Customs Unions Versus Free Trade Areas

Although the bulk of the theoretical literature on international economic integration deals with the formation of customs unions (CUs), it should be apparent that the basic framework employed can easily be extended to tackle the problems of free trade areas (FTAs). Recall that both CUs and FTAs share the common characteristic of the complete removal of tariffs and other trade impediments on all trade between the partners, but that the two forms of economic integration are distinguishable from each other in two main respects: in a FTA, (i) member nations retain their freedom to determine their extra-union tariffs and general commercial policies, and because this freedom may result in differing tariff rates in the member countries, this creates an atmosphere for importing from third countries via the nation with the lower tariff rate, (ii) they will most likely employ some sort of ‘rules of origin’ to ensure that only those commodities which are entirely or largely produced within the FTA should be exempt from customs duties. Hence, apart from the features discussed below, there are basically no theoretical differences between CUs and FTAs. These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.