Customs union

A customs union is generally defined as a type of trade bloc which is composed of a free trade area with a common external tariff.^[1]

Customs unions are established through trade pacts where the participant countries set up common external trade policy (in some cases they use different import quotas). Common competition policy is also helpful to avoid competition deficiency.^[2]

Reasons for establishing a customs union normally include increasing economic efficiency and establishing closer political and cultural ties between the member countries^{[citation needed]}. It is the third stage of economic integration.^{[clarification needed]}

Every economic union, customs and monetary union and economic and monetary union includes a customs union.^{[citation needed]}

WTO definition

The General Agreement on Tariffs and Trade, part of the World Trade Organization framework defines a customs union in the following way:^[1]

(a) A customs union shall be understood to mean the substitution of a single customs territory for two or more customs territories, so that

(i) duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and XX) are eliminated with respect to substantially all the trade between the constituent territories of the union or at least with respect to substantially all the trade in products originating in such territories, and,

(ii) subject to the provisions of paragraph 9, substantially the same duties and other regulations of commerce are applied by each of the members of the union to the trade of territories not included in the union;

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 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.^[3] 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.^{[citation needed]}

In 1834, 18 states joined to form the German Customs Union with Prussia as the leader.^{[citation needed]} Thereafter, this alliance was further expanded to all German-speaking regions^{[citation needed]} 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.^{[citation needed]}

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 in 1958, and by the Economic Community of Central African States in 1964.^{[citation needed]} At that time, the European Free Trade Association was separate from the European Economic Community Customs Union.^{[citation needed]} Free trade within the former was limited to industrial products, and no uniform tariffs were imposed on countries outside the Union.^[4][5]

Main feature

The main feature of a customs union is that the member countries not only eliminate trade barriers and implement free trade, 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.^[6] GATT 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.^[3]

Protection measures

The exclusive protection measures of a customs union include the following:^[7]

• 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.^{[citation needed]}
• 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^{[clarification needed]}.^{[citation needed]}
• Formulation of unified protective measures, such as import quotas, health and epidemic prevention standards, etc.^[8]

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.^[9]

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.^{[citation needed]}

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.^[10]

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.^{[clarification needed][10]}

1. One dynamic effect of a customs union is the large market effect (or economies of scale). 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.
2. 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.^[11]
3. The establishment of a customs union helps to attract foreign direct investment, 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

  European Union Customs Union

  Eurasian Customs Union

  East African Community

  West African Economic and Monetary Union

  Southern African Customs Union

  Economic and Monetary Community of Central Africa

  Mercosur

  Andean Community

  Caribbean Community

  Central American Common Market

  Gulf Cooperation Council

  Switzerland–Liechtenstein

  United Kingdom–Crown Dependencies Customs Union

Current

Agreement	Date (in force)	Recent reference
Andean Community (CAN)	1988-05-25	L/6737
Caribbean Community (CARICOM)	1991-01-01
Central American Common Market (CACM)	2004-10-06	WT/REG93/R/B/2
Common Market for Eastern and Southern Africa (COMESA)	2005-01-01[12]
East African Community (EAC)	2005-01-01[13]	WT/COMTD/N/14
Economic and Monetary Community of Central Africa (CEMAC)	1999-06-01[14]
Eurasian Customs Union (EACU)	2010-07-01[15]
European Union Customs Union (EUCU; EU–Monaco)	1958
∟ EU–Andorra Customs Union	1991-07-01	WT/REG53/M/3
∟ EU–San Marino Customs Union	2002-04-01
∟ EU–Turkey Customs Union	1996-01-01	WT/REG22/M/4
Gulf Cooperation Council (GCC)	2015-01-01[16][17][18]
Israel–Palestinian Authority	1994[19]	[20][21]
Southern Common Market (MERCOSUR)	1991-11-29	WT/COMTD/1/Add.17
Southern African Customs Union (SACU)	1910[22]	WT/REG231/3
Switzerland–Liechtenstein (CH-FL)	1924[23]
West African Economic and Monetary Union (WAEMU)	1994-01-10	WT/COMTD/N/11/Add.1
United Kingdom–Crown Dependencies Customs Union (UK-CD)	2018-11-26	[24][25] UK CD CU

Additionally, the autonomous 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 (or combinations thereof) with the mainland and in regards to third countries through the trade pacts signed by the mainland state.^[26]

The European Union is a customs union and therefore sets a common external tariff.

Proposed

• 2010 Southern African Development Community (SADC)
• 2011 Economic Community of Central African States (ECCAS)
• 2015 Arab Customs Union (ACU)^[27]
• 2023 African Economic Community (AEC)

Defunct

• The Zollverein in the German states (1834–1919) – Remained in effect after German unification and not dissolved until superseded by the Weimar Constitution of 1919.
• – Customs union between Austria (later Austria–Hungary) from 1852 to 1918. Was replaced by the Liechtenstein–Switzerland customs union in 1924.^[23]
• Customs and Economic Union of Central Africa (UDEAC) – superseded by CEMAC
• 1925 French Customs Union over occupied Territory of the Saar Basin
• Steuerverein or Tax Union in north-west Germany
• Custom Union between Lebanon and Syria^[28]
• Czechia and Slovakia from the dissolution of Czechoslovakia on 1 January 1993 until superseded by 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

• Freedom of movement § Examples of free movement arrangements between countries
• European Customs Information Portal (ECIP)
• List of international trade topics
• Trade creation
• Trade diversion
• Open Balkan
• Craiovia Group
• CEFTA