International Order and Economic Integration

EPILOGUE EPILOGUE – EUROPEAN FREE TRADE – THE GREAT DIVIDE1

The common market and the free trade area are the latest methods by which the goal of European economic integration is being sought. One or the other of them has captured the support of most of the champions of a European economic order because it has become widely believed that the possibilities for integration offered by the Organization for European Economic Co-operation and the European Payments Union are now exhausted.

The belief in new devices for integration extends also, of course, to Euratom, which was set up with the common market. Euratom has attracted much less attention than it should have done, which is perhaps to its advantage. For it is doubtful whether it could survive any searching analysis. Weighty evidence that it is necessary has neither been asked for nor given. It has been launched behind a cloud of vague ideas of a ‘new industrial revolution’, reminiscent of the technocracy of the 1930s, and if there is a core of fact within these ideas it is largely inaccessible. Here it is not proposed to give Euratom the examination which it merits. We shall merely note that it shares the principle of a supra-national organization with the common market and the European Coal and Steel Community. While the common market is already under way the career of the plan for a free trade area has been chequered. Those who from the beginning have spied danger in the new approach to European unity are seeing their fears confirmed. For the frightening prospect now looms forth that if the common market is not capped by the free trade area it will disintegrate Europe. What was meant to be mortar may prove to be dynamite.

If Europe now faces a crisis it is because confusion surrounds the concept of economic integration. In its ten fruitful years the OEEC has gone far to unify Europe, and the common market is envisaged as a great new stride along the same route. It is not. Its path, which was opened up by the Coal and Steel Community, is very different from that of the OEEC, and the two cannot for long be followed together 2).

The true task of integration is in fact re-integration. It is to restore the Europe of free exchanges and multilateralism, in which the only obstacles to trade were customs duties, and these of moderate proportions. Such duties, albeit artificially produced, were comparable to the costs of transport between countries, and did not seriously hinder the free interchange of goods and money which is the mark of integration. It was only in the minds of those who did not see that the market was the great economic integrator and who thought that economic units must be coterminous with political units, that this was not an integrated Europe. The market was not thought of as a specifically European economic integrator, since it integrated the European countries with the rest of the world also; but European integration does not require European exclusiveness.

THE COLLECTIVIST CONTRADICTION

The European economy was fragmented, mainly after 1931, by exchange controls and quantitative trading restrictions; and these devices, which became so popular and seemed so new, were the result of the spread of the belief in policies of inflation and economic planning, which in turn they strengthened. As national collectivism was thus the cause of disintegration, the task of re-integration was to remove it. But this could not be easy or pleasant; first, because it required widespread, and now deep-rooted, notions to be abandoned, and secondly, because a tempting alternative to the removal of the original cause of disintegration has appeared to be available. This is the policy of supra-national collectivism.

However, a scheme for a European collectivist order must have grave disadvantages. First, if it were practicable, it would create a closed bloc, different only in size from its former national blocs. External controls, internal planning, and inflation, which go hand in hand under collectivism, would continue to do so, though on a larger stage; and thus integration would proceed without performing the task of liberation for which it is needed. Secondly, it would not in fact be practicable. For European economic planning requires a strong centralized European government; and even the most fervent planners of the new Europe seek no more, and know that no more is feasible, than a loose political federation.

Hence every step along the path of European collectivism or dirigisme subjects our continent to rising political stresses and strains. It has not been possible to extend the Coal-Steel Community beyond the Six, and the chances are faint that the common market will show any greater power to spread. Here is the dilemma of the Coal-Steel/common market method of integrating Europe. It requires a supra-national political order which, if it is combined with economic planning, most of Europe will not submit to. As economic planning is of its essence, it therefore cannot integrate the whole of Europe.

We must now, however, come to a dilemma of the opposite, or liberal, method of integration. If the European economy was disintegrated by national collectivism, it was as part of the disintegration of the world economy. Why then is anything necessary beyond the abandonment by the individual European nations of their collectivist practices? What need is there for, and what relevance is there in, a specifically European movement towards freedom? Why not leave it to GATT, the General Agreement on Tariffs and Trade? Or, if GATT is insufficiently effective, why not strengthen it? Clearly there is a conflict between liberal principles and regionalism, for regionalism does not make sense unless it creates some kind of preferential arrangement.

This conflict arises from the needs of the strategy of economic liberation. Unfortunately the attempt to dislodge the hold of collectivism from within each country has in general not succeeded. Economic planning, the welfare state, full employment, cheap money, and the like are fountains of extraordinarily seductive slogans, and the frontal attack on them, in favour of the liberation of external trade and exchange, is heavily handicapped. As liberation can plausibly be made to appear to be a way of doing the foreigner a favour, few people will be enthusiastic about it without international agreements and institutions that will produce, or promise, reciprocity. Hence regionalism, at least as a first step, is unavoidable. In fact we know that regionalism, in the form of the OEEC and the EPU, has been successful. It has loosened the grip of economic nationalism in Europe as probably nothing else could have done; and in the process it has done no harm, and much good, to the rest of the world.

OPEN CLUB OR RESTRICTIVE BLOC?

The test of regionalism as a means of integration by liberation is whether it is of the ‘open’ or ‘closed’ character. A regional arrangement of an open kind starts in a limited area but is capable of, and indeed naturally tends to produce, extension to the rest of the world. A closed arrangement is one which is, at least in practice if not in theory, incapable of extension, and naturally tends to raise barriers between its region and the rest of the world. The OEEC and the EPU clearly pass this test. They can move, when it is desired, from a preferential to a general non-discriminatory system. Thus there is no reason why they should not be gradually extended to the dollar area, and in practice, through the mechanism of the exchange markets and commodity markets, dollar transactions have been coming within their ambit for some time. And the EPU could be gradually transformed into a system of free convertibility by, for example, increasing the amount of debit balances payable in gold. These are not mere theoretical possibilities. They comprise part of a practical policy, and if achieved they would make the strategy of European integration conform once again to the requirements of true internationalism.

Contrast this with the pattern of the ‘closed bloc’. The Coal-Steel Community may be taken as the best-tried modern example. In theory it does leave the door open for further countries to join, but in practice, as we have already suggested, the principle of supra-national controlling power was bound to keep the door closed. And furthermore, the closer the integration achieved by the Community, with its highly complicated structure, the more difficult and unpleasant would be the adjustments required for any extension of membership. It is for these reasons that the OEEC has been able to comprehend the whole of non-communist Europe while the Coal-Steel Community has had to limit itself to six countries. But the fundamental character of the difference between the open and the closed system has not yet been fully appreciated – as may be seen from the fact that the architects of the common market seem to have assumed that they can continue to make use of EPU and enjoy its benefits. Only recently, and to their surprise, has the possibility presented itself to them that their project may destroy both OEEC and EPU.

A major reason why it has been possible to push these contradictions of policy out of the field of debate is the expectation that at least within the common market the benefits of free trade will be reaped. Here the champion of the common market seems to borrow the liberal’s clothes. In fact the expectation is hardly well-founded. First, there are the hazards of the long transitional period. Secondly, and more important, the final result in terms of economic benefits will depend far less upon the freedom of trade within the Six than upon the degree of inflation, dirigisme, and external protectionism practised by them. Thirdly, freedom of trade within a large bloc that is under the pressure of uniformity has a feature that is too seldom mistrusted. Here free trade is confused with the ideal of mass-production, which is too often lauded without qualification as the source of American success. In fact the case of Switzerland, among others, shows that high prosperity and the giant firm or plant are not necessarily inter-linked. Of course free trade among nations must produce some geographical concentration of production, but that is not the same thing as the concentration of enterprises3). Free trade will tend to weed out inefficient enterprises, large or small.

This last point enables us to place in perspective some of the complaints that are being made about France. The spirit with which France approaches the common market differs from that of the others, apart from Italy, because it is a spirit of anxious defence rather than cheerful confidence in the expansionist forces of unrestricted international competition. This arises from the fear that France may fall victim to a process of European concentration which would destroy the still un-American character of the French economy without conspicuously raising productivity. The French are not so wrong about this as their critics believe. Where the French are really wrong is in joining the common market despite these anxieties, without relieving their economy from its dangerous and long-established inflationary pressures, and indeed hoping that the common market will free them from the need to do so. In joining in this spirit they unavoidably become hostile to the free trade area.

This brings us to the nub of the problem facing the common market. There is a line running right across Europe which divides it into two groups of countries, and this line splits the common market itself. On the one side are the few countries that, by the exercise of monetary controls and by reliance on market forces, have achieved equilibrium with the rest of the world and thus a de facto convertible currency; on the other side are those suffering chronic difficulties in their external payments. If the second group followed the example of the first, the problem of European economic integration would be largely solved. But for this we do not need a common market; and without it the common market will leave Europe disintegrated.

But will not the association of countries from the two groups have a beneficial influence? Unfortunately the trend will be the other way. Market forces and monetary discipline are much harder to make popular than ‘welfare’ policies and inflation, and the countries pursuing the latter will infect those of the former. We may realize too late that, where they exist, the market economy and monetary discipline should not have been sacrificed on the altar of ‘Europe’.

‘HARMONIZATION’ TO INFLATION

Thus integration will tend to settle at the lowest degree within the Six of economic freedom, monetary discipline and restraint in social policies. This tendency expresses itself in the demand for ‘harmonization’ of labour costs, characteristically put forward by the country with the weakest balance of payments. Of course, ‘harmonization’ means the levelling upwards, not downwards, of costs, and is as grotesquely incompatible with the requirements of free trade as the familiar demand by American protectionists for duties to balance the difference between the standards of living of America and the countries supplying her. Trade does not require equality of the costs of factors of production; in some countries labour cost may be high, in others capital cost, or some other cost. In fact it is free trade that tends to reduce the differences between factor costs, but the trade must come first. If factor costs are first ‘harmonized’ the trade cannot take place.

Now the high French labour costs (at current rates of exchange) are not an expression of high productivity. They have been pushed up by political pressure so far beyond the rise in productivity that they have become the mainspring of inflation. And the crises in the balance of payments and losses of reserves of gold and foreign exchange have not been stemmed even by new import restrictions, export subsidies or the devaluation of the franc. Thus the demand for ‘harmonization’ becomes a demand that the French economy should be restored to equilibrium not by monetary discipline and the proper adjustment of rates of exchange, but by inducing other countries to fall into line with French costs. The ‘harmonization of social costs’ comes to mean the ‘harmonization of inflationary pressure’.

What must be understood is that, both in the common market and the free trade area, it is impossible to combine more than two of the following three things: free trade, fixed rates of exchange, and uncoordinated monetary policies. One of them must be sacrificed.

First, the sacrifice might be free trade, a member country falling out one line being allowed to defend its balance of payments by what the Rome Treaty euphemistically calls ‘mesures de sauvegarde nécessaire’. It is interesting that for the first time in the history of customs unions the possibility of restricting trade in order to regulate the balance of payments is not regarded as a ‘dolus eventualis’ but is solemnly incorporated in the treaty of union. But it must be presumed that trade restrictions cannot be the primary instrument of adjustment to external fluctuations.

RATHER A MONARCHY . . .

Secondly, the sacrifice might be fixed rates of exchange. Now no doubt some current rates are wrong and need adjustment; and no doubt also there is something to be said for floating rates. Still this is hardly a practicable solution. I have elsewhere claimed that Switzerland would rather become a monarchy than renounce the stability of its franc exchange rate; and this is only an extreme formulation of a point of view dominant in all Europe. We have recently seen that when devaluation is necessary in France it is extremely difficult to get because it threatens the prestige of the Government; while when revaluation is desirable in Germany it is met by fierce and successful opposition from industrial and trading interests.

Thus the only reasonable choice is the sacrifice of entirely independent and unharmonized monetary policies. Co-ordination of monetary discipline must be agreed upon. But this immediately raises the question of the degree of discipline that it is desirable and possible to reach. We can easily say what is desirable. It is such a degree of discipline for all as has already been achieved in Switzerland and Germany; it can be defined as the measure of monetary control that would produce equilibrium with the freely convertible currencies of the world and thus make European currencies fully convertible. But what hope is there of achieving this? We have already suggested that the countries of ‘full employment before all else’, of inflation, and of advanced ‘welfare’ policies are much more likely to draw the others their way than to be drawn away from it by them. Thus would the sick contaminate the sound. This is a problem for both the free trade area and the common market. But the free trade area has this advantage: if a member country has the will to resist, it is much less likely to be dragged down to the lowest common level of monetary discipline than a country in the common market.

Now let us consider the rift between the Six and the rest of the world that will be caused by the adoption of the common outside tariff. There are three main reasons why the rift will become wide and deep. First, although the Rome Treaty requires the common tariff to be the arithmetic average of the four levels of France, Germany, Italy and Benelux, there will in fact be strong pressure, as interests ensconce themselves behind the new tariff wall, to raise it ultimately above the average. In any case, averaging hardly helps outsiders, even where it brings down, say, the French or Italian tariff; for they will have to compete with duty-free goods of Germany and Benelux.

HOW PROTECTION MAY EXTEND

Secondly, the greater the diversity of the productive structures of the countries forming the union, the more likely is it that the total protectionist pressure will rise. For producer interests which now exist solely in one of the Six will demand protection in all of the Six. In this way, the extension of the tariff area may have perverse effects4). The economies of the Six may not be judged to be conspicuously heterogeneous, it is true, but they have been made artificially more heterogeneous by the inclusion of the overseas territories, so that even tropical products must enter into the account. Thus revenue duties such as those on coffee and bananas, which exist in a country like Germany, will now become protective duties for all. In the case of some important raw materials most of the Six will find that they have erected barriers, and hence cost-burdens, that are new; and this immediately makes the common market an awkward bedfellow for the free trade area. For the countries of the rest of the free trade area can hardly be expected to burden themselves with the common market level of tariffs on raw materials5). Thus the price of the integration of the Six becomes less integration vis-à-vis the rest of the world.

Thirdly, there will be the effect of the period of transition. The line of least resistance will almost certainly be to tackle those duties first which affect producers outside the union; those which affect competition within it will be low on the list for change. It will be an easy concession to ‘Europe’ to reduce the partners’ mutual duty on oranges. The Italian producers could not want anything better than that the common market should remove the duty on their oranges and maintain the duty for competitors outside the union. But the Italian car industry, which is now protected to a degree which almost gives it a domestic monopoly, is likely to be given the benefit of maximum permissible delay at each stage of tariff reduction. These tendencies would mean not only that the ‘distorting’ tariff reductions will take precedence over those that on balance may liberate trade and increase competition, but also that the processes of the transitional period may be particularly provocative and disturbing to the world economy.

The common market and the free trade area alike can improve the use of resources and raise productivity only to the extent that the removal of tariffs hurts producers inside, not outside, the union. To this extent, the discrimination inherent in the reductions in intra-regional tariffs will be less provocative to the outsiders. The longer is the transition during which careful consideration is given to producers within the union, the more will the de-merits outweigh the merits. But a gradual process in the reduction of tariffs is inevitable in any regional scheme; the road to union must pass through a swampy belt of half-measures, delayed action, exemptions, hardship clauses and distorting preferences.

Here again is the dilemma of any form of regionalism compared with either a universal or a unilateral reduction of tariffs. Ideally a regional system requires speedy, energetic and drastic steps, but in practice it cannot get them. In contrast a reduction of tariffs generally applied can proceed gradually without producing trade dislocations and distortions. However, for reasons set out above, the distortions of the common market are likely to be much more enduring or harmful than those of the free trade area: for they will be aggravated by the effects of its supra-national economic planning. Thus, for example, if the European Investment Bank really performs the task of controlling investment in the Six that is allotted to it, the common market will see to it that errors in the planning of capital uses will not become exposed to view and to test by free competition from abroad.

We see now that in taking the name ‘Europe’, the common market and its institutions (the European Economic Community, European Investment Bank, etc) usurp the name. Their discriminatory and disintegrating effect is now becoming more and more clear. At first the area of integration was to become that of the whole OEEC. But when the Outer Six took the Inner Six at their word and proposed the free trade area, the Inner Six became shy. More and more is heard about the difficulties of the free trade area. If these difficulties are as great as they are said to be, they confirm the rashness with which the common market has been rushed into being. Now we are told that if the ‘outside countries’ cannot join the common market, they must adjust themselves to the disintegration of Europe.

All this has happened because the architects of the common market were in such a hurry that they failed to realize that the Treaty of Rome would be a provocation to the other OEEC countries and would shake the structure of the Europe which had been pieced together by OEEC. If so thoughtful a statesman as M. Petitpierre, who directs the foreign policy of a country so prudent as Switzerland, has thought fit to declare in the Swiss Parliament that the discrimination of the common market would threaten the foundations of the EPU, the true friends of Europe must sit up and take notice. As M. Petitpierre went on to say, a country like Switzerland, with which the Six may have a negative balance of payments, cannot be expected to continue to extend credits, in lieu of payments in gold, in order to cushion countries that discriminate against Swiss exports while they enjoy the free opportunities offered by Switzerland for their exports. Such discrimination not only would be contrary to the spirit of OEEC and EPU, but also is forbidden by the treaties relating to them. The Austrian Government has sounded a similar warning, and, of course, the British position is known to be on similar lines.

If Europe has to choose between the common market without the free trade area and the state of affairs existing before either was mooted, there can be little doubt that the latter is to be preferred. If there can be no free trade area then let it be recognized that the path chosen by the Rome Treaty has been a mistake. We could then press forward with greater energy for the integration of Europe along the OEEC path. Such a renunciation would have to be called for in the name of European integration, of which the most vocal supporters have been the architects of the common market. This would offer the finest proof of their ‘Europeanship’. On the other hand, it is too early to write off the free trade area, and it is still possible for the common market countries to show their true ‘Europeanship’ by making sure that the common market is capped by the free trade area. But the free trade area must genuinely befit its name. The temptation to bridge the gap by compromises on fundamentals may be just as dangerous as the complete rejection of the project. In this connection the proposals by the industrial federations of the Outer Six countries are well conceived and reasonable. They ought not to be the subject of compromise.

Obviously we cannot close our eyes to the danger that the common market Six will continue on their course regardless of the effect on Europe. But even if we make the most favourable assumption and proceed on the basis that the immensely difficult task is achieved of fusing the common market into a free trade area worthy of the name, problems will still face us. The list is headed by the problem of monetary equilibrium and the national balances of payments, in short the problem to which a solution was found before such words as ‘integration’, ‘harmonization’, ‘European this and that’ became common currency.

 

NOTES

6. (p. 259) Economic Integration:

See the author’s ‘Integration und Desintegration der internationalen Wirtschaft’ (Wirtschaftsfragen der freien Welt, Frankfurt a. M., 1957).

7. (p. 263) Concentration of production:

‘There are few industries, even where large-scale production is common, in which there are not plants of moderate size which are as efficient, or nearly as efficient, measured in unit-costs, as the giant plants; and there are few giant firms which do not maintain some of their plants, presumably at a profit, on a moderate scale’. – J. VINER, ‘The Customs Union Issue’, New York, 1950, p. 46.

8. (p. 266) The tariff area:

The theory of customs unions, in its modern form, demonstrates that the less alike are the economies of the member-countries, and hence the less is the competition between them, the less will be the amount of trade freed by a union, and the greater the danger of diversion of trade from lower-cost producers outside the union. It is true that the greater the geographical extent of the customs union, the more will trade within it be freed; but if this extent increases heterogeneity it will tend to raise the ring-fence, and the net effect on trade may be harmful.

9. (p. 266) Tariffs:

It is such a privilege to have low tariffs! The advice given on February 12, 1958, to the French Government by the Conseil Economique (intended as the coup de grâce of the free trade area) was: ‘The absence of a common external tariff, and the inequality of terms of supply of war materials, especially of certain overseas products, set up a risk that there will be a diversion of trade to the benefit of those foreign countries having a weak customs protection’.

10 Originally published in The Banker, September 1958. See preface.

• 1* Originally published in The Banker, September 1958. See preface.
• 2. (p. 25) The Sociology of War:
• 3. (p. 27) War of Conflict and War of Aggression:
• 4. (p. 31) The inadmissable over-simplification of the peace problem:
• 5. (p. 57) Communist Imperialism:
• 6That the various factors are interwoven with extraordinary intricacy becomes particularly evident in the dramatic catastrophe of international interrelations which we call war). One of the moral perversities with which our age is afflicted was to deny at times the supremely catastrophic character of war, until two world wars brought disillusionment – let us hope for ever. For centuries the time-honoured belief existed that war was, as a rule, one of the incomprehensible evils of the world system, which – like the other Horsemen of the Apocalypse – Pestilence, Hunger and Death – had to be borne with resignation. Pacifism, in the sense of a mass movement directed towards the abolition of war, only became possible after the beginning of the modern age, when war, like all other things alleged to be the Will of God, came to be regarded in the light of critical and ameliorative reason, and, together with other social institutions, as a work of man which it would be quite possible to alter. Thus instead of being a subject of theology, war became a subject of sociology. Has it in this way become entirely comprehensible? To be honest we must admit that we are still very far from understanding it. Although men have at all times pondered over the phenomenon of war, and although recent generations especially have amassed a gigantic literature on the sociology of war, all that progress adds up to is that we possess a fairly complete list of the possible causes of war and that we realize the extraordinary intricacy which links these causes and which excludes any monistic theory of war sociology. Only a separate and comprehensive volume could do justice to the epistemology which results.
• 7In order to understand in detail what an international peace based on justice must accomplish, the various categories of war must be distinguished. Above all a difference must be made between two types of war, the importance of which is not lessened by the fact that they have often been combined with each other in the course of history and that there are borderline cases in which it is not easy to say whether the one or the other type predominates. A war may arise either through a conflict over concrete claims, which may be compared with a case under civil law (war of conflict), or through an act of violence which corresponds to a breach of the peace under criminal law (war of aggression) ). Whereas individual legal disputes arising from contentions of personal honour or material claims are finally settled by judicial decision, international conflicts of this kind may easily lead to war, as long as a decision by force of arms, which corresponds to the ordeal of the Middle Ages, is not abolished through obligatory international legal procedure, and before this is the case we shall continue to regard war rather as a tragic chain of events than as a vicious action. From their very nature such wars of conflict make it difficult to clarify the question of guilt, provided one of the warring parties – as is however often enough the case – does not misuse the conflict as an excuse for a war of aggression, or does not oppose the readiness of the antagonist to come to an understanding with inexcusable intransigence. This last applies on the whole to the case of the first world war, whereas we should not hesitate to characterize the second in its origin and in all its phases purely as a war of aggression, after it had already been preceded by the wars of aggression in China and Abyssinia.
• 8Is not then the solution of the war problem in reality very simple and only dependent upon the firm determination of the governments and the peoples? If this were our opinion we should be contradicting ourselves, since earlier on we termed just such thinking ‘internationalism’ and warned our readers against it. In actual fact this contradiction is only an apparent one. To explain it we should consider that the problem can be regarded from various angles. In formulating the solution of the war problem so sharply and smoothly above, we were regarding it from the juridical angle. Here in fact everything appears much simpler than it actually is. To be content with such considerations is to lapse into that monistic way of thinking which may be termed legalism and which is no better than economism or any other one-sided outlook. In indicating the legal solution the question has still not been answered as to the conditions under which the peoples and governments would be prepared to accept it firmly and undeviatingly. This question however brings us back to the higher level of the sociological, ethical and political considerations with which we started).
• 9Already in the first German edition of this book, which appeared at the end of the war, attention was diverted, with an outspokenness which at that time was understood by only a few, from the recently overthrown totalitarianism of the Axis powers to the new threat to peace and international order presented by the last remaining totalitarianism of Russian Communism). This danger has meanwhile grown so enormous that all questions of international order today must be considered in its perspective. This fact emerged very clearly in the foregoing section. Everything is of a temporary nature, everything is in a state of constant tension, everything is doubtful, as long as the world is overshadowed by this danger. What is the nature of this danger, and how can it be abolished? A book which deals with the fundamental problems of international order must at least give some indication of the lines along which these questions which weigh so heavily upon us are to be answered, if it is not to lack the foundation of hard and fast reality which the middle of this century demands.
• 10EPILOGUE – EUROPEAN FREE TRADE – THE GREAT DIVIDE*