Distinguish between a free trade area and a customs union?

Answer 1

A free trade area is where there are no tariffs between member nations.

A customs union goes a step farther and requires all members to have the same external tariff policy to goods coming in from outside the customs union.

So, if Countries A & B are in a customs union, they would both charge the same tariff on goods imported from Country C.

The reason for this is to prevent imports coming into the country with the lowest tariff and then being sent to another country in the union (without a tariff). The producer can send it directly to the end nation.

Answer 2

1. Free Trade Areas

   • A free trade area eliminates most, if not all, trade barriers such as tariffs, quotas and preferences on the flow of goods and services between its member countries. However, member countries negotiate trade agreements separately with external countries. The 1994 North American Free Trade Agreement between the U.S., Canada and Mexico, also known as NAFTA, formed the largest free trade area at that time.

   Customs Unions

   • A customs union, in contrast to a free trade area, is a trade agreement in which a group of countries charges a common set of tariffs to external countries, while granting free trade among member countries. It is a higher level of economic integration over a free trade area, but less than a common market, which also allows free movement of resources such as capital and labor between member countries. The European Union, for example, evolved from a customs union to a common market. The addition of common tariffs imposed on external countries differentiates a customs union agreement from a free trade area.

   Significance

   • Regional economic agreements reflect the level of political cooperation of the countries involved and serve to affirm their political relations. Whether such trade agreements are beneficial to member countries depends on the level of trade creation versus trade diversion. The impact of economic integration on political ties, however, remains unquestionable.

Answer 3

free trade areaA group of countries that invoke little or no price control in the form of tariffs or quotas between each other. Free trade areas allow the agreeing nations to focus on their competitive advantage and to freely trade for the goods they lack the experience at making, thus increasing the efficiency and profitability of each country. Example: NAFTA common market

Group formed by countries within a geographical area to promote duty free trade and free movement of labor and capital among its members. European community (as a legal entity within the framework of European Union) is the best known example. Common markets impose common external tariff (CET) on imports from non-member countries

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