Discussion paper
DP13634 How Britain Unified Germany: Trade Routes and the Formation of the Zollverein
If trade costs vary with trade routes, the location of a state can shape its bargaining power. To show this, we study an exogenous change in Prussian borders 1815 following a British intervention. This led to the formation of the Zollverein, the first customs union in history. We document how trade routes mattered for the decision of states to join a customs union. We present a model featuring tariffs that depend on location. Calibrated to historical data the model replicates sequence of historical decisions. With counterfactual borders absent Britain's intervention, the Zollverein would not have been formed.
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