Trade Wars

The historical origins for strong competition in Central Europe

Martin Ehl
27 February 2017
Discussions about TTIP demonstrate that after centuries of trade wars, European nations are well aware of how trade agreements can affect their economies. Martin Ehl showcases the changing face of competition through the ages.

Central Europe has always been a crossroads of trade, quite often of goods produced elsewhere. Customs and trade rulers were thus important parts of the local economy. Simultaneously, what are now considered Visegrad countries, were also part of individual, at times larger, economies or trading blocs such as the Polish-Lithuanian Commonwealth, the Austro-Hungarian Empire, and Comecom.

With the exception of the twenty years between the two world wars and the short period after the fall of socialism in 1989, the Visegrad countries were much more so objects to be passed around rather than the subjects of any trade war. This does not imply that they refrained from fighting each other, economically, before all four countries entered the EU in 2004. This would mark a turning point in their mutual trade and the wars were transformed into something wholly different.

Competition through the ages

The Spiš region was historically one of the most important trade regions in Central Europe. Largely found in the northeast of Slovakia with a small segment in the south of Poland, it is home to a culturally diverse population which gives this region a unique atmosphere of historical importance exemplified by the richness of castles and royal cities.

Likewise, the German Zips, the Polish Spisz, and the Hungarian Szepes all played important roles as the pawns of the Austrian King Sigismund of Luxembourg matched against the Polish nobility in order to finance his wars and serve as temporary shelters for the Polish Crown Jewels. Beyond their political involvement, this area and these people have also held due influence as the economic crossroads for Central Europe.

The royal towns of Spiš like Stará Lubovňa, Kežmarok, and Levoča have developed unique trade, craftsmen rules, and privileges which were quite often subject to mutual competition; in modern terms, this would be called trade wars. For example, Levoča, in 1364, was awarded the right to store all goods entering the Spiš region which attracted merchants from the surrounding area, leading to a strong economic advantage over neighboring towns. Kežmarok, the biggest competitor with Levoča at the time, did not respect Levoča’s monopolistic claim, and, subsequently, a “hundred-year” war broke out between the two towns. Both towns were not only hunting for merchants in the region to pay a storage tax in their respective towns, but also actively damaging property held by their competitors. Furthermore, in the political arena, the two towns supported different candidates in the fight for the Hungarian throne.

War and trade

As economic development advanced from the times of Spiš royal towns, the region of Central Europe has also been subjected to the ramifications of many real wars, which are indispensably connected with the economic (or trade) policies of the area. In Power and plenty. Trade, War and the World Economy in the Second Millennium Kevin O’Rourke and Ronald Findlay suggest that the level of trade is not a simple outcome of tariffs, quotas and other trade policy instruments. The greatest expansions of world trade have tended to come not from bloodless negotiations but from barrels, guns, and ammunition, not to mention the forced enslavement of populations. “When trade required more profits, these could be earned via plunder or violently imposed monopolies. For much of our period the pattern of trade can only be understood as being the outcome of some military or political equilibrium between contending powers,” they conclude in the chapter on the interdependence of trade and conflict (O’Rourke, Findlay).

For centuries Central Europe was a chessboard for manoeuvres of different armies and imperial powers. Usually the Czech, Polish, and Hungarian markets, with their raw materials and products, were not the subject of the wars themselves, but part of a wider issue at stake. One example is Germany’s struggle for unification under Prussian leadership in the 19th century.

Trade was also used as an excuse for wider political campaigns. The most prominent example in recent history comes from August 1st of 1939, when Germany claimed that Poland was damaging the economy of Gdańsk/Danzig by refusing to import Danzig’s margarine and herrings, the main export products of the free city. This supposed attack on Danzig’s “vital economic necessities” was an additional excuse to attack Westerplatte.

Modern tariffs

Trade wars, with their modern form of imposing tariffs or quotas on imported products to safeguard domestic producers and markets, came into the region in full force with the emergence of nation states after the fall of the European Empires in 1918. The inter-war commercial policies of the Central European states were highly protectionist and are considered today as a major factor leading to the outbreak of the Second World War.

Economic historian Richard Pomfret documented how the tariffs increased over time. Czechoslovakia had average tariff levels in 1913 set at 22.8% (adopting the Austro-Hungarian system after the 1918 independence); in 1927 it was already at 31.3%, and in 1931, at the height of the Great Depression, it was 50.0%.

Likewise, Hungary had 30% in 1927 and 45% in 1931. Poland, which in 1913 was divided among three powers, had an average tariff level of 53.5% in 1927 and reached a staggering 67.5% in 1931.

Similarly, Pomfret shows how Hungary defended its agricultural sector, which was de facto the only source of export revenue for the heavily indebted country by guarding any danger of devaluation. After the 1933, no trade policy instruments were used. All imports were subject to “secret and arbitrary” administrative procedures about the level of tariff for each import transaction.

This example might suggest that in the inter-war period, trade wars were mainly affecting the agrarian sector. However, Czechoslovakia was much more industrialized than Poland or Hungary, and its interests ranged from exporting weapons and planes to shoes produced by the famous Bata Company. But due to the influence of the agrarian party, Czechoslovakian agricultural tariffs were among the highest in the developed world, and its trading partners answered with higher tariffs for Czechoslovakian industrial products.

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A classic example is the Czechoslovak – Hungarian custom war in the 1930s, described in detail by Aleš Skřivan. It occurred in the peak of the Great Depression, as Czechoslovakia raised its agrarian custom tariffs in 1930. At that time, exports to Hungary were 5.8% of all Czechoslovakian trade. After a quarrel, which resulted in the renouncement of the trade treaty between Czechoslovakia and Hungary, Czech exports to Hungary in 1932 fell to 2.7%. A similar situation occurred with the imports from Hungary.

It is difficult to assess how tariffs had an impact on Central European economies in the decades that followed. Firstly, the Second World War ravaged those economies. Secondly, they could not freely participate in the international trade under communist regimes. During the Comecom era, the main aim for trade was to obtain as much hard currency as possible from behind the Iron Curtain.

Back to competition

Only after 1989 did the national economies of Central Europe return to their pre-war levels of competition and tariffs. In the 1990s, it seemed that free trade areas like CEFTA would create an alternative to the EU; or if not an alternative, then perhaps a waiting room. But these years did see harsh competition, which resulted in trade wars on beer and wine exports and imports.

For example, the Czech Republic in the middle of 1990s had negotiated quotas for the export of beer to Slovakia, Poland, and Hungary. According to Václav Lavička’s article in the MFDnes daily, these quotas were small. Hungarians at that time were willing to increase the quota on Czech beer, but wanted higher quotas for the import of Hungarian wine into the Czech Republic in exchange.

Unfortunately, this move blocked by Slovakia, which at that time created the Czecho-Slovak custom union and was protecting its own wine market. Earlier that year, the Czecho-Slovak custom union had already been damaged by a 7% change in tariffs affecting 80% of the Czech imports by Slovaks. This was supposed to improve the Slovakian trade balance.

Similar protectionism was seen in the agrarian market where mainly Poland was defending its own grain producers. For example, in 1999 Poland increased the custom tariff for imported wheat from 20% to 70% and cancelled preferential treatment of Czech, Slovak, and Hungarian suppliers. And, in 1998, the Czech Republic was in a trade war with the European Union which imposed an import quota for apples. Brussels showed through its restrictions in the meat and milk trade, how it was willing to protect its internal market and the exhibited the strength of a united response.

How do we do it in the EU

After entering the EU, the rules changed profoundly; not only for hot wars but also for trade wars. Classical trade wars like the raising of custom tariffs and the imposing of quotas is not possible within the EU. Instead of custom tariffs, sanitary inspections of food products from neighboring countries, alternative tax, and/or social incentives for prospective investors are used.

As an example, in 2012 the Czech Republic used a scandal about technical salt, which Polish food uses regularly, to impose food quality inspection, effectively putting Polish products on a black list of dangerous products. Thus they regulated their imports on the open common market. The Czech Republic is the third biggest market for Polish food products, and recently the Polish government decided to pay a marketing company to engineer a campaign in support of the consumption of Polish food.

A second example of this kind of trade war inside EU regulations was fought recently between Poland and Slovakia for the Jaguar Land Rover investment. Worth more than 1.3 billion EUR and estimated to create up to five thousand jobs, both governments encountered the deal before elections. Equally as desperate to get strong marketing tools that would offer tax breaks, social support, and promises of infrastructure, in the end the Slovaks provided a stronger case. But this appeal also had to be approved by the European Commission.

Details of the Slovak offer were not public at time of writing this article. But it is worth it to look closer at the arguments the Polish minister of economy Janusz Piechociński made after the Slovak’s victory was declared:

“[The] Polish offer – in terms of finance – was much lower than Slovak one because of simple reason: we had additional argument with localization. First, bigger potential of people, perfect experts in this area. Second, the most important, at close distance big possibilities of production of parts of the highest quality, part of that already today working like driver units for all Jaguar marks. When finishing, Slovak party has offered such high conditions of public support that it would be impossible to continue discussion in Polish conditions; spread of benefits and expenditures would be irrational not only from the point of view of jobs created but also from future budget requirements.”

Central Europe is also affected by a trade war resulting from sanctions from Russia coordinated with its aggression in Ukraine. These are affecting not only staple products like food, but also other products in textiles and machinery. It remains hard to distinguish whether the damage is a consequence of these sanctions or from the weakened Russian rouble and Ukrainian hryvnia. Similarly as in the past, Central Europe has been a part of a bigger block and the individual states couldn’t influence their own trade policies directly; only as EU members. A similar situation is reflected in the negotiations of the Transatlantic Free Trade Zone with USA.

Although they will have tendencies to defend themselves, the national economies in Central Europe have become integrated into not only the EU market but also the global economy like never before.

REFERENCES

1. Findlay, Ronald and Kevin O’Rourke. Power and Plenty. Trade, War and the World Economy in the Second Millenium. Princeton University Press, 2007.

2. —. “Danzig Boils at Trade war”, AP report August 1 1939 (The Spokesman – Review, August 2, 1939).

3. Lavička, Václav “Export piva na východ brzdí obchodní bariéry”, MF Dnes 27. 10. 1997.

4. Lavička, Václav. “Země CEFTA stále trápí zemědělství”, MF Dnes 21. 10. 1999.

5. Pomfret, Richard. The Economics of Regional Trading Arrangements. Oxford University Press, 1997.

6. Skřivan, Aleš. “K charakteru, rozsahu a zaměření československého vývozu v meziválečném období”, Acta Oeconomica Pragensia. 15/no.7, 2007.

7. “Fabryka Jaguara Land Rovera powstanie na Słowacji” (Jaguar Land Rover Factory will be established in Slovakia), Polish Press Agency, 12. 08. 2015.

This article is taken from Visegrad Insight 2 (8) 2015.

Martin Ehl (@MartinCZV4EU), co-editor of Visegrad Insight, the chief international editor of the Czech daily Hospodářské noviny

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