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Study Notes

Explaining the differences between a free trade area and a customs union

Level:
AS, A-Level, IB
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 8 Apr 2023

This study note looks at free trade areas and customs unions

A free trade area is an agreement between two or more countries to eliminate import tariffs and other trade barriers on goods traded between them. Members of a free trade area are free to set their own trade policies with non-member countries.

The United States-Mexico-Canada Agreement (USMCA) replaced the North American Free Trade Agreement (NAFTA) on July 1, 2020. The USMCA is a trade agreement between the United States, Mexico, and Canada. It was negotiated to update and modernize NAFTA, which was signed in 1994. The USMCA includes provisions on trade in goods, services, investment, and intellectual property. It also includes provisions on labor and environmental standards.

The USMCA is a more comprehensive and ambitious agreement than NAFTA. It includes new provisions on digital trade, e-commerce, and small and medium-sized enterprises. It also includes stronger provisions on labor and environmental standards. The USMCA is expected to create jobs and boost economic growth in all three countries.

A customs union is a type of free trade area in which members also agree to have a common external tariff on goods traded with non-member countries. This means that goods imported from non-member countries into a customs union will be subject to the same tariff, regardless of which member country they are imported into.

An example of a customs union is the European Union (EU). Under the EU, goods can be traded between member countries without tariffs or other trade barriers. The EU also has a common external tariff on goods traded with non-member countries.

The main difference between a free trade area and a customs union is that a customs union has a common external tariff, while a free trade area does not. This means that goods imported from non-member countries into a customs union will be subject to the same tariff, regardless of which member country they are imported into. Goods imported from non-member countries into a free trade area, on the other hand, may be subject to different tariffs, depending on which member country they are imported into.

Another difference between a free trade area and a customs union is that a customs union is a more integrated form of economic cooperation than a free trade area. This is because a customs union requires members to have a common external tariff, while a free trade area does not.

Finally, a customs union is more difficult to establish than a free trade area. This is because it requires members to agree on a common external tariff, which can be difficult to do.

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