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European Free Trade Association EFTA

European Free Trade Association EFTA

The European Free Trade Association (EFTA) is a trade organisation formed in 1960 which created a free trade area between the countries of the United Kingdom, Norway, Sweden, Austria, Portugal, Switzerland, and Denmark. It is also known as the 'Outer Seven' in comparison to the EEC’s six founding states who were known as the 'Inner Six'.

The formation of the EFTA in response to the EEC (European Economic Community) is an example of Britain's foreign economic policy during the British Economic Golden Age. Its principal goal was to aid with economic modernisation in Britain.

The formation of the EFTA highlights Britain's position in world affairs during the post-war period, as it attempted to consolidate its ties with the Commonwealth and the United States with the increasingly-appealing possibility of entering Europe's common market.

EFTA countries

The European Free Trade Association is still active today, but only two of the founding members remain: Norway and Switzerland.

The European Economic Community (EEC)

The European Economic Community (EEC) was established by the 1957 Treaty of Rome, which was signed by six founding members: France, Italy, Luxembourg, Belgium, the Netherlands, and West Germany.

The Schuman Plan of 1950

The Schuman Plan paved the way for the formation of the European Economic Community. It was a proposal by French foreign minister, Robert Schuman, to place France and West Germany's coal and steel production under a single authority, what became the European Coal and Steel Community. The purpose of the Schuman Plan was to revitalise the European economy and to make strides toward world peace, eliminating the possibility of war between these nations, as their heavy material resources would be tied up together.

The EEC's common market and customs union

The treaty created a common market based on the free movement of goods, people, services and capital, and a customs union for these members.

  • Common market: the six signatories of the treaty agreed to align their economic policies and to gradually abolish restrictions on trade through a common trade policy. This meant that members had to abide by trade rules established by the EEC and not by national government bodies. Thus, a common market of a net 200 million people was established.
  • Customs union: the treaty established a common external tariff on imports from outside the EEC and abolished customs duties between the six.

The aim of the EEC was to strengthen both the economic and political relations between 'the Six', thereby moving towards the economic and political unification of Europe.

The EEC's trade rules were not based on principles of free trade, but on protectionist principles of restricting imports from non-EEC countries through the use of a common external tariff.

Protectionism

The economic policy of restricting imports from other countries through control methods such as tariffs on imports and import quotas. Goods imported from other countries have taxes and a limit can be set on the number of imports a country can accept.

Common Agricultural Policy

The EEC's Common Agricultural Policy (CAP) established a common agricultural trade policy. The trade policy of the CAP is seen as a protectionist for two reasons:

  • Subsidies: agricultural products produced within the EEC were to be subsidised to address rural poverty. The subsidies meant that farmers were guaranteed a fixed price for their products, regardless of cost or demand. This had the adverse effect of high prices for the consumer.
  • Quotas and tariffs abolished: members of the EEC would not be limited to a certain amount of agricultural imports from other EEC countries; there would be no added tariff on agricultural goods produced by EEC states.
  • Common tariff on imports: a common tariff on agricultural imports from non-EEC countries was established.

Britain's initial opposition to the EEC

Britain could have easily joined the EEC from 1951 to 1957, as the founding members of the EEC were still undergoing negotiations on the organisation. However, there was a consensus between the government and the public and within political parties that Britain should not join the EEC.

Euroscepticism

The British government and British people both shared a distrust in the EEC and the idea of European integration, which the EEC was based upon. This ideology is known as Euroscepticism and it was prevalent in post-war Britain.

One reason for Euroscepticism was the fresh memories of the roles Germany and France, now sitting at the head of the table in the EEC, had played in the Second World War. Britain was reluctant to hand over its sovereignty to ‘the Six’ and instead wanted to cling to its declining status as an Empire and a superpower.

Euroscepticism was shared by both the Conservatives and the Labour party. In 1962, Labour Party leader Hugh Gaitskell declared that if Britain were to join the EEC, it would be

the end of Britain as an independent European state. I make no apology for repeating it. It means the end of a thousand years of history.

Preserving trade links with the Commonwealth and the special relationship with the United States

The CAP made agricultural goods costly for EEC members, but Britain could get much cheaper food in the Commonwealth markets. There was a consensus between political parties to prioritise trade links with Australia, Canada, and New Zealand.

Joining the EEC would mean giving up these valuable trade links, as the EEC's common external customs tariff stipulated that members of the association could not pursue any agreements with non-EEC countries that would breach the trade rules established by the EEC.

The European Free Trade Association (EFTA)

Countries in continental Europe that did not join the EEC ran the risk of reduced economic growth, as they did not benefit from the Common Market. Therefore, in 1959, the United Kingdom took the lead in setting up the EFTA with Norway, Sweden, Austria, Portugal, Switzerland, and Denmark as a free trade rival to the protectionist EEC. The Convention of the EFTA was signed in 1960.

European Free Trade Association EFTA Harold Macmillan oversaw the creation of the EFTA, StudySmarterThe Prime Minister who oversaw the creation of the EFTA was Harold Macmillan, Wikimedia Commons.

The goal of the EFTA was to promote closer economic cooperation and to liberalise trade in Europe.

Economic modernisation

Economic modernisation

To modernise an economy means to bring it in line with the global frontiers of capitalist expansion. Technological innovation is one example of economic modernisation.

The formation of the EFTA was part of Britain's efforts to modernise the British economy. On a basic level, economic modernisation refers to a country's efforts to keep up with the global frontier of economic developments and progress. In the post-war moment, one development in global economics was the move towards international cooperation in trade, as can be seen with the Marshall Plan, and of course, the EEC.

Therefore, the creation of the EFTA under the Macmillan government was an attempt to catch up with this new frontier of economic development without giving up Britain's sovereignty.

Free trade

The other key aspect of the EFTA was its promotion of 'genuine' free trade, in contrast to the protectionist nature of the EEC's trade policies. The EFTA did not impose import tariffs and import quotas on its members, who were free to seek their own trade agreements with nations outside of the EFTA.

Differences between the EFTA and the EEC

The table below outlines the main differences between the EFTA and the EEC, illustrating how the EFTA purposefully set itself apart from the political and protectionist nature of the EEC.

EECEFTA
An economic and political organisation that sought to unify Europe.A solely economic organisation without the political goal of unification between the member countries.
The customs union of the EEC was a supranational union, as trade was managed at the EEC level, rather than at the national government level, promoting the economic integration of Europe.The EFTA had no supranational governing body. Rather than seeking integration, the EFTA sought intergovernmental cooperation on trade, with member countries' governments retaining autonomy.
Common external customs tariffs were in place and member states were not allowed to enter into non-EEC countries which would breach EEC rules.EFTA countries were free to establish their own customs duties or free-trade agreements with non-EFTA countries.
The EEC had a Common Agricultural Policy, whereby member states agreed to pay agricultural subsidies and tariffs on agricultural imports in place.The EFTA had no common agricultural policy, but EFTA states grant each other preferential market access to basic agricultural goods.
There were potential economic disadvantages to the EEC's protectionist trade policies. For example, the high prices of agricultural goods.Free trade and the reduction of trade barriers were considered to have a more positive effect on economic growth.

EFTA advantages and disadvantages

Let’s study some advantages and disadvantages of EFTA.

Advantages of the EFTA

The main advantage of the EFTA was its free trade policy which allowed Britain to keep its trade connections with the Commonwealth while also strengthening trade links with other European nations.

This aided with the project of the economic modernisation of Britain and contributed to an increase in economic growth in Britain.

Disadvantages and failure of the EFTA

The main disadvantage of the EFTA was its inability to match the influence and economic growth of the EEC. By 1972, most members of the EFTA had joined the EEC. The EFTA didn't give the UK economy enough of a boost to sustain its costly public or military expenditure.

GDP growth rate in European nations 1951-64:

CountryPercentage growth
Italy5.6
West Germany5.1
France4.3
UK2.3
The relatively stilted economic growth of Britain became clear to Harold Macmillan in 1961, who put forward Britain's first application to join the EEC.

Professor of Political Economy, Arthur I. Cyr, argues that the EFTA's 'geographically peripheral and economically diffuse combination of nations provided neither greater internal prosperity nor a meaningful counterweight to the EEC.'¹

European Free Trade Association EFTA, a map of Europe highlighting countries with EFTA membership,StudySmarterA map of Europe depicting the founding member states of the EFTA. In dark green: remaining members of the EFTA and in light green: former EFTA members. Source: Júlio Reis, CC-BY-SA-2.5, Wikimedia Commons.

Britain's 1961 application to join the EEC

As Britain missed the opportunity to be a founding member of the EEC, by the time it submitted its 1961 application to join the organisation, it was four years late to the party. Not only was Britain late, it demanded to be let in on its own terms.

Motivations

Despite widespread Euroscepticism, Macmillan was driven to send Britain's application for mostly economic reasons:

  • The EFTA was no match for the EEC.
  • The Suez Canal Crisis and the decolonisation project set in motion by Macmillan both contributed to the decline of Britain's empire and harmed Britain's economy.
  • The US was eager to see Britain join the EEC, as the US' close ties with Britain meant that the latter would act as a bridge between the US and the EEC.
  • Joining the EEC would mean accessing a large scale trade network which would help significantly increase exports of British goods.
  • The efficiency of British industry would also be increased as there would be greater competition.
Macmillan tried to convince his party that joining the EEC was in Britain's best interest by stressing how it would impact Britain's status as a world power:

I believe that our right place is in the vanguard of the movement towards the greater unity of the free world, and that we can lead better from within than outside.

Negotiations

Macmillan wanted Britain to join the EEC without giving up its links and this quote points to the emphasis on securing special exemptions for Britain's links with the Commonwealth:

If a close relationship between the United Kingdom and the countries of the EEC was to disrupt the long-standing and historic ties between the United Kingdom and the other nations of the Commonwealth the loss would be greater than the gain.

- Harold Macmillan, 1961.

However, the problem wasn’t that the EEC would not accept Britain's requests for special exemptions, it was that the EEC would not accept Britain at all.

The 1963 veto by De Gaulle

European Free Trade Area EFTA, French Premier Charles De Gaulle who vetoed Britain's EEC application twice StudySmarterFrench Premier Charles De Gaulle in 1961, Wikimedia Commons.

Britain's unwillingness to give up its special relationship with the United States led to De Gaulle's veto. French Premier Charles De Gaulle used his veto to block Britain's entrance to the EEC in 1963. His reasons were:

  • In the wake of the Second World War, it was important for France to reassert its power independently of Britain and the EEC was one way to achieve this end. If Britain joined and was granted special exemptions, this political goal would be compromised.
  • Britain's special relationship with the US: De Gaulle didn't want the US to have a hand in the economic success of the EEC, with whom the EEC was in competition. De Gaulle was against America having economic or political control in Europe.
  • He saw Britain's agricultural model as incompatible with the EEC's, especially as the EEC's members had to adhere to the Common Agricultural Practice (CAP).

Britain's 1967 application to join the EEC

Britain's second application to join the EEC was put forward by Prime Minister Harold Wilson in 1967. This was during the later years of Britain's Economic Golden Age. Wilson toured Europe visiting member countries and building a favourable relationship with leaders, only to also be met with rejection by De Gaulle in December of 1967.

European Free Trade Association EFTA, Harold Wilson was the Prime Minister who put forward Britain's second EEC application in 1967, StudySmarterPrime Minister Harold Wilson (1964–70) put forward Britain's second application to the EEC in May 1967, Wikimedia Commons.

Motivations

Wilson inherited an ailing economy from Macmillan and Douglas-Home. The sterling crisis that led to the devaluation of the pound in 1967 had seriously weakened Britain's economy, leading him to put forward Britain's second application.

Wilson was also prepared to move away from the solely economic goals of the EFTA, stressing the importance of European integration and unification. He shared the EEC's political goals:

Europe is now faced with the opportunity of a great move forward in political unity and that we can — and indeed must — play our full part in it.

Negotiations

Wilson was also prepared to accept the EEC's agricultural policies if Britain was granted a transitional period to adapt to these:

We must be realistic and recognise that the Community's agricultural policy is an integral part of the Community; we must come to terms with it. But the Government recognises that this policy would involve far-reaching changes in the structure of British agriculture. This will require suitable arrangements.

The 1967 veto by De Gaulle

Despite Wilson's goal to integrate Britain within the EEC, De Gaulle was still as reluctant to let Britain into the EEC in 1967 as he was in 1961 and he vetoed Britain's application in December 1967.

Joining the European Economic Community in 1973

Under the Edward Heath ministry, Britain left the EFTA to join the EEC in 1973, approved by France's Premier Georges Pompidou.

Harold Wilson returned to office after Heath, however, and he was unhappy with the terms of Britain's EEC membership, so he held a referendum in 1975. The electorate was overwhelmingly in favour of Britain's continued membership.

The European Union was formed in 1993 and the EEC was incorporated within it.

European Free Trade Association EFTA - Key takeaways

  • The EEC was created in 1957, establishing a common market and a customs union. The EEC operated under a common trade policy and a common external tarriff.
  • The aim of the EEC was to strengthen both the economic and political relations between 'the Six', thereby moving towards the economic and political unification of Europe.
  • The EFTA was created as an alternative to the EEC in 1960 in an attempt to modernise the British economy. The main difference between the two associations is that the EFTA promoted free trade without relying on a common trade policy, but instead operated on a principle of preferential market access.
  • The aim of the EFTA was to promote economic cooperation and to liberalise trade in Europe.
  • Britain's opposition to assimilation with the EEC was due to Euroscepticism, a desire to preserve trade links with the Commonwealth and to maintain the special relationship with the US.
  • Britain was moved to apply to join the EEC due to economic hardship, with Harold Wilson in his second application, expressing a desire for Britain to be unified with France. However, Britain's 1961 and 1967 applications were both vetoed by Charles de Gaulle.

Sources

1. Arthur I. Cyr, Europe and the United States: change and continuity, International Affairs (Royal Institute of International Affairs 1944-), November 2012.

Frequently Asked Questions about European Free Trade Association EFTA

The founding members of the EFTA were United Kingdom, Norway, Sweden, Austria, Portugal, Switzerland and Denmark. Of the founding 'Seven', only Norway and Switzerland remain. The current member countries of the EFTA are Iceland, Liechtenstein, Norway and Switzerland.

The UK was part of the EFTA at the time of its formation in 1960. The UK left the EFTA in 1973 and joined the EEC. The EEC was incorporated into the EU in 1993. The UK left the EU in January 2020.

The difference between the EFTA and the EEA is that the EFTA is a solely economic association that does not share the political goals of the EEA for the integration of its member states and of Europe. The EFTA does not have a supranational governing body and it does not impose a customs union on its members.

Final European Free Trade Association EFTA Quiz

Question

Who were the founding members of the EEC, also known as 'the Six'?

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Answer

France, Italy, Luxembourg, Belgium, the Netherlands and West Germany.

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Question

Who were the seven founding members of the EFTA, also known as 'the outer Seven'?

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Answer

The United Kingdom, Norway, Sweden, Austria, Portugal, Switzerland and Denmark.

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Question

What was the Schuman Plan?

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Answer

  • The Schuman Plan was an agreement to place France and Germany's coal and steel production under the authority of the European Coal and Steel Community.
  • The purpose of this was to keep the peace between France and West Germany.

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Question

What were the key features of the EEC?

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Answer

  • The common market
    • A Common trade policy
  • The customs union
    • A common external tariff

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Question

What is protectionism?

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Answer

Protectionism is the economic policy of restricting imports from other countries through tariffs on imports and import quotas.

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Question

What is free trade?

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Answer

Free trade is international trade without any restrictions, such as tariffs or quotas.

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Question

What is the Common Agricultural Policy (CAP)?

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Answer

  • Subsidies: farmers guaranteed a fixed price for their products.
  • Quotas and tariffs were abolished; no added tariff on agricultural goods produced by EEC members.
  • Common tariff on imports: all agricultural imports from non-EEC countries were taxed.

Show question

Question

Why was Britain originally opposed to the EEC?

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Answer

  • Euroscepticism: distrust in the EEC and the idea of European unification.
  • The CAP would make agricultural goods costly for Britain.
  • Britain had good trade links with the Commonwealth.
  • Britain wanted to preserve the Special Relationship.

Show question

Question

What is economic modernisation? How was the creation of the EFTA an attempt to modernise the British economy?

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Answer

  • Economic modernisation means bringing an economy in line with the global frontiers of capitalist expansion.
  • One development in the post-war global economy was the increase of international cooperation with trade.

Show question

Question

What are the key differences between the EFTA and the EEC?

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Answer

  • The EFTA is a solely economic organisation without the political goal of unification between the member countries.
  • The EFTA had no supranational body. Rather than seeking integration, the EFTA sought intergovernmental cooperation on trade, with member countries' governments retaining autonomy.
  • EFTA countries were free to establish their own customs duties or free-trade agreements with non-EFTA countries.
  • The EFTA has no common agricultural policy, but EFTA states grant each other preferential market access to basic agricultural goods.
  • Free trade and the reduction of trade barriers is considered to have a more positive effect on economic growth.

Show question

Question

What are the advantages of the EFTA?

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Answer

  • Its free trade policy allowed Britain to keep its trade links with the Commonwealth.
  • It aided with economic modernisation.
  • It led to economic growth.

Show question

Question

What are the disadvantages of the EFTA?

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Answer

The EFTA didn't lead to enough economic growth in Britain.

For example, its GDP growth rate from 1951-64 was 2.3 per cent in comparison to Italy, which had a GDP growth rate of 5.6 per cent.

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Question

What were the motivations behind Harold Macmillan's 1961 application to join the EEC?

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Answer

  • The EFTA was no match for the EEC.
  • The Suez Canal Crisis and the decolonisation project harmed Britain's economy.
  • The US was eager to see Britain join the EEC.
  • Joining the EEC would mean accessing a large scale trade network which would help significantly increase exports of British goods.
  • The efficiency of British industry would also be increased as there would be greater competition.

Show question

Question

Why did De Gaulle veto the 1961 application?

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Answer

  • Independence: If Britain joined and was granted special exemptions, De Gaulle's goal of having France be independent of Britain would be compromised.
  • Special relationship: De Gaulle was against America having economic or political control in Europe.
  • Agriculture: he saw Britain's agricultural model as incompatible with the EEC's.

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Question

What was different about the 1967 application to join the EEC?

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Answer

  • Prime Minister Harold Wilson put the second application forward.
  • Wilson was pro-Britain's assimilation within Europe and acknowledged the importance of the CAP and that Britain should adhere to it.

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Question

When did Britain join the EEC and when was the EEC referendum held?

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Answer

Britain joined the EEC in 1973.

A referendum was held in 1975.

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