Customs Union
A customs union is a group of countries who join together and agree to have free trade between them, and the same tariffs on other countries.
Trade Creation - Benefit
For example, Uruguay joins a Customs Union, and switches from Australian wine to Argentinian wine, which is cheaper.
- The country moves from a more expensive producer to a lower cost producer
- Costs of production decrease
Trade Diversion - Drawback
For example, Uruguay used to buy lamb from New Zealand, but now a tariff is levied on NZ by the Customs Union. The customs union would want to levy this tariff, since Brazil produces lamb, but it is more expensive than NZ lamb. However it is less expensive than the NZ lamb with the tariff, so Uruguay switches to Brazillian lamb.
- The country moves from a cheaper producer to a more expensive producer
- Costs of production increase
Advantages vs Disadvantages
| Advantages | Disadvantages |
|---|---|
| Trade Creation | Trade Diversion |
| Increased market access for firms, Economies of Scale | Small firms pushed out the market |
| Progressive - Benefits consumers on lower incomes | Can be regressive - may pay more for some goods due to tariffs. |
| Gives more power to large nations | Less power for smaller nations |
| Beauracratic / slow |
Depends upon
- Size of economy and level of negotiating power
- Could negatively influence infant industries, especially if you are small / less developed economy
- The amount of Creation vs Diversion