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A customs union is generally defined as a type of
trade bloc A trade bloc is a type of intergovernmental agreement, often part of a regional intergovernmental organization, where barriers to trade (tariffs and others) are reduced or eliminated among the participating states. Trade blocs can be stand-alon ...
which is composed of a
free trade area A free-trade area is the region encompassing a trade bloc whose member countries have signed a free trade agreement (FTA). Such agreements involve cooperation between at least two countries to reduce trade barriers, import quotas and tariffs, and ...
with a
common external tariff A common external tariff (CET) must be introduced when a group of countries forms a customs union. The same customs duties, import quotas, preferences or other non-tariff barriers to trade apply to all goods entering the area, regardless of which ...
.GATT
Article 24
s. 8 (a)
Customs unions are established through trade pacts where the participant countries set up
common external trade policy A common commercial policy is several states coordinating some or all aspects of their trade policy. It is sometimes agreed by treaty within a customs union. In the case of the European Union, a form of the EU's common commercial policy The Europe ...
(in some cases they use different
import quota An import quota is a type of trade restriction that sets a physical limit on the quantity of a good that can be imported into a country in a given period of time. Quotas, like other trade restrictions, are typically used to benefit the producers ...
s). Common competition policy is also helpful to avoid ''
competition Competition is a rivalry where two or more parties strive for a common goal which cannot be shared: where one's gain is the other's loss (an example of which is a zero-sum game). Competition can arise between entities such as organisms, indivi ...
deficiency''. Purposes for establishing a customs union normally include increasing
economic efficiency In microeconomics, economic efficiency, depending on the context, is usually one of the following two related concepts: * Allocative or Pareto efficiency: any changes made to assist one person would harm another. * Productive efficiency: no addi ...
and establishing closer political and cultural ties between the member countries. It is the third stage of economic integration. Every economic union,
customs and monetary union A customs and monetary union is a type of trade bloc which is composed of a customs union and a currency union. The participant countries have both common external trade policy and share a single currency. Customs and monetary union is establis ...
and
economic and monetary union An economic and monetary union (EMU) is a type of trade bloc that features a combination of a common market, customs union, and monetary union. Established via a trade pact, an EMU constitutes the sixth of seven stages in the process of economic ...
includes a customs union.


WTO definition

The General Agreement on Tariffs and Trade, part of the World Trade Organization framework defines a customs union in the following way:


Historical background

The German Customs Union, the Zollverein, which was established in 1834, and gradually developed and expanded, was a customs union organization that appeared earlier and played a role in promoting German economic development and political unification at that time. Before the establishment of the unified
German Empire The German Empire (), Herbert Tuttle wrote in September 1881 that the term "Reich" does not literally connote an empire as has been commonly assumed by English-speaking people. The term literally denotes an empire – particularly a hereditar ...
in the 1870s, there were checkpoints between and within the German states, which hindered the development of industry and commerce. In 1818, Prussia took the lead in abolishing the customs duties in the mainland; it was followed by the establishment of the North German Customs Union in 1826. Two years later, two customs unions were established in the states of South Germany. In 1834, 18 states joined together to form the German Customs Union with Prussia as the main leader. Thereafter, this alliance was further expanded to all German-speaking regions and became the All-German Customs Union. The contents of the alliance convention included: abolishing internal tariffs, unifying external tariffs, raising import tax rates, and allocating tariff income to all states in the alliance in proportion. In addition, there is a customs union between France and Monaco, which was established in 1865. A customs union was established by Switzerland and Liechtenstein in 1924, by Belgium, the Netherlands, and Luxembourg in 1948, by the countries of the
European Economic Community The European Economic Community (EEC) was a regional organization created by the Treaty of Rome of 1957,Today the largely rewritten treaty continues in force as the ''Treaty on the functioning of the European Union'', as renamed by the Lisbo ...
in 1958, and by the
Economic Community of Central African States The Economic Community of Central African States (ECCAS; french: Communauté Économique des États de l'Afrique Centrale, CEEAC; es, Comunidad Económica de los Estados de África Central, CEEAC; pt, Comunidade Económica dos Estados da Áfr ...
in 1964. At that time, the European Free Trade Association was different from the
European Economic Community Customs Union The European Union Customs Union (EUCU), formally known as the Community Customs Union, is a customs union which consists of all the member states of the European Union (EU), Monaco, and the British Overseas Territory of Akrotiri and Dhek ...
. Free trade within the former was limited to industrial products, and no uniform tariffs were imposed on countries outside the Union.


Main feature

The main feature of the Customs Union is that the member countries have not only eliminated trade barriers and implemented
free trade Free trade is a trade policy that does not restrict imports or exports. It can also be understood as the free market idea applied to international trade. In government, free trade is predominantly advocated by political parties that hold eco ...
, but also established a common external tariff. In other words, in addition to agreeing to eliminate each other 's trade barriers, members of the Customs Union also adopt common external tariff and trade policies.
GATT The General Agreement on Tariffs and Trade (GATT) is a legal agreement between many countries, whose overall purpose was to promote international trade by reducing or eliminating trade barriers such as tariffs or quotas. According to its prea ...
stipulates that if the customs union is not established immediately, but is gradually completed over a period of time, it should be completed within a reasonable period, which generally does not exceed 10 years.


Protect measures

The exclusive protection measures of the Customs Union mainly include the following: * Reduce tariffs until the tariffs within the union are cancelled. In order to achieve this goal, the alliance often stipulates that the member countries must transition from their current external tariff rates to the unified tariff rates stipulated by the alliance in stages within a certain period of time, until finally canceling tariff. * Formulate a unified foreign trade policy and foreign tariff rates. In terms of foreign affairs, allied members must increase or decrease their original foreign tariff rates within the prescribed time, and eventually establish a common external tariff rate; and gradually unify their foreign trade policies, such as foreign discrimination policies and import quantities. * For goods imported from outside the alliance, common different tariffs are levied, such as preferential tax rates, agreed national tax rates, most-favored nation tax rates, ordinary preferential tax rates, and ordinary tax rates, according to the types of commodities and the provider countries. * Formulate unified protective measures, such as import quotas, health and epidemic prevention standards, etc.


Meaning

* It avoids the problem that the
free trade zone A free-trade zone (FTZ) is a class of special economic zone. It is a geographic area where goods may be imported, stored, handled, manufactured, or reconfigured and re-exported under specific customs regulation and generally not subject to cust ...
needs to be supplemented by the principle of origin to maintain the normal flow of commodities. Here, instead of the principle of origin, a common 'foreign barrier' is built. In this sense, the customs union is more exclusive than the free trade zone. * It makes the 'national sovereignty' of the member countries to be transferred to the economic integration organization to a greater extent, so that once a country joins a customs union, it loses its right to
autonomous In developmental psychology and moral, political, and bioethical philosophy, autonomy, from , ''autonomos'', from αὐτο- ''auto-'' "self" and νόμος ''nomos'', "law", hence when combined understood to mean "one who gives oneself one's ow ...
tariffs. In reality, the more typical customs union is the European Economic Community established in 1958.


Economic effects

Economic effects of customs unions can generally be grouped into ''static effects'' and ''dynamic effects''.


Static effects

There are trade creation effects and trade diversion effects. The trade creation effect refers to the benefits generated by products from domestic production with higher production costs to the production of customs union countries with lower costs. The trade diversion effect refers to the loss incurred when a product is imported from a non-member country with lower production costs to a member country with a higher cost. This is the price of joining the customs union. When the trade creation effect is greater than the transfer effect, the combined effect of joining the Customs Union on the member countries is net profit, which means an increase in the economic welfare level of the member countries; otherwise, it is a net loss and a decline in the economic welfare level. The trade creation effect is usually regarded as a positive effect. This is because the domestic production cost of country A is higher than the production cost of country A 's imports from country B. The Customs Union made Country A give up the domestic production of some commodities and change it to Country B to produce these commodities. From a worldwide perspective, this kind of production conversion improves the efficiency of resource allocation.


Dynamic effects

The customs union will not only bring static effects to member states, but also bring some dynamic effects to them. Sometimes, this dynamic effect is more important than its static effect, which has an important impact on the economic growth of member countries. # The first dynamic effect of the customs union is the large market effect (or economies of scale effect). After the establishment of the customs union, good conditions have been created for the mutual export of products between member countries. This expansion of the market has promoted the development of enterprise production, allowing producers to continuously expand production scale, reduce costs, enjoy the benefits of
economies of scale In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of output produced per unit of time. A decrease in cost per unit of output enables a ...
, and can further enhance the externality of enterprises within the alliance, especially for non-member companies
competitive Competition is a rivalry where two or more parties strive for a common goal which cannot be shared: where one's gain is the other's loss (an example of which is a zero-sum game). Competition can arise between entities such as organisms, indivi ...
power. Therefore, the large market effect created by the Customs Union has triggered the realization of economies of scale. # The establishment of the Customs Union has promoted competition among enterprises among member countries. Before the member states formed a customs union, many sectors had formed domestic
monopolies A monopoly (from Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none), as described by Irving Fisher, is a market with the "absence of competition", creating a situation where a speci ...
, and several enterprises had occupied the domestic market for a long time and obtained excessive monopoly profits. Therefore, it is not conducive to the resource allocation and technological progress of various countries. After the formation of the customs union, due to the mutual openness of the markets of various countries, enterprises of various countries face competition from similar enterprises in other member countries. As a result, in order to gain a favorable position in the competition, enterprises will inevitably increase research and development investment and continuously reduce
production costs Cost of goods sold (COGS) is the carrying value of goods sold during a particular period. Costs are associated with particular goods using one of the several formulas, including specific identification, first-in first-out (FIFO), or average cost ...
, thereby creating a strong competitive atmosphere within the alliance, improving economic efficiency, and promoting technological progress. # The establishment of a customs union helps to attract external investment. The establishment of a customs union implies the exclusion of products from non-members. In order to counteract such adverse effects, countries outside the alliance may transfer enterprises to some countries within the customs union to directly produce and sell locally in order to bypass uniform tariff and non-tariff barriers. This objectively generates
capital inflows In macroeconomics and international finance, the capital account, also known as the capital and financial account records the net flow of investment transaction into an economy. It is one of the two primary components of the balance of payments, ...
that accompany the transfer of production, attracting large amounts of foreign direct investment.


Lists of customs unions


Current

Additionally, the
autonomous In developmental psychology and moral, political, and bioethical philosophy, autonomy, from , ''autonomos'', from αὐτο- ''auto-'' "self" and νόμος ''nomos'', "law", hence when combined understood to mean "one who gives oneself one's ow ...
and
dependent A dependant is a person who relies on another as a primary source of income. A common-law spouse who is financially supported by their partner may also be included in this definition. In some jurisdictions, supporting a dependant may enabl ...
territories such as some of the EU member state special territories are sometimes treated as separate customs territories from their mainland states or have varying arrangements of formal or de facto customs union,
common market The European Economic Community (EEC) was a regional organization created by the Treaty of Rome of 1957,Today the largely rewritten treaty continues in force as the ''Treaty on the functioning of the European Union'', as renamed by the Lisbo ...
and
currency union A currency union (also known as monetary union) is an intergovernmental agreement that involves two or more states sharing the same currency. These states may not necessarily have any further integration (such as an economic and monetary union, ...
(or combinations thereof) with the mainland and in regards to third countries through the trade pacts signed by the mainland state. The European Union is a customs union and therefore sets a common external tariff.


Proposed

*2010
Southern African Development Community The Southern African Development Community (SADC) is an inter-governmental organization headquartered in Gaborone, Botswana. Its goal is to further regional socio-economic cooperation and integration as well as political and security coopera ...
(SADC) *2011
Economic Community of Central African States The Economic Community of Central African States (ECCAS; french: Communauté Économique des États de l'Afrique Centrale, CEEAC; es, Comunidad Económica de los Estados de África Central, CEEAC; pt, Comunidade Económica dos Estados da Áfr ...
(ECCAS) *2015
Arab Customs Union The Arab Customs Union is a customs union announced at the Arab League's 2009 Arab Economic and Social Development Summit in Kuwait in order to achieve a functional customs union by 2015 and an Arab common market by 2020 and to increase inter-Ar ...
(ACU) *2023
African Economic Community The African Economic Community (AEC) is an organization of African Union states establishing grounds for mutual economic development among the majority of African states. The stated goals of the organization include the creation of free trade ...
(AEC)


Defunct

*
Customs and Economic Union of Central Africa The Economic Community of Central African States (ECCAS; french: Communauté Économique des États de l'Afrique Centrale, CEEAC; es, Comunidad Económica de los Estados de África Central, CEEAC; pt, Comunidade Económica dos Estados da Áfr ...
(UDEAC) – superseded by CEMAC * 1925 French Customs Union over occupied Territory of the Saar Basin *The former '' Zollverein'' of the Holy Roman Empire and the succeeding German confederations *
Steuerverein The Steuerverein (Tax Union) was formed in 1834 as a customs union first of the Duchy of Brunswick and the Kingdom of Hanover and then with the Grand Duchy of Oldenburg in 1836. Hanover joined the Deutscher Zollverein (German Customs Union) in 185 ...
or ''Tax Union'' in north-west Germany * Custom Union Between Lebanon and Syria *
Czechia The Czech Republic, or simply Czechia, is a landlocked country in Central Europe. Historically known as Bohemia, it is bordered by Austria to the south, Germany to the west, Poland to the northeast, and Slovakia to the southeast. The C ...
and Slovakia from the dissolution of Czechoslovakia on 1 January 1993 until both countries' accession to the European Union on 1 May 2004.


Further reading

* The McGill University Faculty of Law runs a Regional Trade Agreements Database that contains the text of almost all preferential and regional trade agreements in the world
ptas.mcgill.ca
* Michael T. Florinsky. 1934. The Saar Struggle. New York: The Macmillan Company.


See also

*
European Customs Information Portal (ECIP) The European Customs Information Portal (ECIP) is an importing and exporting service provided by the EU for business operators of the member states of the European Union. European Customs Information Portal (ECIP) background The European Customs ...
* List of international trade topics *
Trade creation {{trade bloc Trade creation is an economic term related to international economics in which trade flows are redirected due to the formation of a free trade area or a customs union. The issue was firstly brought into discussion by Jacob Viner (1950 ...
* Trade diversion


References


External links

* Agreements Notified to the
GATT The General Agreement on Tariffs and Trade (GATT) is a legal agreement between many countries, whose overall purpose was to promote international trade by reducing or eliminating trade barriers such as tariffs or quotas. According to its prea ...
/ WTO an
in Force
{{Authority control Commercial policy Economic integration Trade blocs