Customs Union


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Customs Union


  • A customs union is a free trade area in which all members shares the same tariffs and quotas when importing from non members.
  • this is called a 'common external tariff'.
  • Having the same external tariff simplifies the free trade area as there is no need to prove the origin of a product.
  • Any tariffs collected at the point goods enter the customs union are shared amongst all members.
    • The country that imports the goods may recieve a larger share as it may incur adminitrative costs when collecting the tariff.

Trade Creation and Diversion

  • As tariffs drop between members, the flow of trade will change.
    • More trade will happen between members inside the customs union, while trade with producers on the outside will drop.
  • However the total overall trade will increase.
    • This is because the reduction in tariffs will create a drop in prices, leading to higher demand.
    • The increase in total trade is called 'trade creation'.
  • Producers outside the customs union will lose out on trade to producers on the inside.
    • Even if the new producer is less efficient at producing the goods, they can take advantage of the reduced tariffs to gain a competitive advantage.
    • This is called 'trade diversion'.


  • Total trade will increase through trade creation.
  • Unlike an FTA, there is no need to prove the origin of a product due to each member sharing the same external tariff.
  • The customs union can negotiate trade deals as a whole. This increased buying power can be used as leverage to get a better deal.


  • Members of a customs union are not free to seek independent trade deals.
  • They also cannot impose their own tariffs on imports.
    • This makes it difficult to protect a declining industry.
  • Members must impose all tariffs outlined by the customs union.
    • For example, the customs union may put a 10% tariff on pineapples.
    • Every member must impose this tariff.
    • For members that do not produce their own pineapples, there is no domestic industry to protect.
    • The only effect of this tariff will be to raise prices for consumers.
  • There can also be issues with sharing tariffs fairly.
    • The country that collected the tariff might not get its fair share of the revenue.
  • Finally, the reduction in tariffs in trade across the customs union will lead to a loss in revenue, and other taxes may have to rise to compensate.