Bavaria and the Case for Free Trade

Imagine that you are a citizen of a small country facing the decision whether to join an economic organisation dominated by a much larger and more economically advanced leader.

The potential benefits of tariff-free access to a huge market are large. But there are costs, including unrest among those who would suffer from the initial dislocation. You also worry that the leading country is a bully and joining might be the first step towards ending your country's independence.

From this description, some might think of Mexico and the North American Free Trade Area, or several eastern European countries and the European Union. But I am describing Bavaria in 1834. The leading country was Prussia and the organisation the Zollverein, the German free-trade area that preceded the formation of a unified German state. And yes, Bavaria joined.

I am not seriously suggesting an analogy between Mexico and Bavaria. The point is that, in this case, we know how the story turned out. Most current debates about globalisation turn on claims about what will happen if countries open themselves up to trade. Some debates deal with what has already happened - but usually over a short period, often the past 20 years.

This short-term perspective biases attention towards what globalisation's advocates readily concede: in any economy, more open trade entails both winners and losers. The balance of winners and losers depends on the country's economic structure and on how nimble its people and institutions are in adjusting to the new opportunities.

Most of the costs are immediate and short-term. Some people lose their jobs because of trade and some businesses lose out because of trade. But those losses are self-limiting; only in rare cases does the harm extend to the next generation. The benefits can flow for ever. Restricting our attention to a 10- or 20-year period prejudices the case against greater openness.

Integration into the Zollverein in 1834 helped some Bavarians and hurt others. Bavaria was heavily agricultural but had some small-scale industry. Other Zollverein members lagged behind England's industrialisation but were far ahead of Bavaria's. Dropping tariffs meant a flood of manufactured imports that undermined the comparable sectors in Bavaria.

As late as the 1870s there were still small-scale industrial producers that would have been better off if Bavaria had stayed on its own. On the other hand, some of Bavaria's agricultural producers responded quickly to the opportunities implicit in the large and relatively wealthy market now open free of tariffs.

Bavaria also began its own industrial revolution. As late as the 1890s much of its industry was low-technology, located there to take advantage of low wages. But, by the early 20th century, Bavaria had become a centre for cars, metals and other products of the second industrial revolution.

Today there can be no doubt of the benefit of integration into an all-German customs union. Bavaria owes its success to factors including technology, a skilled workforce and capable private and public management. None can be attributed entirely to the Zollverein but none of them would have yielded such dividends if they had been restricted to a small, poor market for the past 160 years.

Per capita incomes in Bavaria today are at least 20 times their 1830 levels. Bavarians today - even those who oppose globalisation - are the beneficiaries of painful economic adjustment in the past, the same painful adjustment that motivates much opposition to globalisation today. And there are many Bavarias in the wealthy countries of the world. Something like Bavaria's experience happened in the US and elsewhere in Europe - everywhere that political, legal and economic change broke down barriers to internal and international trade.

Some critics of today's international economic order rightly object to trade, intellectual property and other rules that unfairly favour rich nations. Others rightly call for transfers to ease the suffering of very poor people caught in a modernising economy. But some in the developed world oppose globalisation itself. Saying one wants an end to globalisation now is like saying one wants to accept the benefits of our ancestors' willingness to face change but prevent the accrual of those same benefits to today's poor. How many Bavarians would want to be stuck at the living standards of 1830?