A novel institution: the Zollverein and the origins of the customs union

Abstract

AbstractThe Zollverein, the outcome of sequential negotiations between Prussia and other sovereign German states in 1834, was the first international customs union, the template for modern ones such as the European Union. This paper applies a bargaining model to analyse the logic behind the creation of this novel institutional form and the choice of sequential rather than multilateral negotiations. The existence of negative coalition externalities, the effects of new coalitions on non-participants, led the agenda setter, Prussia, to choose sequential over multilateral negotiations as that lowered the membership reservation prices of the other states involved. Institutionally, the features of a customs union structure provided a higher payoff for the agenda setter than capturing the welfare gains from the differential tariff setting in a free trade agreement, explaining the emergence of this novel institutional structure on an international scale.