Jacques Delors, former president of the European Commission passed away last week. He was considered one of the reasons why the Eurozone got a single currency and a leader who paved the way for Europe’s free trade market or the EU (European Union).
That got us thinking about why other economies haven’t had single markets that stand out like the EU. So in today’s Finshots, we try to answer just that.
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The Story
When the Second World War came to an end in 1945, it left a large part of the European economy in ravages. There was severe inflation. By 1948, wholesale prices were 200% higher in Austria and 1,820% higher in France than they had been before the war. The French government devalued the Franc by 80%, making a 5,000 French Franc note practically worthless. For context, you could buy at least 1,500 grams of gold with that kind of money in the early 1900s. Countries like Germany were staring at a complete collapse of their monetary system. The barter system of buying goods with goods was back. And people often used cigarettes as money.
The European economy naturally needed a pick-me-up. And it was in the 1950s that Belgium, France, Luxembourg, Germany, Italy and the Netherlands began economically cooperating with each other. They laid the foundation for a free economy. And soon, more countries were attracted to the idea of a single market. This means that countries within this market could freely trade with each other. Most of them used the Euro as their common currency. Even people could move across most borders for work or travel without restrictions.
If you were to rank the EU on the list of top global economies today, it would be at number 3 and easily worth $16 trillion. It’s 27 countries strong and goods, services and money can move freely across most of these countries. There’s more choice, so more competition and fewer rules for other countries to comply with. So if countries outside the EU want to sell to an EU country, they just have to adhere to one standard rather than 27 different ones.
Okay. So if a single market can transform economies so much, then why don’t we see more of such cooperation among other countries, you ask?
Well, we do have a few countries that are trying to emulate the EU but with little success.
There’s the North American Free Trade Agreement (NAFTA) which almost failed. In 1994, the US, Canada and Mexico signed a pact to eliminate trade barriers. But a 29% drop in manufacturing employment in the US between 1993 and 2016 meant that it partly blamed the agreement for its job losses. The theory is that these jobs may have gone to folks from Mexico, hitting the brakes on NAFTA in 2018.
South Asia has a similar story too. In 2006, 8 South Asian countries namely Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka entered into a free trade arrangement called the SAFTA (South Asian Free Trade Area). Their goal was to liberalise trade among each other. But it didn't move the needle much.
To put things into perspective, even a decade after this agreement, trade amongst the SAFTA countries remained insignificant at about 3–6% of global trade. On the flip side, its Southeast Asian counterparts like Singapore, Vietnam and others which had a similar trade agreement called the ASEAN (Association of Southeast Asian Nations) saw tremendous growth. By 2017, their inter-regional trade progressed to about 25% of global trade on average.
So why do you think NAFTA and SAFTA almost failed?
You see, being part of a single market needs one simple trigger ― unity. And it all depends on how much countries can trust one another to promote each other’s economies. And both these agreements may have lacked that. For SAFTA, tariffs were a dampener of sorts too. Trade was pulled back by something called a sensitive list. There were hundreds of products in this list that couldn’t be traded between these countries without additional tariffs. Countries failed to lower taxes while trading with each other. So imports and exports naturally stagnated.
But let’s just keep that aside for a bit and look at what would happen if all South Asian countries were a single market. Well, unless you’ve been living under a rock you know that our neighbours Pakistan and Sri Lanka have struggled to tame inflation levels in the recent past. And a unified market may have helped them here.
We could simply look at the UK to understand this. In 2020, the UK officially severed ties with the EU. This may have been responsible for about a third of UK food price inflation since 2019, adding nearly $9 billion to Britain’s grocery bill. And that’s simply because the country had to cope with additional checks to keep an eye on what was entering or leaving its borders. In the South Asian context, unrestricted movement of goods and services could help flourishing economies like India share their resources with countries like Pakistan or Sri Lanka without too much red tape.
But here’s the thing. The UK remained a part of the EU for nearly half a century. And it could, because it shared a common culture with the rest of the lot. But single markets could be hard to build when there’s a cultural and political divide. It just makes communication difficult and increases conflicts. And with SAFTA, you know that’s a problem.
Countries also lose their individual power to negotiate with countries outside of the single market that they’re part of. For instance, India intends to reduce its dependence on China. But maybe Sri Lanka or Pakistan cannot. In a scenario like that, a single market could be a distant dream, no?
That’s pretty much why economies might still be struggling to achieve significant success in their hopes for a single market.
But there’s still hope for Africa. The continent has been trying to create a $3 trillion borderless market to reverse its poverty and inequality trends with AfCFTA (African Continental Free Trade Area). Its bounty of products like coffee, sugar and dry fruits could help its nations trade as a single market with others. But progress has been slow and it could take a couple of decades for the continent to take the shape of a single market. So yeah, if and when that happens, maybe we could see how other aspiring economies could borrow a cent from its success story too.
Until then…
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P. S.: There isn’t strong evidence to prove that NAFTA was responsible for the loss of US’ manufacturing jobs. And recently, the country seems to have shown some renewed interest in resurrecting the deal in a different form.
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