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The difference between the two is that in a customs union, the participating countries
set a common customs tariff (a single external tariff applied by all members) against
third countries, while in an FTA, they do not. This results in other differences:
(i) under a customs union, the participating countries must engage in trade
negotiations as a single entity (typically the EU), while in a FTA, the members
may negotiate individually;
(ii) in a customs union, free movement of goods is allowed among the member
nations, although in an FTA, it is not;
(iii) under a customs union, a customs house is not required between member
nations, yet in an FTA, it is required and its function may even be reinforced.

The main difference between customs unions and free trade area is how they deal with
non-treaty countries. While a customs union by definition requires all parties to the
agreement to impose identical external tariffs on trade with non-treaty nations (those
that have not signed the agreement), members of a free trade area are free to impose
whatever tariff rates they deem necessary or desirable on foreign imports from non-
signatory nations. This provides an uneven playing field in terms of foreign
nation/non-signatory countries' ability to avoid particular country tariffs by
concentrating their exports to those countries with the lowest external tariffs.

A customs union is made up of a free trade area and includes the introduction of the
same import quotas, custom duties which apply to imports within the region. What
this does is it eradicates re-exporting that would otherwise be practiced by member
countries. An example of a customs union is the Southern African Customs Union
(SACU. A free trade agreement on the other hand refers to the eradication of import
quotas, tariffs and some if not all trade preferences. An example of free trade area is
the ASEAN Free Trade Area (AFTA). The major difference between a customs union
and a free trade area is that in a free trade area there is no common external tariff
imposed. This means that they may interact differently with non-members with
regards to trade. A customs union seeks to establish a standard of how member
countries should interact with non members. This brings the issue of diminished
customer choice because the products available may just be from the member
countries. In summary according to Krueger: "A free trade agreement is preferential
arrangement in which tariff rates among members are zero, although external
tariffs may be at different rates for different members of the arrangement. Customs
union is an arrangement in which there is zero duty between members on imports
of goods and services, and common external tariff.",

Customs union represents a higher level of economic integration than a free trade area
does. A free trade area is simply an area in which countries have agreed to trade with
one another freely. There are no (or at least not many) tariffs or other trade barriers
that impede the flow of goods and services from one country to another. An example
of this is the North American Free Trade Agreement (NAFTA).There are essentially
no trade barriers between the NAFTA countries. A customs union is a free trade area.
There is free trade between all the countries in a customs union. However, that is not
all there is to it. The countries in a customs union also have a common foreign trade
policy. They have one set of policies for trading with countries outside the union.
They have a common tariff that applies to goods being imported into the customs
union. The United States, Canada, and Mexico do not have such a common policy and
therefore they are not a customs union.