How does a free trade area differ from a customs union?

A free trade area eliminates tariffs between member countries, while a customs union also adopts a common external tariff policy.

A free trade area and a customs union are both types of economic integration, but they differ in their level of integration and the policies they implement. In a free trade area, member countries agree to eliminate tariffs, quotas, and preferences on most, if not all, goods and services traded between them. However, each country is free to establish its own trade policies with non-member countries. This means that goods imported from a non-member country into a member country of the free trade area can be re-exported to another member country without additional tariffs, a situation known as trade deflection.

On the other hand, a customs union not only eliminates tariffs between member countries but also adopts a common external tariff (CET) policy. This means that all member countries apply the same tariffs on goods and services imported from non-member countries. The purpose of the CET is to prevent trade deflection, which can occur in a free trade area. By having a CET, goods can move freely within the customs union without the need for customs checks and without the risk of trade deflection.

In terms of economic integration, a customs union represents a deeper level of integration than a free trade area. While a free trade area only deals with the liberalisation of trade in goods and services among member countries, a customs union goes a step further by harmonising external trade policies. This can lead to closer economic ties and greater policy coordination among member countries.

However, both free trade areas and customs unions have their own advantages and disadvantages. For instance, while a free trade area allows member countries to pursue their own external trade policies, it can lead to trade deflection and the distortion of trade flows. Meanwhile, a customs union can prevent trade deflection and ensure a level playing field for all member countries, but it requires member countries to give up some of their sovereignty in trade policy-making. Therefore, the choice between a free trade area and a customs union depends on the specific circumstances and policy objectives of the countries involved.