) • US enforced quick reconstruction of Germanys industry and mining in private structures against French opposition; 1948 International Ruhr Authority with French influence as step towards the French, but incl. German representation • UK and US started to unify their occupation zones incl. Ruhr and created facts: Bizonal Law no. 75 announced re-privatisation of the Ruhr The University of Warwick

  15. Cold War and “Marshall-plan” • Next step towards reconstruction was creation of European Payments Union (EPU), September 1950 • US forced the creation of a multilateral clearing system that neglected any reparations wrt Germany, the latter being delegated to separate discussions • EPU collected every month all bilateral deficits and surpluses of members • Sum of positions cleared at Bank of International Settlements (BIZ) in an artificial currency (1:1 US$) t be paid at end of month in US$ or Gold • [Full convertibility of European currencies not in place before 1958] The University of Warwick

  16. Cold War and “Marshall-plan” • Participation of Germany induced others to be involved to gain access to German exports and Import markets • Solution to a massive coordination problem: Germany at brink of default due to huge war debt, creditworthiness after WW2 =zero: how to insure trade with such a country? • EPU shared that risk over all European trading partners and he US The University of Warwick

  17. (West-)European Integration • Policy change in France on this background •  French Minister of Foreign Affairs R. Schumann proposed 9 May 1950 creation of a European Market for Coal and Steel • Joint with some prior agreements (1944 Benelux Tariff Union between Belgium, NL, Lux, 1948 Francital) this was crucial step towards Integration The University of Warwick

  18. (West-)European Integration • 1951 foundation of the European Coal and Steel Community in Paris (to start July 1952), between France, Benelux, Italy and West-Germany • A High Authority shall foster production and supply to a fixed price without discrimination • Part of it were massive subsidies to he mining industry based on the Tinbergen report 1953 that predicted huge increase in demand for coal due to costs for nuclear energy and high costs of gas and oil; 1950s and 60s changed all this, share of coal in energy supply of ECSC members fell from 74% (1950) to 31.3% (1967) The University of Warwick

  19. (West-)European Integration • Limited economic but huge political success • 27 May 1952 members of ECSC sign Plan Pleven to create a European Defence Community, rejected by French parliament in 1954 • As substitute from 1955 plans to intensify European economic cooperation beyond OEEC (Plan Beyen) • Spaak report 1956 proposed creation of a common market in three steps: tariff union, harmonised infrastructure and agricultural policy and elimination of NTBs, free market for capital, labour, services The University of Warwick

  20. (West-)European Integration • UK invited to join, but refused to do so in 1955 due to agriculture issues and opposition against economic integration beyond a tariff union • 25 March 1957 signing of treaties of Rome to create the European Community: France, Italy, West-Germany, Belgium, Luxemburg, Netherlands (EC of Six, EC6) • 4 January creation of European Free Trade Agreement EFTA (UK, Norway, Sweden, Denmark, CH, Portugal), 1965 enacted, UK joined EC in 1981 The University of Warwick

  21. Quantitative Development of European Trade • What were the effects of all this on economic integration? • Two kinds of evidence: • Share of Intra-Bloc trade in total? • What effects on bilateral trade flows? The University of Warwick

  22. Quantitative Development of European Trade Intra-bloc trade and out-of bloc trade (% shares in total) Bayoumi/ Eichengreen (1995) The University of Warwick

  23. Quantitative Development of European Trade • EC6 massive, EFTA limited • EC6 out-of-bloc suffers • What effects of supply, demand, exchange rates...? The University of Warwick

  24. Quantitative Development of European Trade •  estimate institutional effects on bilateral flows • Gravity-Model: • ln(Tradeijt) = c0 + c1*ln(Yit) + c2*ln(Yjt) + c3*ln(distij) +…+ +c4*EC6ijt +c5*EFTAijt +(…)+ c6*WK with US$ + errorijt • Data: bilateral trade between 21 developed states 1953-1992 The University of Warwick

  25. Quantitative Development of European Trade Trade Creation and Trade Diversion Bayoumi/ Eichengreen (1995) The University of Warwick

  26. Quantitative Development of European Trade • EC and EFTA visible until 1970s • EC and EFTA out of bloc from 1959-61 massive below average: trade diversion! • Evidence on large trade creation in 1960s and some trade diversion • Really? Maybe this just reflects the reconstruction of pre-great-depression Europe! • Can we predict the formation of the EC6, EC15 and the Euro from pattern of 1928 trade integration The University of Warwick

  27. Ritschl und Wolf (2005) The University of Warwick

  28. Quantitative Development of European Trade • Yes, we can! 1928 helps to predict post-war • Especially countries that in 1928 were integrated with the UK enter Euro with low probability... The University of Warwick

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