As the world becomes more interconnected, countries are seeking ways to boost their economies through international trade agreements. Two of the most popular types of agreements are customs unions and free trade agreements. But what exactly are they, and how do they differ from one another?
A customs union is a trade agreement between countries that eliminates tariffs (taxes) on goods traded between them. In addition, the member countries agree to apply a common external tariff (CET) on goods imported from non-member countries. This means that all countries in the customs union charge the same tariff on goods from outside the union. The European Union is an example of a customs union, as is the Southern African Customs Union (SACU).
On the other hand, a free trade agreement (FTA) is a trade agreement between countries that eliminates tariffs on goods traded between them. However, unlike in a customs union, member countries are free to set their own tariffs on goods imported from non-member countries. Essentially, FTAs aim to reduce barriers to trade without creating a common external tariff. NAFTA (North American Free Trade Agreement) and the United States-Mexico-Canada Agreement (USMCA) are examples of FTAs.
So, what are the advantages and disadvantages of each type of agreement? Customs unions can be beneficial for member countries as they create a common market, which can lead to increased trade and economic growth. By reducing tariffs on goods traded between member countries, customs unions can also make goods more affordable for consumers. However, because member countries must apply a common external tariff, they may not be able to negotiate trade deals with non-member countries on their own. In addition, the member countries may have different economic priorities, which can make it difficult to agree on policies.
Free trade agreements, on the other hand, give member countries more flexibility in setting tariffs and negotiating trade deals with non-member countries. This can lead to greater economic benefits for individual countries, as they can prioritize their own economic interests. However, FTAs don`t create a common market, which can make it more difficult for member countries to harmonize regulations and standards. And, while FTAs aim to reduce barriers to trade, some industries may be negatively affected by increased competition.
In conclusion, both customs unions and free trade agreements are popular types of trade agreements. Customs unions can create a common market and lead to increased trade, while FTAs give member countries more flexibility in setting tariffs. Ultimately, the choice between the two depends on the economic priorities and goals of the member countries.