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-alone ...

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 tr ...

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. Quotas, like other trade restrictions, are typically used to benefit the producers ...

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 l ...

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, ind ...

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

. 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 produc ...

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 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 pr ...

, part of the

World Trade Organization The World Trade Organization (WTO) is an intergovernmental organization that regulates and facilitates international trade. With effective cooperation in the United Nations System, governments use the organization to establish, revise, and ...

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 German states formed to manage tariffs and economic policies within their territories. Organized by the 1833 treaties, it formally started on 1 January 1834. However, its foundations had b ...

, 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 hereditary ...

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 Lis ...

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 The European Free Trade Association (EFTA) is a regional trade organization and free trade area consisting of four European states: Iceland, Liechtenstein, Norway and Switzerland. The organization operates in parallel with the European U ...

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

s 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 econ ...

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

, 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 cu ...

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

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 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 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 ...

, and can further enhance the

externality In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced goods involved in either co ...

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

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 that accompany the transfer of production, attracting large amounts of foreign direct investment.

Lists of customs unions

Current

Additionally, the

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 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

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. Its goal is to further regional socio-economic cooperation and integration as well as political and security coopera ...

(SADC) *2011

(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 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 ...

* 1925 French Customs Union over occupied Territory of the Saar Basin *The former ''

'' of the

Holy Roman Empire The Holy Roman Empire was a political entity in Western, Central, and Southern Europe that developed during the Early Middle Ages and continued until its dissolution in 1806 during the Napoleonic Wars. From the accession of Otto I in 962 unt ...

and the succeeding German confederations * Steuerverein 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 Cz ...

and

Slovakia Slovakia (; sk, Slovensko ), officially the Slovak Republic ( sk, Slovenská republika, links=no ), 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 ...

from the dissolution of

Czechoslovakia , rue, Чеськословеньско, , yi, טשעכאסלאוואקיי, , common_name = Czechoslovakia , life_span = 1918–19391945–1992 , p1 = Austria-Hungary , image_p1 ...

on 1 January 1993 until 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 located primarily in Europe, Europe. The union has a total area of ...

on 1 May 2004.

References

External links

* Agreements Notified to the

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