Customs Unions - a case of internal protectionism as well as external

Types of customs unions

Customs unions were developed  by French economic thought in the 17th century.

The goal was to create an efficient state to drive more funds in the state's  offers: accordingly, the government of Louis XI set up to a common set of laws and trading standards throughout France to encourage trade and to reduce the costs of doing trade across France, while imposing a common tariff on other nations. This in a nutshell is what a customs union is: free trade within the borders, but controlled trade without.

In the case of France in the 17th and 18th sentries and potentially as a result of its national protectionism, it's not surprising that France was often at war during this time: the economic system of Louis's finance minister, Jean Colbert, was designed to funnel funds into the government's coffers for territorial expansion. Even without an aggressive external policy, the reason for forging free trade within the nation state was to empower the centralisation of government and in turn the regulation of internal trade. For, after all, if the state was to become politically powerful, the energy of its people needed directing; unfortunately for the French traders, Colbert and his ministers did not understand that controlling trade imposed higher costs on producers, which in turn effected local corruption as well as the hindering of competition; although Colber'ts government got rid of taxes and tariffs between the towns, they introduced such complex regulations that the cost of doing business were raised substantially. Imagine the telephone directory that they manufacture would have to consult in order to produce something simple such as vases or trousers.

Unsurprisingly, the French found that the sovereign could be increasingly greedy and in turn the direction and taxation of people's commerical lives intensified to fund a growing state and it increasingly expensive Court and wars.

Economic growth as we now call it was not to be encouraged for its own sake or for the enrichment of the population, but for the empowerment of the elites. The poor were expected to remain poor. The momentum created was not to end well: the French populace erupted in revolt in 1789 and the Ancien Regime was overthrown. 

Meanwhile, a similarly established country with just as aggressive external policy as France followed a different ecomomic path. Freeing the commercial classes to get on with producing wealth and setting moderate taxation (the political classes did have a bloody civil war in the 17th century to reflect on), the British effected an agrarian and then an industrial revolution producing enormous wealth and becoming the "workshop of the world." Generally speaking, the British pursued a free trade policy with other nations, as it's businessman realised that trade could be much more profitable when they had access to cheaper resources and not to be hindered by central direction and regulation.

The US and later the EU ("a United States of Europe") customs unions were built on French lines as it were. Initially, in the US the driving motive was not to empower elites: the American constitutionalists did their best to avoid the formation of a political and commercial elite, retaining as it did in the early 19th century a healthy scepticism of political power. The EU on the other hand, was (is) more obviously a project for an elite, albeit a technocrat elite who would be empowered as unelected Commissioners to direct the development of the European project and to steer the member states away from protectionism and the economic causes of war. In both countries regulations were developed to control the internal trade and thereby reduce internal competition, as well as create indirect barriers against foreign competition.

For a long time, the United States avoided such over regulation of companies, although the scene was set not long got after the war of independence by commercial interests quietly seeking to thwart the competition or using legal procedures to impose restraints (e.g., the American Medical Association's attacks on chiropractors and other altnernive health providers in the 1930s). Nonetheless, even in the 1950s, Americans were relatively free to set up and to expand the businesses as they saw fit as long as they did not take on such established professions and the medical doctors; but gradually the French model - to give it a word - took over so today Americans are inundated with regulations, just as Europeans are.

Cracks in both systems were also quickly evident in these projects. Political elites formed, the technocrats and officials of both systems entrenched themselves economically, legally, and bureaucratically. American producers now create legal impediments to domestic and foreign competition (from intellectual patents to basic tariffs), which they still do, and European member states retained licence requirements to subtly inihibit free competition within the Union. Pork barreling as the Americans call entrenched political interests looking after themselves became rife, and has grown to such an extent that serious economic problems currently hinder economic growth which has become anaemic in recent years.

So customs unions do not necessarily create free trade within the boundaries, especially if the French-EU model is followed rather than the British model. (No nationalism is implied in these terms - they're just useful as they reflect the different paths the French and the British took in the 18th century, which still has ramifications today.)

All nation states have internal weaknesses and have to deal with government waste or corruption. But the economic interests of populations can be seriously damaged by internal and external protectionism.

External protectionism

When barriers are raised against trading partners, a few producers or service providers may profit but at the expense of everyone else who have to put up with higher import costs. And what is often not considered, exporters also suffer from external protectionism, because if a nation reduces its trade with the rest of the world (economics speak for anyone else), the the rest of the world necessarily buys less from it. And jobs are lost in hitherto profitable industries and gradually shift towards those that are the product of political subsidy, support, or protection, which in turn creates more of an internal impetus towards more political lobbying and further protection and subsisdy to support increasingly inefficient industries.

So what exactly are free deals, if a nation's or customs union's motive panders to domestic political and bureaucratic interests?

It is an interesting question because what is often touted as a free trade deal is rarely as free as it appears. The major free trade deals are often more akin to an expansion of the customs union French style - a reaching out of the customs union's bureaucracy to the newly admitted trading partners. "The devil is in the detail", a lawyer will remind us, and many alleged free trade deals create not genuine free trade as that which occurs between two local towns, for instance, in which the population are free to trade and sell their wares, energy and time with each other without impediment; instead, they echo the orignal Colbertist project of empowering political elites and their officials.

In the world following the Second World War, the shift to globalisation and free, unfettered free trade has generally been not for the sake of national poltical elites but for a growing international elite. There has been - under the name of free trade - a growing internationalist project designed to expand the size of political intervention within and across borders. Often it is the symptoms of this that anti-globalization protesters unwittingly rail.

The 'liberal' paradigm is to form international political elites whose power to effect monetary and fiscal policy transcends borders. It is already in place in many respects, for the IMF and the World Bank as well as the customs union of the EU are already effective in controlling trade, finance, investment, as well as the migration of peoples around the world. Their plans are to intensify that control through the use of international monetary regulation, disguised as a control on the flow of criminal funds, as well as the implementation of a common tax policy across nation states. Colbert would have been impressed by the ambition of the new international liberal elite, for they seek aggrandisement using the name of freedom.

Accordingly, we have two kinds of customs union. One that seeks to control internal trade as much as it controls external trade by driving the centralisation of government and the banner of standardisation of measurements and internal taxes, versus one that permits unfettered, unregulated trade between its peoples but retains a common tariff against other countries. It is in this context, that bilateral free trade agreements may be more the real deal for free trade, then the subtle expansionism and statism but is often behind customs unions and their so-called free trade deals.

Dr Alexander Moseley, editor, The Economics Circle (online Economics Magazine for students and the interested: CLICK ON THE IMAGE BELOW FOR ITUNES APP, ALSO AVAILABLE ON ANDROID)