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

1 Customs union

A customs union is a group of countries that agree to eliminate tariffs and quotas on trade among themselves, and adopt a common external tariff on imports from non-members. This means that goods can move freely within the customs union, but face the same barriers when entering from outside. A customs union also requires a common trade policy and coordination on issues such as standards, regulations, and customs procedures. An example of a customs union is the European Union (EU), which has a single market and a customs union with 27 member states.

2 Free trade area

A free trade area is a group of countries that agree to eliminate tariffs and quotas on trade among themselves, but retain their own external tariffs and trade policies on imports from non-members. This means that goods can move freely within the free trade area, but face different barriers depending on the origin and destination of the trade. A free trade area also allows more flexibility and sovereignty for its members to negotiate bilateral or multilateral trade agreements with other countries or regions. An example of a free trade area is the North American Free Trade Agreement (NAFTA), which has a free trade area with Canada, Mexico, and the United States.

3 Advantages and disadvantages

Both customs unions and free trade areas have advantages and disadvantages for their members and the rest of the world. Regional integration and trade blocs can increase trade and economic growth by creating larger and more competitive markets, reducing costs and prices, and encouraging innovation and specialization. Furthermore, they can foster common interests, values, and institutions, as well as strengthen the bargaining power of their members in global trade negotiations. However, they may also create trade diversion and distortion by favoring trade within the bloc at the expense of more efficient trade with other countries or regions. Additionally, they can reduce policy autonomy and sovereignty by imposing constraints on their members, as well as increase complexity and uncertainty by creating overlapping rules.

4 How to compare

When comparing customs unions and free trade areas, you need to take into account several factors such as the level of integration and harmonization, the impact on trade creation and diversion, and the flexibility and diversity of trade relations. Customs unions are more integrated and harmonized than free trade areas, as they share a common external tariff and trade policy, as well as require more coordination on standards, regulations, and customs procedures. Additionally, customs unions may create more trade within the bloc than free trade areas; however, they may also divert more trade from non-members due to their uniform external tariff on imports. On the other hand, free trade areas have more flexibility and diversity than customs unions since they allow their members to retain their own external tariffs and trade policies, as well as to negotiate different trade agreements with other countries or regions.

5 Examples and cases

There are many examples and cases of customs unions and free trade areas around the world, with varying levels of scope, depth, and success. The European Union (EU) is the largest and most advanced customs union and single market in the world, with a population of about 450 million and a GDP of about 15 trillion euros. It has free trade agreements with over 70 countries and regions, including Canada, Japan, and South Korea. North American Free Trade Agreement (NAFTA) is the largest free trade area in the world, with a population of about 490 million and a GDP of about 23 trillion dollars. It eliminated most tariffs and quotas on trade among Canada, Mexico, and the US; however, it also faced criticism due to its effects on jobs, wages, environment, and sovereignty. In 2020, NAFTA was replaced by the United States-Mexico-Canada Agreement (USMCA). The African Continental Free Trade Area (AfCFTA) is the newest and most ambitious free trade area in the world, with a population of about 1.3 billion and a GDP of about 3.4 trillion dollars. It aims to create a single market for goods and services; however, it also faces challenges such as diversity among members, lack of infrastructure and connectivity, and the COVID-19 pandemic.