Eastern European Trade Research Paper

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To understand trading patterns in Eastern Europe it is useful to examine the East–West divide of Europe that had its roots in the ancient and premodern world. With post-Communist globalization of trade, and the increasing exchange among European Union members in the twenty-first century, there is little reason to consider Eastern Europe as a distinct trading region.

If civilization means thinking about and acting toward “aliens” civilly, then globalization means thinking about and acting toward potential partners globally. Both concepts come into play when discussing European regional economic relations, which embody aspects of mutual alienation—here “alienation” is used in its original, general sense of being “other,” the Latin alius—especially between East and West.

The concept of “otherness” that divided Europe in terms of geographic longitude originated in two major “unifications” of classical times (the Greek Empire of Alexander the Great and the Roman Empire) and in two major, subsequent divisions (the split of the Roman Empire into a Western Empire ruled from Rome and an Eastern Empire ruled from Byzantium, and the Great Schism of 1054 between the Roman Catholic and the Eastern Orthodox churches). Both empires thus considered the rest of Europe as “other” from themselves, and the two divisions made Eastern “other” to Western, and vice versa.

Early East–West Trade

Whereas the boundaries separating “east” from “west” depressed trade and barter, the later religious division— the “north” remaining Christian and “south” becoming Islamic—initially stimulated trade. The explanation lies in cultural asymmetry, be the boundary longitudinal or latitudinal.

In its crudest form the cultural divide was language, merely because that of the “other” was incomprehensible: Greeks and Romans called foreigners barbari, “barbarians,” parodying their tongues as bah bah; Slavs described foreigners as nemets, from the verb nemet’, “to become dumb”; Russians and Poles later restricted the word to Germans (nemtsy; niemcy), paradoxically the nation with whom both political confrontations and economic exchanges were greatest.

The cultural, political, and economic development of the “west” was more advanced than that of the “east” and tended to limit trade to the “western” import of raw materials and agricultural and hunting produce against its export of manufactures. Thus the treaty of 944 between Prince Igor of Kiev and Byzantium—the first formalization of east–west trade—imposed quotas on the quantity of silk goods that the gosti, or traders, of Kievan Rus could purchase annually. Although Suzdal succeeded it as the Russian capital in 1169, Kiev was (until conquered by the Mongols in 1240) one of Europe’s largest trade centers, a “Ravenna of the North.”

A reverse asymmetry was obtained across the north–south division of the Mediterranean and western Asia. Byzantium, and Europe generally, bought metal goods and textiles from networks spanning Alexandria and Damascus to Bukhara and Samarqand, cities that in the Middle Ages were more industrially advanced than those of Europe. The Silk Roads from Europe to Central Asia, along which Chinese, Persian, and Indian manufactures flowed, became the major channel of east–west trade when piracy impeded use of the sea passages and Ottoman Turks blocked Christians from the southerly land routes. But by the time Marco Polo publicized the route’s commercial attractions, cities in his native Italy were creating new forms of enterprise and new products in a proto-industrialization that would by the eighteenth century eventuate in Western economic superiority over the East.

Medieval Markets

Meanwhile, however, Russia had succumbed to the Mongols. Already controlling China, Persia and Transcaucasia from their Central Asian base, Tatar armies arrived on the Volga in 1236 and by 1240 had conquered most of the Russian principalities, which for two centuries thereafter paid tribute to the Khans of the Golden Horde. The command economy imposed by the “Tatar yoke” (tatarskoe igo) influenced the Russian administrative and fiscal structure—the present Russian words for customs house, label, money, and treasury derive from Mongol. The command economy itself was to return, albeit in modern and more complex form, in the Soviet system of 1918–1991. The Republic of Novgorod resisted the Tatars and became the commercial capital of Russia: until the establishment of Saint Petersburg in 1703, the Novgorod Fair was the epicenter of east–west trade.

From the twelfth century the institutional setting for overland trade in Western Europe was the annual fair (Jahrmarkt in German), though its equivalent in Russia, derivatively the yarmaka, did not appear until the sixteenth century. German, Scandinavian, and Greek traders presented their goods for sale, which were purchased by Russian gosti, who supplied farm and forest products in return, organizing supply chains that for fur pelts stretched for more than a thousand kilometers. Merchants organized as the Hanseatic League were the most important Western mercantile community, while the Russians grouped themselves by sources of imports—stetichniki trading with Stettin, for example, or the gotlandsky dvor with Swedes. For the rest of medieval Eastern and Central Europe, the Frankfurt Fair was the cynosure among many regional fairs, convened around the feast day of locally venerated saints. Seaborne trade remained in the hands of foreigners, Venetians and Genoese in the Mediterranean and the Black Sea, and English to the White Sea, whence Russian forests provided exports directly as timber, and indirectly as charcoal for smelting copper and iron and as ashes for bleaching linen.

Trade between Modern Nation-States

The transition from medieval to modern statehood in Europe is conventionally dated at the Treaty of Westphalia in 1648, though the fiction of Europe’s Holy Roman Empire was not to be terminated until Napoleon’s fiat of 1801. Nation-states became economic as well as political entities, limiting by taxes, duties, and bans the trade of their citizens with others. Thus long globalization of Christian Europe ended —in the sense that within its area a trader could choose globally among potential partners. The largest state on the eastern side was, of course Russia, and its trade relations were transformed by Peter the Great (1672– 1725). His visits in 1697 to his Baltic provinces, Prussia, Hanover, the Netherlands, and England provided the czar with models for far-reaching administrative and fiscal modernization and the encouragement of trade and industry. The creation of his “window on the West,” Saint Petersburg on the Baltic Sea, and territorial expansion along the Black and Caspian Seas fostered commerce. Trade across the Pacific, however, had to wait for the founding of Vladivostok in 1860 and the construction of the Trans-Siberian Railway in the ensuing decade. Financial intermediation was internationalized by the opening of the Petersburg stock exchange, the Bourse (Birzha), in 1703, and by 1914 there were 115 stock and commodity exchanges across the country. Nevertheless it was not until 1897 that Russia went on the gold standard, only to suspend convertibility at the outbreak of World War I in 1914.

Between 1648 and 1914 the only large state of Eastern Europe was Poland until its dismemberment by Russia, Prussia, and Austria at the end of the eighteenth century. In the Balkans, Montenegro clung to a precarious autonomy throughout, with little to export save bandits; in the nineteenth century, Bulgaria, Romania, and Serbia gained their independence, but, being small and agrarian, their impact on European trade was negligible. Serbian pigs were herded to Austrian slaughterhouses, Bulgarian attar of roses and tobacco had niche markets, and in the later nineteenth century tankers shipped Romanian oil up the Danube. German occupation of much of the region during World War I nullified frontiers, but within a controlled Kriegswirtschaft (war economy) there was scant trade to flow across them.

Post-Habsburg Europe

The leitmotif for Eastern Europe in the Versailles and Trianon peace treaties (1919, 1920) was national self-determination: Poland and Albania were reborn; Hungary, Czechoslovakia, and parts of a new Yugoslavia were separated from the Austro-Hungarian Empire, as was Transylvania, to enlarge Romania. Soviet Russia after Lenin’s 1917 revolution lost territory to Poland and Romania. The immediate economic damage of the new frontiers was the disappearance of the Austro-Hungarian customs area: at the Portorosa Conference (1921) the successor states negotiated a set of protocols that could have restored a low-tariff basis, but governments never ratified them, and by the time of another failed attempt, the Geneva Conference of 1927, mutual tariffs were 39 percent of price. The reason lay in the smaller states’ fear of economic and financial domination by Budapest and Vienna: Czechoslovakia, Romania, and Yugoslavia were concerned lest Hungary reinstate itself territorially or commercially. Nevertheless the foreign trade turnover of all seven, like that of the USSR (the title formally adopted by that nation in 1924) during its New Economic Policy (1921–1928), expanded during the 1920s. The reverse was true of the 1930s. The industrial exports of Czechoslovakia and Poland were worst hit by the world depression after the 1929 stock market crash, but all of the countries concerned lost export earnings as raw material and agricultural prices collapsed. Over the two interwar decades most countries exported only one-tenth of their national product (but almost double that in Czechoslovakia and Hungary), while after 1928 the Soviet Union retreated into near autarky under Stalin’s five-year plans (by 1937 it exported only 0.5 percent of an enlarged national product). The Eastern European reaction to the depression, as elsewhere in the developed world, was to erect higher protective tariffs and restrict currency convertibility. Apart from Czechoslovakia, which was a net capital exporter in the 1920s, the region borrowed substantially from Western Europe, but creditor-currency devaluation and the shrinkage of financial markets brought the ratio of the Eastern European countries’ external debt down to 18 percent of GNP by 1938. Overall, the interwar years were an abnegation of regional globalization.

Already before World War II Nazi Germany had imposed a Reichsmark clearing system on its Eastern European trade partners except for Poland; this at least assured them of markets in a depressed world, but Germany’s rearmament left few goods and services upon which they could spend otherwise inconvertible balances. In essence they were financing that arms drive. Beginning with the annexation of Sudetenland from Czechoslovakia in 1938, German (and in the Balkans, Italian) occupation policies, and those of its client states, subordinated Eastern Europe to German economic requirements, formulated as a Grossraumwirtschaft (the economy needed to support German territorial expansion). The region, and the western USSR after the 1941 invasion, were to be tributaries of farm produce and raw materials to a German “core” of heavy industry, into which only the German “protectorate” of Bohemia-Moravia was economically incorporated.

The COMECON Era

Eastern Europe endured a further occupation when the Soviet armies swept to victory in 1945. By 1947 the governments of eight states were under Communist rule (Albania, Bulgaria, Czechoslovakia, Hungary, Poland, Romania, the USSR, and Yugoslavia), and in 1949 the USSR adapted its Zone of Occupation in Germany into the German Democratic Republic. If the decisive break with the Western market economies is to have a date, it would be 1947, when the Soviet Union and its subordinate states rejected participation in the Marshall Plan and in the ensuing Organization for European Economic Cooperation. In ostensible compensation for the absence of a corresponding body for Eastern Europe, the USSR sponsored the establishment of a Council for Mutual Economic Assistance, commonly abbreviated to COMECON, in 1949. By then Yugoslavia had broken with the USSR and Albania had changed allegiance from Yugoslavia to the Soviet Union. COMECON included Albania briefly in its membership, and later two other Soviet allies, Cuba and Mongolia. In the 1950s and 1960s a steady 60 percent of members’ exports were directed to each other—exports predominantly of Soviet raw materials against Eastern European equipment and manufactures. Trade was underwritten among COMECON members by a mutual coordination of annual and longer-term plans for each economy, and trade with the West deterred by strategic embargoes and restrictions imposed by NATO members through a Consultative Group Coordinating Committee (CoCom). As the imperatives of the Cold War weakened and estimates of comparative trade advantage strengthened, the mutual export dependence among COMECON nations diminished: by 1980 it was 49 percent and by 1990, 38 percent.

Post-Communist Globalization

The collapse of communist regimes in all COMECON states between 1989 and 1991 brought the Council to an end and opened the trade of the twenty-seven countries of Central and Eastern Europe and the Commonwealth of Independent States (CIS) to worldwide globalization: by 2002 only 21 percent of their exports moved within the region, while 73 percent were to other developed market economies (6 percent were with developing countries). Capital from the West supported economic development. Foreign direct investment amounted to $34 billion in 2002; gross external debt was in aggregate 46 percent of Eastern European GDP with 44 percent of that in the CIS alone. All but three countries (Belarus, Turkmenistan, and Uzbekistan) had by 2003 liberalized trade and current payments, and all but those three and six others (Azerbaijan, Bosnia-Herzegovina, Kazakhstan, Russia, Serbia-Montenegro, Tajikistan, and Ukraine) had joined the World Trade Organization. Once it had been opened to commercial and financial flows like those of most developed economies, scant rationale remained for considering Eastern Europe as a distinct trading region. As the European Union extended its membership—the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Slovakia, Slovenia, and Poland joined in May 2004; Bulgaria and Romania joined on 1 January 2007; Croatia, the former Yugoslav Republic of Macedonia, and Turkey are candidates to join, while Albania, Bosnia and Herzegovina, Montenegro, Serbia, and Iceland are recognized as potential membership candidates; Kosovo is also seen as a potential candidate, but not all member states recognize its independence from Serbia—what had once been trade between blocs became the internal trade of a single market or trade with countries, both east and west, having association agreements with the EU. Thus, perhaps, the concept of “other” (alien) will give way in a market of globalized trade to a truly civilized exchange.

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