Ties to West European Markets

Finland Table of Contents

Although trade with Western Europe developed slowly in the early postwar years, by the 1980s it was more important than trade with the East. During the early and mid-1950s, when the West European countries liberalized trade and exchange regulations under the OEEC, Finland maintained import and export controls inherited from World War II and the reparations years. Conducting almost all trade under bilateral agreements (except for occasional trilateral deals worked out with the Soviet Union and another East European country), Finland saw its trade grow only slowly. Thus, although the forest industries were competitive, the economy as a whole remained isolated. The Finns did participate to a limited extent in international economic organizations, joining the International Monetary Fund (IMF), the World Bank, and the General Agreement on Tariffs and Trade (GATT) in the late 1940s. The country also became a member of the Nordic Council and agreed to a Nordic labor market, but did not favor a Nordic common market because of Soviet opposition. Faced by the growing movement toward West European economic integration after 1955, Finland ran the risk of remaining on the sidelines, not only because of Soviet pressures but also as a result of domestic protectionism.

It was not until 1957 that the Finns first shifted their policy toward Western Europe in a move designed to protect access to traditional export markets, especially in Britain, and to shift economic activity to branches in which the country had a comparative advantage at a time when extensive economic growth was reaching its limits. The new policy package combined an austerity program, a sharp currency devaluation, and multilateral tariff reductions for trade in industrial goods arranged through the Helsinki Club, which was a model for further trade agreements. In effect, Soviet opposition had blocked Finnish membership in the OEEC, leading the Finns to set up the Helsinki Club, which the OEEC countries, agreeing to apply their liberalized import lists to Finnish goods, then joined. In 1958 Finnish authorities further liberalized trading conditions by making the Finnish mark convertible in European markets.

Since the late 1950s, Finland has consistently pursued freer trade in industrial products with the members of EFTA and the EEC, while protecting domestic agriculture to maintain food supplies and while controlling oil imports to safeguard trade with the Soviet Union. Under the FINEFTA agreement, signed in March 1961, Britain and other EFTA states extended associate membership and free-trade arrangements to Finland. In 1969 Finland joined the Organisation for Economic Co-operation and Development (OECD), the successor to the OEEC. Although the OECD played a minor role in commodity trade, its recommendations regarding cooperation among industrialized free-market economies touched on issues such as freer trade in services and liberalized capital transfers. When two important trading partners, Britain and Denmark, switched from EFTA to the EEC, Finland (like the other EFTA states) negotiated with the EEC an industrial free-trade agreement that came into effect in 1974. In 1986 Finland became a regular member of EFTA, the Soviet Union's finally having recognized that the organization posed no threat to its security or its trade interests. Under these freetrade agreements, virtually all Finnish industrial goods entered West European markets duty-free (but they sometimes faced troublesome nontariff barriers). These arrangements led to rapid increases in trade with Western Europe, stimulating specialization and improving economic efficiency in Finland.

Finnish business intensified its interest in Western Europe during the mid-1980s and the late 1980s, as falling oil prices led to a curtailment in trade with the Soviet Union. In 1986 and 1987, the Finns managed to shift trade smoothly from Eastern to Western markets, a development that soothed trade worries. Despite this success, in early 1987 prominent Finns voiced fears that the EC's plan to unify its markets by 1992, a plan approved in June 1985, might harm Finnish trade interests. According to this line of thought, the elimination of the remaining hindrances to trade in commodities, the establishment of free markets in services and capital, and the further harmonization of European macroeconomic policies would favor EC products, reducing Finnish access to EC markets. Commentary became especially heated after reports that other EFTA states, including Norway and Austria, were considering joining the EC, as Portugal had done in 1986. Moreover, the tendency for EC countries to expand cooperation from economic matters to security questions made Finnish membership in the EC politically impossible.

Informed analysts noted that, as it had in the years after 1957, Finland could maintain access to European markets without undermining its independent foreign policy. Although deepened integration among the EC countries would tend to reduce EC-EFTA trade, Finland and the other EFTA countries were not defenseless. As a group, the EFTA countries formed the EC's largest trading partner and could exert considerable pressure on EC harmonization decisions. Indeed, the EC had demonstrated some willingness to cooperate with the EFTA countries in April 1984, when representatives of the two trading groups issued the Luxembourg Declaration, which called for reduced technical barriers to trade, for common norms in information technology and telecommunications, and for greater cooperation in multilateral research and development programs. Even if EFTA efforts lagged, Finland could maintain trade ties with the EC by aligning national technical norms, commercial practices, and economic policies with those chosen by the EC. Other arrangements were also possible. For example, in 1986 Finland joined the ESA (which included other non-EC countries), participating in the group's earth observation satellite program as well as in basic research efforts. In effect, expanded technical cooperation offered the prospect that, while integration with the EC countries would extend far beyond commercial agreements during the 1990s, Finland could participate without sacrificing political neutrality.

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Source: U.S. Library of Congress