Customs Union

Updated on January 25, 2024
Article byKhalid Ahmed
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Customs Union?

Customs unions refer to a cluster of countries applying one common set of methodology tariffs & rules concerning imports, exports & transport of products within themselves. It enables one-time duty payment on goods exported from member countries that then get exempted from any taxes within the member country.

Customs Union

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It mainly enhances ties, economic cooperation, cultural assimilation, and economic efficiency within member countries. It gets included in every custom, monetary and economic union. Also, it behaves as a special free-trade zone having common tariffs. It usually leads to higher consumer costs and protection for specific local manufacturers. However, it gets balanced by protecting some politically important producers and reducing goods costs.

Key Takeaways

  • A customs union means a group of nations uniting under an umbrella of charging a common system of tariffs to other nations while carrying free trade between each other.
  • It facilitates one-time payment of international tariffs on goods exported after it; no other tariff gets levied on the goods.
  • It also allows member nations to increase their trade and economic prosperity and leads to problems such as loss of sovereignty and expensive and time-consuming tariff-setting problems.
  • European Union customs union has been at one of the forefronts of creating, enacting, and sustaining the regulations of a customs union within its member nations across Europe.

Customs Union Explained

A customs union meaning refers to a medium of removing all trade barriers, eliminating customs duty, and removing trade quotas through an agreement signed amongst two or more countries. Commercial policy and customs law are aligned in several areas, including intellectual property, competition, taxation, and law. Furthermore, the customs union theory defines a tariff theory branch dealing with effects on trade barriers owing to changes in geographical discriminations of the nations, according to Canadian economist R.G. Lipsey.

In other words, it is a political setup created between more than two countries to set up a free-trade zone for all the participating members. As a result, the members decide to make rules regarding trading with non-member nations and having a common trade barrier to these nations. Therefore, to fulfill their commitment, they start limiting the import of certain goods or services using a trade quota. No customs fees are charged at the internal borders, allowing goods to circulate freely between two regions of the customs union (whether they were entirely manufactured within the union or imported after being placed in free circulation from other nations).

Member nations do it to protect their weak industry from outside trade influence and competition. Moreover, a customs union does not include members’ free capital exchange and workforce movement.

The most vivid examples would be the southern African customs union & EU customs union, which has been a customs union for a long and succeeded in implementing its rules.

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Objective

A customs union promotes trade divergence and creation, which aids in economic integration.

Making it simpler for member nations to engage in unrestricted trade is the goal of a customs union. In addition, by lowering the administrative and financial costs of barrier trading, the union promotes international economic cooperation.

Members are not permitted to negotiate their trade agreements, nevertheless. So, to get the most out of being members of the customs union, the nations that make up the union typically reform their domestic economies and economic policies. As a result, according to its members’ combined economic output, the European Union is the biggest customs union in the world.

Examples

Let us look at some customs union examples to understand the concept better.

Example #1

The first example would be dealing with the Central American Common Market (CACM), also called the Spanish Mercado Comun Centro Americano (MCCA). It initially consisted of five central American countries that utilized economic integration and free trade to facilitate regional trade. It began in 1960. Finance ministers from five economic zones comprise the council headed by the secretary general, overseeing the council’s work and implementation of policies. It intended to create a policy-making body coordinating free trade and economic integration in South America.

Example #2

The next example would be the European Union Customs Union (EUCU), which consists of all members of the European Union. The customs union member nations have placed no tariff or trade barrier. However, all the members do levy a common external tariff on every good & service emanating from non-union countries. European Union (EU) has the authority to conduct all international trade deals for the union member countries. EU represents the union at World Trade Centre concerning any trade dispute with other countries.

All goods passing through a third nation must pay a union transit fee. As a result, Union Customs Code (UCC) took shape on 1.05.2006 to modernize customs procedures in the EU.

Advantages And Disadvantages

Let us discuss the advantages and disadvantages of the system in tabular form:

AdvantagesDisadvantages
Trade flows increasesIt takes away the sovereignty of member nations as they cannot negotiate trade deals out of the groups.
Economic integration with the world happens.These unions often lead to unequal tariff distribution, with major shares retained by the collecting member.
Political cooperation increases between nationsIt becomes difficult for member nations to set the desired applicable trade tariff rate. 
Helps in the utilization of capital-intensive industriesThe procedure tariff setting has become too expensive and time taking.
Trade creation takes place by allowing developed nations to sell to less developed nations.A member is forced to leave the trade of a specific good produced by another member nation.
Trade diversion for less developed countries takes place, allowing weak nations to sell more goods to developed nations. Most of the problems get faced by developing nations instead of developed countries. 
It prevents and reduces trade deflections arising from free trade agreements.A developed nation like the United Kingdom, too, faced problems like BREXIT while exiting from European Union.

Customs Union vs Free Trade Area vs Single Market vs Common Market

Let us get to the differences between three types of trade agreements prevalent in the current times between nations in the table below:

Customs UnionSingle MarketFree trade areaCommon market
Member countries do not have to pay any tariff to each other.No tariff on people’s movement or goods & services exchanged between member nations.Under it, member nations do not have common external tariffs for non-member nations.It tends to be the first step towards a single market. 
Goods do not need to get checked at the border. With a few common regulations on product regulation, the majority of trade obstacles have been removed (for goods).Member nations can pursue their trade negotiation and deals independently. It entails free trade zone having no restriction on the movement of goods, workers, capital, and services.
Tariff applicable to non-member nation becomes commonMember nations have to pay high tariffs to enter into single market access.They require proof of origin for goods. However, other trade barriers remain in place.
Any trade deal gets carried for and on behalf of the whole customs union.This includes the region’s economic growth, enhancing the standard and accessibility of products and services, and lowering prices.Because additional companies can enter the market, monopolies are also eliminated.It took much work for all nations to agree upon a single manufacturing standard.
Once a good gets imported into a customs union, nations can trade that good freely among member countries. It entails common criteria and regulations for the quality of goods.A free trade area has the advantage of fostering competition, which raises a nation’s efficiency as a result, enabling it to compete on an equal footing with its rivals.It poses problems related to checking a country’s manufactured goods by others.

Frequently Asked Questions (FAQs)

1. What did the customs union or Zollverein do?

Zollverein, or customs union, got established in 1834 under the aegis of Prussian leadership. It led to the creation of free trade throughout Germany. It also became the first step in Germany’s unification in alter years. So, to control tariffs and economic policies within national borders, administrators established a coalition of German states.

2. Are Norway in the customs union?

Norway does not belong to the European Union (EU). Nevertheless, it is connected to the Union because it is a part of the European Economic Area (EEA), which nations created in 1994 after being signed in 1992. Norway’s biggest export and import market is the EEA. However, it remains the eighth-most significant partner for imports into the EU Norway.

3. Which countries are in the EU customs union?

All the countries that form a part of the EU also get to be members of the EU customs union. Thus, all European Union (EU) member states, Monaco, and the British Overseas Territories of Akrotiri and Dhekelia make up the European Union Customs Union (EUCU), officially known as the Community Customs Union.

4. Can the UK rejoin the customs union?

The EU’s single market and customs union may both accept the UK. One legal way to do this is through the UK-EU Trade and Cooperation Agreement (TCA). But any attempt to re-enter the EU without a referendum’s approval would compromise the UK’s constitutional integrity.

This article has been a guide to what is Customs Union. We explain its examples, advantages, comparison with free trade area, single & common markets, & objectives. You may also find some useful articles here:

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