Different stages of economic integration

The Economics of a Customs Union

The European Union 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. Goods and services that originate in the EU circulate between Member States duty-free. However these products might be subject to excise duty and VAT
• Adopt a common external tariff (CET) on imports from non-members countries. Thus, in the case of the EU, the tariff imposed on, say, imports of Japanese TV sets will be the same in the UK as in any other EU country
• Preferential tariff rates apply to preferential or free trade agreements that the EU has entered into with third countries or groupings of third countries

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

1. A customs union shares the revenue from the CET in a pre-determined way – in this case the revenue goes into the EU budget fund. The EU receives its revenues from customs duties from the common tariff, agricultural levies and countries paying 1% of their VAT base. Payments are also made through contributions made by member states based on their national incomes. Thus relatively poorer countries pay less into the EU and tend to be net recipients of EU finances.
2. A single market represents a deeper form of integration than a customs union. It involves the free movement of goods and services, capital and labour and the concept are broadened to encompass economic policy harmonization for example in the areas of health and safety legislation and monopoly & competition policy. Deeper economic and business ties requires some degree of political integration, which also requires shared aims and values between nations

Revision Video on the Economics of Brexit

The difference between custom union and monetary union - revision video