AQA Specification focus:
‘The main features of a customs union.’
Introduction
A customs union is a trade agreement where member countries remove internal trade barriers and adopt a common external tariff. This encourages regional integration, boosts trade, and promotes economic cooperation.
Definition of a Customs Union
Customs Union: An agreement between two or more countries to abolish tariffs, quotas, and other trade restrictions on goods traded within the union, while applying a common external tariff on imports from non-members.
A customs union is a deeper form of economic integration than a free trade area because it requires common policies towards external countries, not just internal tariff removal.
The European Union Customs Union diagram demonstrates the elimination of internal trade barriers and the establishment of a common external tariff among member states, facilitating unified trade policies and economic integration. Source
Key Features of a Customs Union
The AQA specification highlights the main features of customs unions. These include:
Free trade within the union: All tariffs and quotas between member states are eliminated, making trade easier and cheaper.
Common External Tariff (CET): All members apply the same tariff rate on goods entering from non-members.
Policy coordination: Members must agree on trade negotiations with outside countries, often conducted collectively.
No trade deflection: Goods cannot enter through the lowest tariff member and then move freely within the union, since all apply the same external tariff.
Intermediate step towards deeper integration: A customs union can lead to further cooperation, such as a common market or full economic union.
Customs Union vs Free Trade Area
A free trade area removes tariffs between members but allows independent trade policies with non-members. A customs union, by contrast, harmonises external trade policy. This prevents trade deflection but requires greater political and economic coordination.
Trade Deflection: The practice of importing goods through the member country with the lowest external tariff before re-exporting them tariff-free to other members.
Because customs unions eliminate this risk, they provide stronger trade discipline compared to free trade areas.
Economic Implications of a Customs Union
Trade Creation
When tariffs are removed within the union, member states import goods from the most efficient producers inside the union, even if they previously imported from outside. This improves resource allocation and increases consumer welfare.
Trade Diversion
When a common external tariff is imposed, trade may shift away from lower-cost non-member producers to higher-cost member producers, reducing global efficiency.
Trade Creation: The replacement of higher-cost domestic production with lower-cost imports from member countries, increasing efficiency.
Trade Diversion: The replacement of lower-cost imports from non-members with higher-cost imports from member countries due to the CET, reducing global efficiency.
Economies of Scale
Larger markets encourage firms to expand output, reducing unit costs.
Increased competition incentivises firms to become more efficient and innovative.
Consumer Benefits
Wider variety of goods available at lower prices.
Stronger competition reduces monopolistic power of domestic firms.
Producer Benefits
Access to larger markets without tariff barriers.
Protection from non-member competition via CET.
Governance and Negotiation
Member states in a customs union must:
Negotiate trade agreements as a bloc.
Maintain consistent customs procedures at external borders.
Share tariff revenues according to agreed rules.
This requires significant political coordination and sometimes reduces national sovereignty over trade policy.
Real-World Examples
European Union (EU): Began as a customs union under the Treaty of Rome (1957). The EU still applies a Common External Tariff, though it has since developed into a single market and monetary union for some members.
Southern African Customs Union (SACU): Includes South Africa, Botswana, Lesotho, Namibia, and Eswatini, making it the oldest customs union still in existence.
Mercosur: A customs union in South America including Argentina, Brazil, Paraguay, and Uruguay.
These examples highlight how customs unions vary in effectiveness, depending on political will, enforcement mechanisms, and levels of economic development.
The world map of customs unions illustrates the global distribution of customs unions, showcasing the diverse regions and countries engaged in such economic integrations. Source
Advantages of a Customs Union
Eliminates internal trade barriers.
Strengthens bargaining power in international trade negotiations.
Encourages political and economic cooperation.
Reduces administrative costs compared to free trade areas (no rules of origin checks).
Disadvantages of a Customs Union
Risk of trade diversion, which reduces global efficiency.
Loss of national sovereignty over external trade policy.
Possible unequal distribution of benefits among members.
Adjustment costs for industries exposed to greater competition.
Features in Summary
The defining features of a customs union include:
Internal tariff elimination.
Common external tariff.
Joint trade negotiations.
Prevention of trade deflection.
Pathway towards deeper integration.
By understanding these features, AQA Economics students can evaluate both the benefits and costs of customs unions in the global economy.
FAQ
A customs union removes internal tariffs and applies a common external tariff, but each country may still have its own regulations on goods and services.
A single market goes further by harmonising regulations, standards, and allowing free movement of goods, services, labour, and capital between members.
Countries in a customs union cannot negotiate individual trade agreements with non-members because they share a common external tariff.
Instead, trade deals must be negotiated collectively by the union as a bloc, which can strengthen bargaining power but reduces national sovereignty.
Smaller economies often have limited domestic markets. By joining a customs union, they gain access to a larger, tariff-free market.
Benefits include:
Greater export opportunities.
Attraction of foreign direct investment.
Stronger protection through a shared external tariff.
In practice, this is very difficult because each customs union requires a common external tariff.
Overlapping membership would create conflicts in applying different tariff policies to non-members, making it unworkable.
Non-member countries may face higher tariffs due to the common external tariff, reducing their competitiveness in member markets.
However, customs unions can also create more predictable and stable trade policies, which sometimes benefit non-members by reducing uncertainty in negotiations.
Practice Questions
Define a customs union and identify one main feature that distinguishes it from a free trade area. (2 marks)
1 mark for a clear definition of a customs union (e.g., agreement between countries to remove tariffs and quotas on internal trade and adopt a common external tariff).
1 mark for identifying a distinguishing feature, such as the presence of a common external tariff or joint trade policy.
Explain two potential economic advantages for member countries of joining a customs union. (6 marks)
Up to 3 marks for each well-explained advantage.
Possible advantages:
Trade creation: 1 mark for identification, 1 mark for brief explanation, 1 mark for clear development (e.g., replacing higher-cost domestic output with lower-cost imports from members).
Economies of scale: 1 mark for identification, 1 mark for brief explanation, 1 mark for clear development (e.g., larger markets allow firms to expand production, reducing unit costs).
Consumer benefits: 1 mark for identification, 1 mark for explanation, 1 mark for development (e.g., greater variety and lower prices due to increased competition).
Maximum 6 marks.
Award 1–2 marks for answers that remain descriptive but lack development.
Award full 3 marks per advantage for well-structured, developed points with clear economic reasoning.
