Do trade ties persist after the breakdown of a political union? With Brexit negotiations still underway and uncertainty over what form future relations between the UK and the EU will take, turning to history can offer some useful insights on the potential implications of political disintegrations.
The existing literature does not provide clear cut answers: while some have documented a worsening of economic ties among successor states, others have highlighted that the dissolution of political unions is not always associated with trade destruction. On the one hand, one of the key negative repercussions of political disintegrations is connected with the deterioration of trade linkages and the related worsening of market integration among newly formed political entities, driven by the creation of new institutions, the introduction of new currencies, and new barriers to trade. This negative effect has been documented for the countries belonging to the former Soviet Union, Yugoslavia, and Czechoslovakia (Fidrmuc and Fidrmuc 2003, Djankov and Freund 2002), as well as for countries ending colonial ties (Head et al. 2010) and leaving currency unions (Glick and Rose 2002).
On the other hand, other studies have shown that well-established economic linkages can persist in new institutional settings, as reflected, for instance, by the experiences of Austria, Czechoslovakia, and Hungary after the end of the Austro-Hungarian Empire (De Menil and Maurel 1994) and Poland after WWI (Wolf 2005). Indeed, countries with a strong history of trading with one another often tend to continue doing so (Eichengreen and Irwin 1998).
This column contributes to this debate by drawing on my recent work investigating the impact of the collapse of the Ottoman Empire on commodity market integration in two of its largest economic regions – Egypt and Syria (comprising of modern-day Syria and Lebanon) - during the interwar years, 1923-1939 (Panza 2020). WWI ended the centuries-long unification of the Middle East, thus interrupting an extensive period of political and institutional unity for Egypt and Syria, which had begun in 1516-1517. This historical era not only coincides with the end of the Ottoman Empire, but also brought two major changes to the region. The first one was global in nature and is associated with the worldwide spread of protectionist practices, which contributed to lowering international trade flows and led to the disintegration of the global market (Hynes et al. 2012). The second one was institutional: Egypt and Syria did not gain independence post-WWI but were incorporated into two different empires. Britain retained control over Egypt, which was declared a protectorate. Meanwhile, Syria became administered by France, in accordance with the Mandate system, established by the League of Nations.
How did the abrupt end of centuries of shared economic relations impact these Near Eastern markets? Did Syria and Egypt become increasingly involved in colonial networks to the detriment of regional ones, or did old ties persist? Did short-distance trade suffer more than long-distance trade during this period of de-globalisation? To answer these questions, one needs to consider that there were two opposing forces impacting the integration of Syrian and Egyptian markets: one reducing trade costs (fostering integration), via colonial investments in infrastructure and improvements in commercial institutions, and the other acting in the opposite direction, through increased protectionism and the incorporation into two different empires.
The major factors acting against market integration were the spread of protectionist practices, particularly tariff escalation in the 1930s, and the practice of competitive devaluations, first of the Egyptian pound (in 1931) and successively of the Syrian pound (in 1936), which contributed to increased price fluctuations in both markets, and triggered further beggar-thy-neighbour policies. The establishment of Egypt-Britain and Syria-France preferential trade agreements may have further weakened regional ties to the gain of colonial ones. The implementation of such policies manifested itself in a decline in Syro-Egyptian bilateral trade, as shown in Figure 1, which is illustrative of the timing of the onset of protectionism in each country. Syrian imports of Egyptian goods dropped sharply from the 1920s, reflective of the fact that Syria embraced a protectionist stance much earlier (from 1923). Syria’s exports to Egypt dropped from 1930, coinciding with the onset of Egypt’s tariff escalation. Between 1930 and 1933 they experienced an 85% decline.
Figure 1 Trade between Syria and Egypt, 1921-1941 in thousands of Syrian pounds
At the same time, both countries expanded their infrastructure, and developed better commercial institutions, which lowered transport and transaction costs. Both processes were likely to favour integration. In Egypt, the railway network grew, and the cost of rail transport declined in response both to an increase in motor competition, and to government subsidies, which were extended also to shipping companies. Similarly, the colonial government in Syria invested in both rail and road building, and improved shipping facilities. Postal and telegraphic services experienced considerable progress, and the first telephone line was installed to connect the two countries. Furthermore, the interwar period saw the expansion of financial institutions focusing on trade, particularly commercial banks, which increased their capital base and facilitated the availability of credit for import-export activities. The foundation of the Banque Misr-Syrie-Liban, the result of a joint initiative of Egyptian and Syrian financiers, symbolises the effort of improving trade and economic relations between the two countries.
To assess which of these two forces prevailed, the empirical estimation proceeds in two steps. First, I test whether regional and international markets were integrated using cointegration tests before and after the end of the Ottoman Empire. Then, I test for market efficiency by computing the speed of price convergence across cities, which tells us how long it takes for prices to return to equilibrium after a shock. The data used in the analysis cover a set of traded goods in Syria (Aleppo and Beirut), Egypt (Cairo and Alexandria), France (Paris), and Great Britain (London) and have been collected from archival, primary, and secondary sources, both during the Ottoman Empire (19th century) and in the interwar era (1923-1939).
The empirical findings highlight that while regional markets were well-integrated and efficient during the Ottoman era, they disintegrated post-WWI. On the other hand, both Syrian and Egyptian markets became well-integrated with their respective coloniser. Sharing a long commercial and institutional history and investing in trade cost-reducing infrastructure and banking were not enough to offset the intensity of protectionist measures and the onset of economic nationalism. While the Near East shared the same anti-global developments of the international economy in terms of regional disintegration, its colonial markets experienced the opposite trend, reinforcing their linkages, a process facilitated by pegged currencies and preferential trade agreements.
This process of trade diversion, driven by the fact that regional trade disruption was countered by colonial trade creation, may have partially mitigated the welfare loss generated by forgone regional trade. However, the new trade arrangement was not just a simple shift in trade partners but reflected a process of decreasing multilateralism and increasing bilateralism, which is not a trade-enhancing alternative. The Ottoman experience shows that when the end of a political union coincides with a shift away from multilateral trade, the successor states expose themselves to a greater risk of trade and welfare losses.
References
De Menil, G and M Maurel (1994), “Breaking up a customs union: the case of the Austro-Hungarian Empire in 1919”, Review of World Economics 130(3): 553–575.
Djankov, S and C Freund (2002), “Trade flows in the former Soviet Union, 1987 to 1996”, Journal of Comparative Economics 30(1): 76–90.
Eichengreen, B and D A Irwin (1998), “The role of history in bilateral trade flows”, In The Regionalization of the World Economy, p. 33–62, University of Chicago Press.
Fidrmuc, J and J Fidrmuc (2003), “Disintegration and trade”, Review of International Economics 11(5): 811–829.
Glick, R and A K Rose (2002), “Does a currency union affect trade? The time-series evidence”, European Economic Review 46(6): 1125–1151.
Head, K, T Mayer and J Ries (2010), “The erosion of colonial trade linkages after independence”, Journal of International Economics 81(1): 1–14.
Hynes, W, D S Jacks and K H O’rourke (2012), “Commodity market disintegration in the interwar period”, European Review of Economic History 16(2): 119–143.
Panza, L (2020), “From a common empire to colonial rule: commodity market disintegration in the Near East”, CEPR Discussion Paper 15434
Wolf, N (2005), “Path dependent border effects: the case of Poland’s reunification (1918–1939)”, Explorations in Economic History 42(3): 414–438.
