Germany’s Zollverein (Customs Union)

Germany unified politically into a single country in the 1870s but its economic integration began a few decades earlier. Trade within Germany had been hindered by the many tariff barriers that existed between a myriad of different principalities each possessing the right to tax goods at its borders. This made trade between Berlin and Stuttgart or München and Hannover more difficult than between certain parts of Germany and foreign countries adjacent to them. Because so many tariff barriers can hinder trade, which in turn hinders an efficient distribution of production, the political situation in Germany slowed its economic development, at least until the development of the Zollverein, a customs union for Germany.

Principalities

In the mid-19th century, Prussia (Preußen)and Austria may have been the leading German powers but the rest of what later became the unified Germany was made up of a myriad of smaller states. Some were mid-sized countries like Bayern, Hannover, Sachsen, and Württemberg, many of which lend their names to states in modern Germany; others were small, and sometimes tiny, principalities or free cities not part of any larger state. Just one example was the Free City of Frankfurt, with a population of just 60,000 or so.

The political geography of Germany was complex. Some of these small principalities were ruled by neighboring countries. Holstein-Lauenburg was ruled by Denmark and Luxembourg by the Netherlands. Also, some countries like Prussia governed enclaves in other parts of Germany far away from their principal territory. There were also small principalities like those in Anhalt, surrounded completely by Prussian territory. In all, the fragmented nature of Germany meant borders were numerous; Prussia alone had land borders of approximately 3,180 kilometers, as compared to 1,197 kilometers for what was otherwise a much larger country, Austria.

Customs Duties

Each of these principalities had all the freedoms associated with independent countries. These included the right to set customs duties on imports. States impose tariffs in order to raise revenue, to reciprocate the trade policy of others, or to promote or restrict trade, perhaps for purposes of protecting a local industry.

In Germany, each principality set its own tariffs and relied on officials at the ports and land crossings to collect these amounts. Collecting tariffs at the borders of so many distinct countries was an administrative burden though. Further, tariffs suppressed trade within Germany; consider that some goods needed to travel across multiple principalities, and thus multiple tariff barriers, to reach their final consumer. Even with some favorable provisions for through-traffic in goods, some useful trade was no doubt priced out of existence. The result was that many people, like the German economist Friedrich List, called for eliminating these trade barriers within Germany.

The most logical way of preserving substantial economic sovereignty for the individual states while resolving the problem of collecting tariffs was a customs union. A customs union is an arrangement that involves a common external tariff and the abolition of internal customs barriers among member states. Customs unions allowed for much more efficient collection of tariffs than other trade arrangements because the common external tariff meant that only external boundaries, those borders with non-member countries, needed to be staffed with customs personnel. Once a good was imported into one member state, and taxed there, it was free to be transported and sold across the union territory.

Neighboring countries like France and Austria favored high tariffs to protect their industries so neither was interested in making overtures to the smaller German states to form such a customs union with them. That would have meant allowing German goods entry free of tariffs. Thus, it fell on Prussia to create a customs union among the German states.

Zollverein

Prussia implemented customs reforms in 1818. These set moderate tariff rates as a compromise between agrarian and commercial interests and modernized tariff collection too. On the eve of the creation of a pan-German customs union, twenty-one states were already part of three existing customs areas. One of these was formed by Prussia upon the conclusion of a trade treaty with Hessen-Darmstadt; another one was formed by Bayern and Württemberg around the same time.

Treaties merged these unions in 1833 and the new customs union, or Zollverein, for Germany launched in 1834. For many countries, this meant large changes in applicable tariff rates, an unavoidable result of synchronizing policy. In some principalities, this meant higher external tariffs than their own independent policy set out and for others this meant reduced tariffs; in any case, the cross-sectional results could vary since unique products carried unique customs duties. In the case of imports to Baden, tariffs rose. The applicable tariff on cotton brought from outside Germany increased from 12% to 18%, that on factory machinery from 19% to 30%, and the tariff on wool imports from 1% to 20%!

The customs unions entailed sacrificing some autonomy. However, it did not mean the creation of a new superstate. The Zollverein was simply governed by a committee, the Generalkonferenz, which convened infrequently. Otherwise, its only other governing institution was a small ‘Central Bureau’ set up in Berlin. The unification of Germany properly took decades more to achieve. The Deutsche Bund, a loose federal government for Germany, had already existed but it was unable to create a single customs union, hence the earlier fragmentation.

Man destroying customs barriers in “The Thinning of a High Forest” (Source: Fliegende Blätter, year 1847, volume 6, number 140, page 157; published in Munich; retrieved via Wolfgang Keller and Carol H. Shiue’s ‘Endogenous Formation of Free Trade Agreements: Evidence from the Zollverein’s Impact on Market Integration’)

In the Zollverein, each member state was in charge of collecting duties at its ports and border crossings on behalf of the customs union. However, this was a duty merely to collect duties; changes in tariff rates had to be approved unanimously among members. Once collected, revenues from the customs duties would be distributed by the Central Bureau already mentioned. Monies were accumulated, states were reimbursed for the cost incurred in collecting duties, and the remainder was divided among members based on their population.

The Zollverein eventually grew to include most of Germany. Six more states joined before 1852, the first of these in an expansion that took place in 1835/36, and still more joined thereafter. Decades later, Hamburg and Bremen joined in 1888, more-or-less finishing this process. Besides controlling tariffs, the Zollverein also regulated members’ abilities to create monopolies and harmonized weights and measures among other things.

Trade

Tariffs suppress trade and are commonly understood to restrict economic growth. However, this is not to say that the Zollverein was unambiguously and uniformly positive. Firstly, official trade statistics are limited before 1872; as a general matter, the volume but not prices of goods are available in trade metrics. As a complement, various private estimates of trade were produced but they have poor or at best mixed reliability.

Still, they show foreign trade growth prior to about 1850 and the return of strong growth in the 1860s and 1870s but not really much growth as a percentage of GDP. So, parts of Germany bordering foreign countries may have lost out as foreign trade stagnated and these regions became rather peripheral in the customs union of which they were now a part.

Of course, the economic impact of the customs union differed by region depending on their locally produced products and to whom they sold these goods. Recall that while the Zollverein reduced intra-German trade barriers; the duties set out by the customs union, imposed on imports from non-member countries, were generally high, at least when compared to some principalities’ prior rates. This would have made the customs union an economic mixed bag; internal barriers may have been reduced but external barriers remained meaningful and, in several cases, increased.

Further, in some areas, the tariffs imposed by the customs union were not ideal for local circumstances. For example, Baden was largely agrarian, lacked large industry, and bordered France and Switzerland. So, Baden previously favored lower tariffs than the Zollverein set out; yet it joined anyway for fear of losing market access to Germany if the project proceeded without them.

Between 1829 and 1844, Baden saw a large increase in industrial employment, perhaps benefiting from some protectionism but such increases were seen everywhere in Western Europe. In any case, growth petered out in the 1840s, first in the regions of Baden closer to France or Switzerland, suggesting a loss of market access to those countries. Eventually though, these regions saw new industrial employment too albeit industrial employment here continued to lag behind nearby regions of France or Switzerland. Baden shows the ambiguous effect of the customs union, at least with respect to what were previously low-tariff jurisdictions.

Lesson

Joining a customs union makes trade more seamless among member countries. However, in and of themselves, customs unions do not support trade with non-members and depending on the orientation of the leading members of the customs union, can actually restrain foreign trade. Prussia and industrializing parts of Germany generally favored higher external tariffs. This meant that a state like Baden, which had little industry, could actually be disadvantaged by joining the customs union. An independent, low tariff, policy may have been more advantageous for this and some other members. However, in a customs union, unlike in a simple free-trade agreement, this sort of autonomy is lost.

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