How Britain Unified Germany: Endogenous Trade Costs and the Formation of a Customs Union

43 Pages Posted: 1 Apr 2019

See all articles by Nikolaus Wolf

Nikolaus Wolf

Humboldt University Berlin - Department of Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); London School of Economics - Centre for Economic Performance (CEP)

Thilo Huning

University of York

Date Written: March 2019

Abstract

We analyze the foundation of the German Zollverein as an example of how geography can shape institutional change. We show how the redrawing of the European map at the Congress of Vienna 1815, notably Prussia's control over the Rhineland and Westphalia, affected the incentives for policymakers to cooperate. Our argument comes in three steps. First, we show that the new borders were not endogenous to trade. They were at odds with the strategy of Prussia in 1815, but followed from Britain's intervention at Vienna regarding the Polish-Saxon question. Second, we develop a theoretical framework, where state planners set tariffs on imports and transits to maximize revenue. We show that in a world with transit tariffs a revenue-maximizing state planner faces a trade-off between benefits from cooperation and the cost of losing geographical advantage. In a third step we calibrate the model combining historical data on prices, freight rates, and market sizes with GIS data on lowest costs routes under endogenous tariffs. We then run counterfactuals to show how borders affected incentives: if Prussia would have succeeded with her strategy to gain the entire Kingdom of Saxony instead of the western provinces, the Zollverein would not have formed. We conclude that geography can shape institutional change. To put it differently, as a collateral damage to her intervention at Vienna, Britain unifed Germany.

Keywords: Customs Union, Economic Geography, Germany, Trade agreements, Transit Trade

JEL Classification: D74, F13, F15, F55, N73

Suggested Citation

Wolf, Nikolaus and Huning, Thilo, How Britain Unified Germany: Endogenous Trade Costs and the Formation of a Customs Union (March 2019). CEPR Discussion Paper No. DP13634. Available at SSRN: https://ssrn.com/abstract=3363547

Nikolaus Wolf

Humboldt University Berlin - Department of Economics ( email )

Spandauer Strasse 1
Berlin
Germany

HOME PAGE: http://www.wiwi.hu-berlin.de/professuren/vwl/wg/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

London School of Economics - Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+4420-7852-3512 (Phone)

Thilo Huning (Contact Author)

University of York ( email )

Heslington
University of York
York, YO10 5DD
United Kingdom

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