Different stages of economic integration

The Economics of a Customs Union

What is a customs union?

A customs union comprises countries which agree to abolish tariffs and quotas between member nations to encourage free movement of goods and services. A customs union also adopt a common external tariff (CET) on imports from non-members countries.

Give examples of customs unions in the global economy

• The European Union
• Caribbean Community (CARICOM)
• Eurasian Customs Union (EACU)
• Southern African Customs Union (SACU)
• Turkey, Andorra and San Marino are each in a bilateral customs union with the EU

Exam tip: Specific knowledge of the economics of a customs union is needed for the exam. Apart from the European Union, another example is that Kazakhstan and Belarus make up a customs union with Russia – forming for the basis for a new Eurasian customs union system

Identify ways in which a Customs Union differs from a Single Market

A single market is a deeper form of integration than a customs union.

A single market involves the free movement of goods and services, capital and labour.

In addition to a common external tariff, a single market also tries to cut back on the use of non-tariff barriers such as different rules on product safety and environmental standards replacing them with a common set of rules governing trade in goods and services within the common market.

Countries such as Norway and Switzerland are outside of the European Union, but they are members of the EU single market, paying into the EU budget to take advantage of some of the benefits of the free flow of capital, labour, goods and services.

How does a trading bloc differ from a customs union?

Trading bloc

A trading bloc is essential an agreement between countries to lower their import tariffs and perhaps extend this to reducing the use of non-tariff barriers to trade. In a free trade area, each country continues to be able to set their own distinct external tariff on goods imported from the rest of the world.

Customs union

A customs union is different from a free trade area, in which means no tariffs are charged on goods and services moving within the area. It adds on a common external tariff on all products flowing from countries outside the customs union, unless specific trade deals have been established. Revenues from import tariffs are combined for all member states. The countries in a customs union negotiate as a bloc when discussing trade deals with countries outside the union. A good example is the recently introduced bilateral trade deal between the European Union and Japan.

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