The Zollverein and the Sequence of a Customs Union

Abstract

The Zollverein was the first international customs union, essentially defining these particular trade agreements. This paper utilizes the predictions of a game theoretic model to analyse the observed sequence of accessions into this union. Coalition externalities, the effects the accession of one state has on states remaining on the outside, are the central mechanisms explaining the negotiations between Prussia, the agenda setter, and other German states. This is demonstrated by detailing these financial, strategic and political externalities and demonstrating their influence on trade policy decisions.

Endogenous Formation of Free Trade Agreements: Evidence from the Zollverein's Impact on Market Integration

“…We take advantage of the historical setting in nineteenth century Germany by using market access variables to predict individual states’ propensity to join the Zollverein . As the membership of the Zollverein under the leadership of Prussia increased in numbers, some German states feared that remaining outside the Zollverein would severely reduce their access to the Northern German sea coast and the gains to international trade available from that location (Keller and Shiue 2008; Ploeckl 2010a). 5 Moreover, the external border of the Zollverein imposed higher costs on the states in Germany's south than those in its north, because the latter did not have to cross the Zollverein customs border to trade internationally 6…”

“… 5 For example, the 1831 accession of Hesse-Cassel to the Prussia-led customs union meant that all goods shipped between southern Germany and the northern ports of Hamburg and Bremen had to pass the external barrier of the Prussian-led customs union (Keller and Shiue 2008); see also Figure 4. Ploeckl (2010a) presents a bargaining model for the formation of the Zollverein as well as additional evidence on the importance of international trade access. …”

“… 9 On the following, see also Henderson (1939), Hahn (1984), as well as Dumke (1976), Ploeckl (2010a). …”

A novel institution: the Zollverein and the origins of the customs union

“…It relies on the model presented here 4 to use coalition externalities between German states as the organising principle to carefully illustrate the historical externalities and how their impact can explain the observed timing and sequence of states joining. This paper complements Ploeckl's (2015) 5 detailed historical description of externalities with a justification of the underlying modelling framework as well as an emphasis on and analysis of wider institutional developments beyond historical details such as the structure of negotiation process in trade negotiations and the choice of trade agreement structures including the innovation of the customs union.…”

“…A major recent exception is Ploeckl (2015) which systematically works through the formation sequence of the Zollverein demonstrating what factors, especially what externalities, shaped the accession of each country. It relies on the model presented here 4 to use coalition externalities between German states as the organising principle to carefully illustrate the historical externalities and how their impact can explain the observed timing and sequence of states joining.…”