Distinguish between a free trade area and a customs union?

  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.