Customs unions and free trade areas are very similar in terms of the internal arrangements with which member nations agree to trade among each other. Within both the free trade area and customs union, there is an agreement to lower or eliminate obstacles to trade such as tariffs, essentially, taxes imposed on imported goods that arbitrarily raises the cost of those goods to the consumer, thereby making those goods less competitive with domestic sources, import quotas and other protectionist tools used to protect domestic industries from foreign competition. The key distinction between customs unions and free trade areas, however, involves their approach to non-treaty nations. While a customs union, by definition, requires all parties to the agreement to establish identical external tariffs with regard to trade with non-treaty nations (those nations that are not signatories to the agreement), members of a free trade area are free to establish whatever tariff rates with respect to foreign imports from non-signatory nations that they deem necessary or desirable. That creates an uneven playing field with respect to foreign nation/non-signatory countries' ability to circumvent individual country tariffs by focusing on exporting to those nations with the lowest external tariffs.
The European Union is the largest and most productive customs union in existence, although internal strife resulting from vast economic disparities among member states has seriously weakened the EU. Members of the EU have agreed to, among other criteria for membership, maintain a common external tariff system with respect to outside nations. The point of the customs union, in contrast to free trade areas, is that they seek to integrate member states more thoroughly than occurs in the case of the latter category. Free trade areas, like the North American Free Trade Agreement (NAFTA), are less cohesive to the extent that each of the three member nations, the United States, Canada and Mexico, are free to establish tariff policies distinct from each other. NAFTA, basically, lacks the political cohesion that bound the EU before the latter organization spread itself too wide.