There has been considerable public debate in recent years about the need for – or dangers of – movement by countries towards free trade with one another. At a CEPR meeting on 16 September 1997, Dan Ben-David (Tel Aviv University, NBER and CEPR) examined the issues surrounding whether countries should adopt free-trade policies, or whether they should look inward to avoid exposing themselves to cut-throat competition from abroad that may lead to domestic difficulties.

One of the cases that Ben-David highlighted was that of the original six founding countries of the European Economic Community (EEC). He sought to establish whether there were any lessons to be learned from the creation of the EEC and, in particular, whether trade liberalization within the EEC had reduced income disparity among member countries and what effects, if any, it had had on their economic growth paths.

Ben-David recalled that the late 1940s had brought the first hints of trade liberalization, with the creation of the Benelux union and the Marshall Aid-induced relaxation of quantitative trade restrictions among the future EEC countries. Trade liberalization had continued with the formal creation of the EEC in 1957 and the implementation of a ten-year transitional period (1959–68). Nearly all remaining trade restrictions among the EEC members were eliminated in a series of across-the-board cuts in tariffs and quotas during this period. Prior to these moves towards free trade, during the six decades between 1870 and 1930, the income gap among the countries had remained remarkably stable. The gap had then fallen by two-thirds between 1950 and 1968, before stabilizing at this new, lower, level. Nor was this example of trade liberalization being accompanied by income convergence unique to the EEC. It had been repeated in other groups of countries where, as mutual trade had increased, the income gap among them had fallen substantially.

This evidence raised the question of whether the catching-up exhibited by the poorer countries had been at the expense of their wealthier partners, i.e. was this a zero-sum game? Ben-David recalled that both World Wars had led to massive reductions in European income levels. But, unlike in the post-1945 period, the first World War had not been followed by extensive trade liberalization. Looking at the five (out of the six) founding EEC countries for which historical data exists, it was clear that, whereas the first World War had been followed only by a return to the original growth path, the second had brought a movement to a new and steeper growth path.

More specifically, the average annual growth rate of real GDP per person in the five countries had been 1.4% between 1870 and 1939, but 3.4% between 1950 and 1989 – an increase of nearly two and a half times. Moreover, the growth rate of exports, which had proceeded at roughly the same rate as output during the decades preceding the second World War, had risen substantially as the countries had liberalized their trade. Thus average post-1945 export-output ratios in the EEC countries were 2.7 times the pre-war ratios.

Consequently, trade liberalization in the EEC had coincided with a sharp drop in income disparity among the countries, and this convergence had not come at the expense of the wealthier countries. In fact, claimed Ben-David, every one of the liberalizing countries had moved to a new and higher long-run growth path. Clearly, there were a number of other post-World War II events, besides the movement to freer trade, that had contributed to these changes. Nonetheless, the fact that differences in the timing of the trade liberalization schedules of different groups of countries appeared to have been strongly related to differences in the onset of income convergence suggested that trade had played an important role in the positive growth experiences of the countries concerned.