Britannica Money

Table of Contents

The European Free Trade Association

The efforts that led to the creation of the EU were paralleled by another attempt to foster trade in the region. At the same time that the EEC was being organized in the 1950s, Great Britain sought to organize a free-trade area that would include 17 member countries of the Organization for European Economic Co-operation. Had it succeeded, this would have given Britain access to the benefits of the industrial common market on the Continent while avoiding possible infringements of British sovereignty. The effort failed, however, mainly because of French opposition. Britain then undertook the formation of a free-trade area in association with Austria, Denmark, Norway, Portugal, Sweden, and Switzerland. Together they made up the European Free Trade Association (EFTA).

The convention setting up EFTA was signed in Stockholm on January 4, 1960. The preamble stated that one of the main purposes of the organization was to “facilitate the future establishment of a wider multilateral association for abolition of customs barriers.” More specifically, EFTA was meant to liberalize trade with the six Common Market countries without subscribing to the commitments of political character embodied in the Treaty of Rome. In the meantime, EFTA gave its seven members a stronger bargaining position vis-à-vis the other six, as well as the means of creating a large market of their own.

Operation of EFTA

The EFTA treaty, like that of the EEC, provided for a transitional period, set forth rules governing competition, and called for the abolition of all indirect protection and trade discrimination. The Association chose to be governed by the EFTA Council, composed of one member from each participating state. Over time the council set up a joint consultative committee comprising representatives of industry, business, and labour; a set of six permanent technical committees (on customs, trade, economic development, agriculture, economics, and budget); and working parties dealing with special topics.

EFTA had one special problem arising from its nature as a free-trade area. Since the duties charged on imports from outside countries were likely to differ from one member to another, traders could take advantage of the differences by channeling imports through the country levying the lowest rates and delivering them to customers in another member country. Rules were established to prevent this by classifying merchandise according to whether it was produced or fabricated in one of the member countries. In the case of goods made from imported raw materials, the rules required that the import content not exceed 50 percent of the export price of the finished product.

EFTA’s record

Although a 10-year transitional period was originally envisaged, internal customs barriers on industrial goods were eliminated on January 1, 1967, three years ahead of schedule. Bilateral trade agreements were also negotiated to increase trade in agricultural products.

EFTA passed through two grave crises in the 1960s. The first was in 1961 when Britain, acting unilaterally, informed its partners that it had applied for membership in the EEC. The upshot was a joint declaration in which EFTA members committed themselves to “coordinate their action and remain united throughout the negotiations.” The second crisis occurred in October 1964, when, to shore up the pound sterling, Britain suddenly introduced a surcharge of 15 percent on all its industrial imports—an act that was in violation of the treaty.

Finland became an associate member of EFTA in July 1961, and Iceland was admitted to full membership in March 1970. In 1973 Britain and Denmark left the association when they were accepted as members in the EEC—Britain, after two previous unsuccessful tries. At the beginning of the 21st century, the remaining EFTA member countries were Iceland, Norway, Liechtenstein, and Switzerland. The group continued to advance global trade; for example, in 2003 EFTA signed separate free-trade agreements with Singapore and Chile.

Comecon

Since the Russian Revolution of 1917, Soviet policy had clearly been influenced by the desire for self-sufficiency, further reinforced by Soviet suspicions of the capitalist world and by a strong desire for centrally directed planning. In response to the Marshall Plan, a Soviet-sponsored effort to integrate the economies of eastern Europe began as early as January 25, 1949. (It was disbanded on June 28, 1991.) Bulgaria, Hungary, Poland, Romania, Czechoslovakia, and the Soviet Union were the founding members of the resultant organization, Comecon (Council for Mutual Economic Assistance). Albania joined in 1949, and the German Democratic Republic in 1950, though Albania ceased to participate after 1961. In its early years the activities of Comecon were limited mainly to the registration of bilateral trade and credit agreements among the member countries. After Joseph Stalin’s death in 1953, it made efforts to promote industrial specialization and to reduce “parallelism” in the economies of its members. In 1956 and 1957, when most of its standing commissions began to operate, attempts were made to harmonize the long-term plans of the members. The establishment of the EEC in 1958, together with pressures from the eastern European countries for a greater degree of independence, induced the Soviet leadership to rethink the organization. A new charter was signed by the members in Sofia, Bulgaria, on December 14, 1959.

Comecon sought to coordinate the development of technology and industrialization, growth of labour productivity, and industrial specialization in member countries. Its objectives, however, were hindered by certain political and economic constraints. One of the most serious was the absence of flexible and realistic price systems in the member countries. This made it impossible to base trade on relative prices; instead it was conducted mainly on a barter basis through bilateral agreements between governments. In negotiating such agreements, the parties were led to use “world prices”—i.e., prices prevailing in the trade of countries outside Comecon. Another hindrance to economic integration was the highly centralized economic planning in the member countries, which had only limited success in coordinating their plans. There were also serious nationalistic tensions within the council. The Romanian government, for example, announced its intention to pursue all-around industrialization, including the development of its heavy industries, in opposition to the policy of specialization in raw materials and agricultural products that was said to have been Comecon’s plan for Romania.

Among the practical achievements of Comecon, however, were the organization of railroad coordination (1956); construction of a high-voltage electricity grid (1962); creation of the International Bank for Economic Cooperation (1963); the pooling of 93,000 railway freight cars (1964); and construction of the “Friendship” oil pipeline from Russia’s Volga region to the eastern European countries. Comecon initially was composed of the Soviet Union’s eastern European satellites, but in 1962 the Mongolian People’s Republic became a member, followed by Cuba in 1972 and Vietnam in 1978.

Comecon was often called the eastern European counterpart of western Europe’s EEC. Although their general aims were indeed the same, the two organizations differed radically in their approach to the problems involved. While Comecon sought to achieve cooperation among nations with centrally planned economies, the EEC aimed to achieve decentralized integration by means of an economic market in which goods, services, capital, and persons could have full freedom of movement—a market regulated by uniform economic legislation.

The collapse of communist governments across eastern Europe in 1989–90 was followed by a shift to private enterprise and market-type systems of pricing, all of which undermined Comecon’s system of trade and by 1991 left the organization defunct. Under agreements made early in 1991, Comecon was replaced by the Organization for International Economic Cooperation, a group intended to assist with the move from centralized to market economies. Each nation was deemed free to seek its own trade outlets, and the obligation of membership was reduced to a weak pledge to “coordinate” policies on quotas, tariffs, international payments, and relations with other international bodies. Over time, the former Comecon countries moved away from the Soviet-era trade restrictions and developed trade relationships with other nations—particularly those of the EU.

Maurice AllaisThe Editors of Encyclopaedia Britannica

Economic integration in Latin America

Progress toward economic integration in Europe encouraged the Latin American republics to make similar attempts. By the late 20th century several organizations had been established to work toward such integration; they included the Central American Common Market; the Latin American Free Trade Association; the Andean Community of Nations; and the Caribbean Community and Common Market.

The Central American Common Market

On June 10, 1958, El Salvador, Guatemala, Honduras, Nicaragua, and Costa Rica signed a multilateral treaty aiming at free trade and economic integration. The Central American Common Market (CACM) provided for the establishment of a free-trade area within 10 years. The participating countries also agreed to the industrial integration of the region. These arrangements were completed by the signing on December 13, 1960, of the Treaty of Managua. Its aims were similar to those of the EEC, namely, the establishment of a common market within five years and the organization of integrated industrial development. Most barriers on the region’s internal trade were then removed or reduced.

Economic integration in Central America has been hampered by disagreements and military conflicts in the area. Following a dispute with El Salvador in 1970, Honduras in effect withdrew from common market membership by implementing tariffs on imports from other member countries. In 1980, however, Honduras signed a treaty with El Salvador, settling their dispute and restoring Honduran participation in the common market trade agreements in 1981. During the 1980s, tensions between the revolutionary government of Nicaragua and its neighbours, as well as other disorders, disrupted trade between the nations of Central America. In an effort to promote freer trade in the larger region, the group began working on trade agreements with the Caribbean Community and Common Market (Caricom, see below) in 1991, and CACM negotiated an agreement with the Dominican Republic in 1998. Throughout this time, CACM also took steps to protect its interests against Mexico’s increasing economic dominance in the region, especially after Mexico, Canada, and the United States signed the North American Free Trade Agreement.

The Latin American Free Trade Association and the Latin American Integration Association

On February 18, 1960, Argentina, Brazil, Chile, Mexico, Paraguay, Peru, and Uruguay signed a treaty setting up the Latin American Free Trade Association (LAFTA), predecessor to the Latin American Integration Association. By 1970 the seven signatories had been joined by Ecuador, Colombia, Venezuela, and Bolivia. The treaty provided for a 12-year transition period during which all obstacles to trade were to be eliminated. It was based on the principle of reciprocity and most-favoured-nation (MFN) treatment. Member states also committed themselves to progressive coordination of their industrialization policies. Special treatment was provided for agriculture and for the relatively least-developed member countries.

Liberalization of trade between the member countries was carried out initially through negotiation of product-by-product concessions. In 1967, however, the negotiations failed; they were postponed to 1968, when agreement was reached on a system of across-the-board automatic tariff reductions similar to those of the EEC. The eventual aim was that LAFTA be the first step in a process that would lead to a common Latin American market, but during the 1970s it became apparent that the geographic diversity and varying levels of economic development exhibited by the member countries were handicapping the formation of a true common market within the association’s existing framework.

In the late 1970s negotiations were begun to establish a new framework for economic integration, and in 1980, 20 years after the creation of LAFTA, the Latin American Integration Association (LAIA; Asociación Latino-Americana de Integración) was formed. Unlike its predecessor, LAIA adopted an alternative to the concept of a free-trade area in that it opted for the establishment of bilateral preference agreements that would take into account the varying stages of economic development of the member countries. Cuba was admitted to LAIA in 1986 with observer status and became a member in 1999. In order to best negotiate bilateral preference agreements the member nations were divided into three categories. Although some countries were shifted to different categories over time, by the beginning of the 21st century the three tiers were: most-developed countries (Argentina, Brazil, and Mexico); intermediate-developed countries (Chile, Colombia, Peru, Uruguay, and Venezuela); and least-developed countries (Bolivia, Cuba, Ecuador, and Paraguay). Panama became a member of LAIA in 2012.