Countries need to generate income and protect their products, which is why they charge tariffs or taxes that are levied on goods to be imported or exported or also create other restrictions on imports. This has led groups of countries to create Free Trade Areas and other Customs Unions. So what is the advantage, disadvantage and difference between ‘Free Trade Area’ and ‘Customs Union’? Keep reading and you know it.
What is a ‘Free Trade Area’ and a ‘Customs Union’?
The ‘Free Trade Area’ is formed by two or more countries by signing free trade agreements (FTAs), in which they agree to eliminate tariffs and other restrictions to allow free trade between them. An example is the FTA between the United States, Canada and Mexico.
In the ‘Customs Union’, several countries replace their customs territories with a common customs area, eliminating tariffs and trade restrictions between them and setting a single and common tariff against countries that do not belong to the union. This was done in the European Economic Community.
Differences between ‘Free Trade Area’ and ‘Customs Union’
In the Free Trade Area, each of the signatory countries of the FTA retains the power to charge the tariff it deems appropriate to countries outside of it and to sign trade agreements with third countries.
States can agree on gradual reductions to common tariffs and lists of products included, set rules of origin and schedule in which tariffs will be reduced. Here, only the goods of the member countries will circulate freely.
In the ‘Customs Union’, everyone sets a single tariff for countries that are not members of the union and it is the entire union that would sign trade agreements with third countries. The primary objective is that tariffs disappear for all products in the union, including agricultural items. Then both the goods produced in the union and those imported will circulate freely. In addition, customs between member countries are eliminated.
Advantages of the Customs Union and the Free Trade Area
In the Customs Union the commercial area is enlarged. This would increase competition and consequently production. That, in theory, would lead to more efficient allocation of resources, lower prices and higher consumer purchasing power. The eradication of customs reduces costs and bureaucratic procedures and this would affect final prices.
In the Free Trade Area, the FTAs bind the member states; and by setting clear rules of the game, uncertainty in foreign trade relations disappears, productivity and competitiveness increase. It is expected that the consumer will be able to buy products at a better price and quality and that foreign investment will increase.
The latter would lead to improving the quality and payment of employment. If intellectual property protection standards are set, creation increases. In theory, if you want to sell your product in a foreign country, your market expands. To do this you must define the objective and analyze your organizational market.
Disadvantages of the Customs Union and the Free Trade Area
In the Customs Union, as agreements with external countries must be made as a bloc, attention may be given to some sectors of a national economy. In addition, drawing up and signing agreements with external states is slower, because there is a group of nations negotiating and each one has its own particular interests.
In Free Trade Areas, many small businesses or family businesses lose out by not being able to compete with multinationals. This can generate internal economic instability. That is why you must open yourself to new possibilities, such as the use of international banking. In addition, there are companies that move to areas where labor is cheaper, leaving the area in question with a high level of unemployment.
But do not be discouraged if you are an entrepreneur who wants to start your business. You just have to undertake a marketing strategy plan to know how to grow your business.