Free Trade Agreements Versus Customs Unions

Although THE GATT embodies the principle of non-discrimination in international trade, Article 24 of the GATT authorizes the creation of “union unions” among GATT members. A customs union is a group of countries that remove all tariffs on trade between them, while maintaining a common external tariff for trade with countries outside the EU (which is technically contrary to the MFN). This exemption was partly intended for the creation of the European Economic Community (EC) in 1958. The EC, which has gone from six to a dozen participating countries, goes beyond removing barriers to trade between Member States. It also coordinates and harmonizes each country`s fiscal, industrial and agricultural policies. The EC aims for even greater economic integration than in a customs union, by moving towards a common market – a regulation that removes barriers to mobility between participating countries from factors of production such as capital and labour. (2) Free Trade Agreements and Customs Unions Customs unions and free trade agreements are called regional trade agreements, both of which are based on Article 24 of the General Agreement on Tariffs and Trade (GATT) and effectively eliminate restrictions on all trade, including tariffs between participating countries. Both trade unions and free trade agreements are contrary to the MFN, a fundamental principle of the WTO, and so many debates have taken place in the past against regional trade agreements [1, 2]. Second, the multilateral removal of trade barriers can reduce political opposition to free trade in each of the countries concerned. This is because groups that would otherwise be opposed or indifferent to trade reforms could join the free trade campaign if they see the trade agreement as export opportunities to other countries. Therefore, free trade agreements between countries or regions are a useful strategy for liberalizing world trade. As a result, many countries have shifted from GATT to bilateral or regional trade agreements.

Such an agreement is the U.S.-Canada Free Trade Agreement (USCFTA), which came into force in January 1989. The USCFTA has eliminated all tariffs on U.S.-Canada merchandise trade and reduced trade restrictions on foreign services and investment, which are not GATT. Economists estimate that the USCFTA will increase Canada`s national income somewhere from 0 to 8 per cent, the special estimate depends on the assumptions underlying the analysis. Total U.S. earnings are about the same as Canadian profits, but the percentage increase in U.S. income is much smaller because the U.S. economy is about ten times larger than the Canadian economy. The United States has also entered into a free trade agreement with Israel and is negotiating with Canada for Mexico`s integration into a North American Free Trade Agreement (NAFTA) and has considered bilateral or regional trade agreements with other Latin American, Asian and Pacific countries. Free trade zones have recently been established in parts of South America. In recent times, we have seen more and more the term “customs union” in relation to Brexit, which refers to the decision of the United Kingdom (UK) to leave the European Union (EU). This section explains what a customs union is based on its differences from a free trade agreement. It should be noted that this column will focus exclusively on tariffs on goods.

Suppose Japan sells bikes for $50, Mexico sells them for $60, and they both expect a U.S. rate of $20. If tariffs on Mexican products are removed, U.S. consumers will transfer their purchases of Japanese bicycles to Mexican bicycles. The result is that Americans will buy from a more expensive source, and the U.S. government does not receive customs revenue. Consumers save $10 per bike, but the government loses $20. When a country enters such a “trade” customs union, economists have shown that the cost of

Comments are closed.