Customs Union A

Customs Union A

Customs Union, a single customs territory within which tariffs and other trade restrictions are eliminated between member countries of the union and a common external tariff is maintained against other countries. It contrasts with a free trade area, which provides for free trade between member countries but permits separate national tariffs against third countries. Because of its common tariff policy and the need for some integration of fiscal and monetary policies of the member countries, a customs union also calls for some degree of political union. Examples are Benelux and the Common Market.

A customs union both diverts and creates trade. It diverts trade to the extent that it turns the demand for imports from outside countries towards higher-cost producers in member countries who can undersell outside competitors only because of the tariff. This tends to impair the efficiency of specialization. It also creates trade to the extent that the removal of restrictions between member countries creates opportunities for more efficient specialization within the union because low-cost producers are encouraged and high-cost producers discouraged. This trade creation is likely to be the smaller the less alike are the economies of the members and therefore the smaller the degree of competition between them. The widening of the market is also likely to produce economies of large-scale production, especially in such aspects as research and design. Additional trade and a more efficient pattern of specialization, depending on the degree of political and economic integration achieved, may also result from the widening of the market in which Government and other public contracts, normally confined to domestic producers, can be placed.

The net gain in economic welfare in the customs union depends on the balance between these contrasting tendencies. Trade diversion will tend to cause some loss of economic welfare to other countries, unless the creation of the union causes such an expansion of trade and income within its area that its total imports from outside countries rise despite the diversionary effects of the common external tariff by a larger amount than they would otherwise have done. Initially, at least, destruction of trade is likely to result in some distribution of world income away from outside countries. In the longer run the effect depends on the degree to which the customs union is part of wider forms of economic integration with which it may be associated or to which it may lead. Even so a customs union may be economically inferior to more universal arrangements for widening the scope of free trade.

The charter proposed for the International Trade Organization considered that its fundamental rule of non-discrimination in trade should not apply to customs unions or free trade areas, but that such arrangements should not provide for increased tariffs and other trade restrictions against other countries.

Cycle, Business. See Trade Cycles.

Cycle, inventory Investment. See Inventory Investment Cycles. Cycle, Trade. See Trade Cycles.

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