Customs Union
A customs union is a form of regional economic integration in which member countries eliminate tariffs and other barriers to trade among themselves and adopt a common external tariff on trade with non-members. It is a deeper form of integration than a free trade area.[1]
Definition
A customs union combines two elements: free trade among its members and a common external trade policy. Because all members apply the same tariff to non-members, goods can circulate freely within the union without the need for rules of origin, since there is no incentive to route imports through a low-tariff member.[1]
Trade creation and trade diversion
The welfare effects of a customs union are analysed in terms of:
| Effect | Description |
|---|---|
| Trade creation | Trade shifts from a high-cost domestic producer to a lower-cost partner, raising efficiency. |
| Trade diversion | Trade shifts from a lower-cost non-member to a higher-cost partner, reducing efficiency. |
The net effect on welfare depends on which of these two forces dominates. A customs union raises welfare when trade creation exceeds trade diversion.[1]
Examples
The most prominent example is the customs union of the European Union, which combines a common external tariff with the free movement of goods, services, capital, and labour (a common market). Other examples include the Southern African Customs Union (SACU) and the Eurasian Economic Union.[1]