Intra-European supply of domestic substitutes. Post war trade

Intra-European trade, unlike during the interwar years, is a
fundamental feature of post-World War Two development for market economies. Research
from Badinger (2005) has shown that inter-continental integration increased
European incomes by 26% from the 1950s to the year 2000. For post-WWII recovery
to be successful and for economies to experience sustainable growth, it is evident
that the restoration of intra-European trade was essential. The lack of post-war
trade was a result from the lack of the US dollar in Europe because of war
debts, absence of traditional trade partners and high demand for US products
due to low supply of domestic substitutes. Post war trade in Western Europe was
set up with bilateral trade agreements which impeded trade. A multilateral clearing
solution ultimately failed so the European Payments Union was set up within the
Marshall Plan so that Western European trade and integration could be rebuilt efficiently
after the war.

 

Focusing on the early Golden Age years, there is clear evidence
to suggest intra-European trade was a factor for the strong economic performance
of the Western European economies. The following figures plot the growth rates
of economic growth and exports for the UK and for West Germany. Each point represents
a year between 1952-1960. There is clearly a strong positive correlation
between growth in trade and growth GDP per capita. This relationship may be
considered to be one only of correlation and therefore causality cannot be inferred
directly. In this instance, trade is endogenous-countries who have high levels
of income for factors other than trade will trade more. However, Frankel and
Romer (1999) challenge this concept of endogeneity. They base their reasoning
on the premise that variations in trade solely due to geographical factors can
be observed “as a natural experiment for identifying the effects of trade” (pg.
394). This is because geographic factors are not a consequence of income or government
policy and do not directly affect income. The results of Frankel and Romer’s
experiments showed that a rise in the ratio of trade to GDP by one percent
increases income per person by at least one-half percent. They argued that
trade raises income of a country by stimulating the accumulation of physical and
human capital and by increasing output for given levels of capital. Following this,
the data from both figure 1 and figure 2 can be an explanation of how growth
for European countries in the Golden Age caused high levels of economic growth

 

Growth of income and
trade for West Germany at the start of the golden age- Figure 1 source of data:
Maddison (Statistics on World Population, GDP and
Per Capita GDP, 1-2008 AD) and The United Nations statistical database.

 

 

Growth of income and
trade for the United Kingdom at the start of the golden age- Figure 2 source of
data: Maddison (Statistics
on World Population, GDP and Per Capita GDP, 1-2008 AD) and The United Nations statistical
database.

 

 

Trade liberalisation and European integration speeded up
technological transfer and increased European technological capability.
Eichengreen (1995) established that globalisation was essential in developing European
integration. He argued that technological advances, including high-speed
motorways and rail transport, containerisation and more later on, broadband and
satellite telephony, greatly reduced transport cost between countries. Rapid advances
in technology and capital accumulation set a path for specialisation of
production and allowed countries to obtain the benefits of economies of scale
on a national perspective. The development of European integration went further
than the increase in European technological competence. It allowed for a large
proportion of an economies resources to be transferred into more productive, peaceful
uses. This is largely down to Political relations and general confidence in
Europe after the World Wars. Eichengreen (1995) points out that many steps
taken by Western European governments in the 1940s and 1950s ensured relations
were built on confidence and trust, creating many positive economic impacts. The
European Coal and Steel Community, first established in 1951, coordinated coal
and steel industries under multinational control. In 1958, several members of Europe
created the words first regional Customs Union-a trade agreement with a common external
tariff is enforced on all imports. Both of these agreements would have improved
Western Europe’s capability to trade with other European countries. The 1959
reforms to the Customs union reduced tariffs and by 1968 all legal barriers to
trade were removed between members, which lead to large amounts of regional
integration growth. West Germany being a member of the multinational coal and steel
agreement, would have given confidence to many doubtful Western European governments
that West Germany’s industrial output would be put to peaceful use, increasing the
likelihood of European trade. Growing Competition, arising from the creation of
a European Customs Union, also forced domestic monopolies to innovate as they
were no competing with hundreds of firms across several European countries. Giersch
et al (1993) suggest that German import liberalisation also helped domestic
economies upon up to European competition. Where firms adapt to changes in competition
and gain new technologies and processes, greater output is generated with the
same input. This is the definition of productivity growth. On an aggregate level,
more goods and services can be produced within the economy. The resulting effects
are also wage stimulation and higher business profitability, which can trigger onwards
investment.

 

 

Llewellyn and Potter (1982) put forward the idea that the
transfer from self-sufficient government policies in Europe, added with the
vast flow of technological innovation, was a key factor that accelerated the growth
rate of total factor productivity after the war.