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What is the difference between a customs union and a free trade area?

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lilylee | Student, College Freshman | Salutatorian

Posted June 20, 2013 at 10:55 PM via web

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What is the difference between a customs union and a free trade area?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted June 20, 2013 at 11:23 PM (Answer #1)

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While a customs union and a free trade area are similar in some ways, they are also different.  A customs union represents a higher level of economic integration than a free trade area does.

A free trade area is simply an area in which countries have agreed to trade with one another freely.  There are no (or at least not many) tariffs or other trade barriers that impede the flow of goods and services from one country to another.  An example of this is the North American Free Trade Agreement (NAFTA).  There are essentially no trade barriers between the NAFTA countries.

A customs union is a free trade area.  There is free trade between all the countries in a customs union.  However, that is not all there is to it.  The countries in a customs union also have a common foreign trade policy.  They have one set of policies for trading with countries outside the union.  They have a common tariff that applies to goods being imported into the customs union.  The United States, Canada, and Mexico do not have such a common policy and therefore they are not a customs union.

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