Scribd
Upload
384 views7 pages

Custom Unions: Key Features & Effects

This document defines a customs union as an agreement between countries to remove trade barriers and reduce or eliminate customs duties on mutual trade, while also imposing a common external tariff on non-member imports. A customs union allows free movement of goods between members but not free movement of capital and labor. The EU-Turkey customs union established in 1996 is provided as an example. The direct effects of a customs union include trade creation by shifting consumption to more efficient low-cost producers within the union, as well as potential trade diversion by shifting consumption to less efficient high-cost producers protected by the common external tariff. Long-term effects can include economies of scale for firms and infrastructure improvements, but also potential issues like the flow of resources to

Uploaded by

LimZhiLing
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
384 views7 pages

Custom Unions: Key Features & Effects

This document defines a customs union as an agreement between countries to remove trade barriers and reduce or eliminate customs duties on mutual trade, while also imposing a common external tariff on non-member imports. A customs union allows free movement of goods between members but not free movement of capital and labor. The EU-Turkey customs union established in 1996 is provided as an example. The direct effects of a customs union include trade creation by shifting consumption to more efficient low-cost producers within the union, as well as potential trade diversion by shifting consumption to less efficient high-cost producers protected by the common external tariff. Long-term effects can include economies of scale for firms and infrastructure improvements, but also potential issues like the flow of resources to

Uploaded by

LimZhiLing
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Economic Integration

Custom Union
Definition

An agreement between two or


more (usually neighboring)
countries to remove trade
barrier,and reduce or eliminate
customs duty on mutual trade.
A custom union (unlike a free
trade area) generally imposes
a common external-tariff (CTF)
on imports from non member
countries and (unlike a
common market) generally
does not allow free movement
of capital and labour among
member countries.
Features

A custom union comprises countries which agree to:

Abolish tariffs and quotas between member notions to


encourage free movement of goods and services.

Adopt a common external tariff (CET) on imports from non-


members countries.

Preferential tariff rates apply to preferential or free trade


agreements that the custom union has entered into with third
countries or groupings of third countries.

A custom union shares the revenue from the CET in a pre-


determined way.
Example

An example of a customs union is the established customs union


between the European Union and Turkey, which came into effect in
1996.

The customs union offers Turkey improved access to the countries of


the European Union. The free circulation of industrial goods and
processed agricultural products is guaranteed, there are no more
custom duties, and quantitative restrictions such as quotas are
prohibited. The customs union involves harmonization of Turkey's
commercial and competition policies including intellectual property
laws with those of the European Union. A large part of the EU's trade
and competition rules is also extended to the Turkish economy.

Another example of a customs union is, not withstanding its name,


Mercosur: Mercado Comn del Sur or the Southern Common Market.
Direct Effects of Custom Union

Trade creation

consumption shifts from high cost production to low cost


production.

Allows greater specialisation.

Trade diversion

Consumption shifts from lower cost producer to high cost producer.

Before removal of tariff, more efficient producer, country X. Country


X is a lower cost producer and country Y is a higher cost producer.

After joining a union, the removal of tariff on hoods produced by


country Y becomes cheaper than country X's goods.
Long term positive effects:

Country's firms may exploit economies of scale.

Improvement in the infrastructure of the members in


the custom union which makes the transport and
handling of imports and exports cheaper.

Gain better terms of trade.

Increased competition may stimulate efficiency,


encourage investment and reduce monopoly power.

Encourage a more rapid spread of technology.


Long term negative effects

Resources flow from a country to a more efficient member or


geographically centre of the union to reduce cost of
transportation. This can be a major problem to common market.

May encourage greater oligopolistic collusion. Prices are kept


higher to the consumers.

Encourage mergers and takeovers which would increase


monopoly power.

Diseconomies of scale.

Cost of administering the customs union may be high.

You might also like