Free-trade areas involve the areas in which the participating countries have entered into a free-trade agreement. Free-trade agreements are ultimately designed to “increase the efficiency and fairness of trade between countries that sign such an agreement” (PMA, 2013). Customs unions are designed to “enable partner states to enjoy economies of scale, with a view to supporting the process of economic development” (Objectives of the Customs Union). The primary difference is that free-trade areas do not have tariffs, while custom unions have tariffs. This does create a multitude of economic differences for the countries involved in each type of trade zones.
Economic Differences
In general, countries that elect to participate in a free-trade area have similar economies. Since there are no tariffs placed on the countries part of the free-trade agreement, the goal is to promote trade growth. This boosts economy by promoting an increase of labor, production, and guides comparative advantage. In general, countries that elect to participate in a customs union are hoping to boost their economies. The goal is to “facilitate formation of one large single market and investment area” (Objectives of the Customs Union). In short, customs union participants are hoping to boost their economies by imposing an external trade policy.
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NAFTA
NAFTA’s free-trade zone created “one of the world’s largest free trade zones and laid the foundations for strong economic growth and rising prosperity for Canada, the United States, and Mexico” (NAFTA, 2012). To date, it has succeeded. Since 2008, international stock has increased 8.8% to 16.5% in 2009 (NAFTA).
European Union
The European Union customs union means “no customs duties at internal borders between the EU Member states, common customs duties on imports from outside the EU, common rules of origin for products from outside the EU, and a common definition of customs value” (European Commision, 2008). One of the reasons the European Union elected to join a customs union is to protect agriculture (Hannan, 2012). The Community Customs Code, adopted in 1992, established that “the common tariff is applied in the same way all along the EU’s external borders, introduction of a common approach on warehousing procedures, facilitation of movements of goods in ‘customs transit,’ and replacing the wide variety of customs documents with a single administrative document” (European Commision, 2008).
- European Commision. (2008). About the Customs Union. Retrieved from 40 Years of Customs Union: http://ec.europa.eu/
- Hannan, D. (2012, October 23). The EU is Not a Free Trade Area but a Customs Union. Retrieved from The Telegraph: http://blogs.telegraph.co.uk
- NAFTA. (n.d.). Retrieved from Office of the United States Trade Representative : http://www.ustr.gov/
- Objectives of the Customs Union. (n.d.). Retrieved from East African Community Customs: http://eac.int/customs/
- PMA. (2013). Free Trade Agreements. Retrieved from PMA: http://www.pma.com/
