Free trade zones and customs unions are both agreements made by nations with the goal of promoting trade. While they have similar purposes and benefits to their members, there are some key differences between the two.
Free trade areas are created when two or more nations wish to eliminate trade restrictions between themselves. Since the goal of a free trade area is to remove barriers to trade, tariffs on member countries’ goods are oftentimes discontinued when free trade areas are created or are reduced to a minimal amount, while each member country maintains the freedom to set individual external tariffs. Benefits of free trade agreements include; increased economic growth, the creation of jobs, increased foreign direct investments and lower priced products. An example of a free trade area is the North American Free Trade Agreement (now the United States-Mexico-Canada Agreement, or USMCA for short).
A customs union is made up of a free trade area, but goes one step further to impose import quotas and a common tariffs on nations who are not part of the union. The European Union is a customs union. Goods between member countries of the EU are able to flow freely, which increases trade, job creation and foreign direct investment. In the case of the EU, common external tariffs imposed by the member states are what classify this agreement as a customs union.
While custom unions and free trade agreements are both created with the intention to reduce barriers to trade, increase economic growth, boost incentives for foreign direct investment, and create jobs, they still have differences with how they view external trade. Free trade agreements offer more freedom to member countries, allowing them to set their own external tariffs, while customs unions make it mandatory to charge a common tariff to all non-member states.
What do you think is more beneficial to a citizen, living in a customs union, or a more sovereign nation with its own free trade agreements?
-Matt and Lindsay
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