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-alo ...

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 pact A trade agreement (also known as trade pact) is a wide-ranging taxes, tariff and trade treaty that often includes investment guarantees. It exists when two or more countries agree on terms that help them trade with each other. The most common tra ...

s where the participant countries set up common external trade policy (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. An import embargo or import ban is essentially a zero-level import quota. Quotas, ...

s). Common

competition policy Competition law is the field of law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. Competition law is implemented through public and private enforcement. It is also known as antitrust ...

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, indi ...

deficiency''. Reasons 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 addit ...

and establishing closer political and cultural ties between the member countries. It is the third stage of

economic integration Economic integration is the unification of economic policies between different states, through the partial or full abolition of tariff and Non-tariff barriers to trade, non-tariff restrictions on trade. The trade-stimulation effects intended by ...

. Every

economic union An economic union is a type of trade bloc which is composed of a common market with a customs union. The participant countries have both common policies on product regulation, freedom of movement of goods, services and the factors of prod ...

, customs and monetary union and economic and monetary union includes a customs union.

WTO definition

The

General Agreement on Tariffs and Trade 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 p ...

, part of the

World Trade Organization The World Trade Organization (WTO) is an intergovernmental organization headquartered in Geneva, Switzerland that regulates and facilitates international trade. Governments use the organization to establish, revise, and enforce the rules that g ...

framework defines a customs union in the following way:

Historical background

The German Customs Union, the

Zollverein The (), or German Customs Union, was a coalition of States of the German Confederation, German states formed to manage tariffs and economic policies within their territories. Organized by the 1833 treaties, it formally started on 1 January 1 ...

, 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 (),; ; World Book, Inc. ''The World Book dictionary, Volume 1''. World Book, Inc., 2003. p. 572. States that Deutsches Reich translates as "German Realm" and was a former official name of Germany. also referred to as Imperia ...

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. It was brought into action by the initiative of Prussia and joined by most of the German states. Pre-modern conditions ( 30+ currencies, trade barriers etc.) were viewed as an obstacle to economic exchange and growth by the new commercial classes, who argued for the creation of a unified economic territory allowing the unhindered movement of goods, people and capital. In 1834, 18 states joined to form the German Customs Union with Prussia as the 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 organisation 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 in 1964. At that time, the

European Free Trade Association The European Free Trade Association (EFTA) is a regional trade organization and free trade area consisting of four List of sovereign states and dependent territories in Europe, European states: Iceland, Liechtenstein, Norway and Switzerland. ...

was separate from the European Economic Community Customs Union. Free trade within the former was limited to industrial products, and no uniform tariffs were imposed on countries outside the Union.

Main features

The main features of a customs union is that the member countries not only eliminate

trade barrier Trade barriers are government-induced restrictions on international trade. According to the comparative advantage, theory of comparative advantage, trade barriers are detrimental to the world economy and decrease overall economic efficiency. Most ...

s and implement

free trade Free trade is a trade policy that does not restrict imports or exports. In government, free trade is predominantly advocated by political parties that hold Economic liberalism, economically liberal positions, while economic nationalist politica ...

, but also establish a common external tariff. In other words, in addition to agreeing to eliminate each other's trade barriers, members of a customs union also adopt common external tariffs 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 p ...

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.

Protection measures

The exclusive protection measures of a customs union include the following: * Reduction of tariffs until the tariffs within the union are eliminated. In order to achieve this goal, the union often stipulates that the member countries must transition from their current tariff rates between member countries to the unified tariff rates stipulated by the union in stages within a certain period of time, until finally aobolishing tariffs. * Formulation of a unified foreign trade policy and foreign tariff rates. Members must alter their original foreign tariff rates within the prescribed time, and eventually establish a common external tariff; and gradually unify their foreign trade policies, such as foreign discrimination policies and import quantities. * Formulation of unified protective measures, such as import

quotas Quota may refer to: Economics * Import quota, a restriction on the quantity of goods that can be imported into a country * Market Sharing Quota, an economic system used in Canadian agriculture * Milk quota, a quota on milk production in Europe * ...

, health and epidemic prevention standards, etc.

Meaning

* A customs union reduces the national sovereignty of the member countries by taking over their power to set tariffs.

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 benefit generated by the transfer of domestic production to other countries in the union 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 on the member countries is a net gain, which boosts the economies of the member countries; otherwise, it is a net loss and a decline in economic terms. 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 In economics, resource allocation is the assignment of available resources to various uses. In the context of an entire economy, resources can be allocated by various means, such as markets, or planning. In project management, resource allocatio ...

Dynamic effects

The customs union does not only bring static effects to member states, but also brings some dynamic effects. Sometimes, these dynamic effects are more important than the static effects, which has an important impact on the economic growth of member countries. # One dynamic effect of a customs union is the large market effect (or

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 Productivity, output produced per unit of cost (production cost). A decrease in ...

). After the establishment of a customs union, conditions are created for the mutual export of products between member countries. This expansion of the market promotes increases in production, which reduce costs. # The establishment of a customs union promotes competition in the market, by allowing companies from across the union to compete on equal terms. As a result, enterprises will tend to increase research and development investment and continuously reduce production costs, thereby creating a strong competitive atmosphere. # The establishment of a customs union helps to attract

foreign direct investment A foreign direct investment (FDI) is an ownership stake in a company, made by a foreign investor, company, or government from another country. More specifically, it describes a controlling ownership an asset in one country by an entity based i ...

, both by increasing the size of the market and putting producers in non-member states at a disadvantage. The establishment of a customs union implies the exclusion of products from non-members.

Lists of customs unions

Current

Additionally, the

autonomous In developmental psychology and moral, political, and bioethical philosophy, autonomy is the capacity to make an informed, uncoerced decision. Autonomous organizations or institutions are independent or self-governing. Autonomy can also be defi ...

and dependent 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 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

s 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. Goals The SADC's goal is to further regional socio-economic cooperation and integration as well as political and se ...

(SADC) *2011 Economic Community of Central African States (ECCAS) *2015 Arab Customs Union (ACU) *2023 African Economic Community (AEC)

Defunct

*The ''

'' in the German states (1834–1919) – Remained in effect after German unification and not dissolved until superseded by the

Weimar Constitution The Constitution of the German Reich (), usually known as the Weimar Constitution (), was the constitution that governed Germany during the Weimar Republic era. The constitution created a federal semi-presidential republic with a parliament whose ...

of 1919. * – Customs union between Austria (later

Austria–Hungary Austria-Hungary, also referred to as the Austro-Hungarian Empire, the Dual Monarchy or the Habsburg Monarchy, was a multi-national constitutional monarchy in Central Europe#Before World War I, Central Europe between 1867 and 1918. A military ...

) from 1852 to 1918. Was replaced by the Liechtenstein–Switzerland customs union in 1924. * Customs and Economic Union of Central Africa (UDEAC) – superseded by CEMAC * 1925 French Customs Union over occupied

Territory of the Saar Basin The Territory of the Saar Basin (, ; ) was a region occupied and governed by the United Kingdom and France from 1920 to 1935 under a League of Nations mandate. It had its own flag (adopted on 28 July 1920): a blue, white, and black horizontal t ...

* Steuerverein or ''Tax Union'' in north-west Germany * Custom Union between Lebanon and Syria * Czechia and

Slovakia Slovakia, officially the Slovak Republic, is a landlocked country in Central Europe. It is bordered by Poland to the north, Ukraine to the east, Hungary to the south, Austria to the west, and the Czech Republic to the northwest. Slovakia's m ...

from the dissolution of

Czechoslovakia Czechoslovakia ( ; Czech language, Czech and , ''Česko-Slovensko'') was a landlocked country in Central Europe, created in 1918, when it declared its independence from Austria-Hungary. In 1938, after the Munich Agreement, the Sudetenland beca ...

on 1 January 1993 until superseded by both countries' accession to the

European Union The European Union (EU) is a supranational union, supranational political union, political and economic union of Member state of the European Union, member states that are Geography of the European Union, located primarily in Europe. The u ...

on 1 May 2004.

References

External links

* Agreements Notified to the

WTO The World Trade Organization (WTO) is an intergovernmental organization headquartered in Geneva, Switzerland that regulates and facilitates international trade. Governments use the organization to establish, revise, and enforce the rules that g ...

an
in Force
{{Authority control Commercial policy Economic integration Trade blocs