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Who benefit from forming a customs union?

12 Sep 2017Economics Essays

Customs union refers to the trade agreement between the various countries. The main purpose of these agreements is to exchange the commodities with concessions in the tariff on the imported goods. It is found that there are many clauses in the customs unions which benefit the exporting country although in certain situations the importing country also stands to benefit. For example we find reference to the formation of the customs union in the European Union, North America and Africa.

The various members of the European Union decided to cooperate with each other by forming a customs union. The formation of customs union in reality replaces competition with cooperation. The member countries of the customs union are expected to lower their tariffs. Recently, Turkey has become a member of the European customs union and the scholars have discussed its benefits to the importing and exporting countries. In the case of North America, USA and Canada have entered into mutual agreements to form customs union. In the case of North America, as early as 1930s the two countries USA and Canada realized the necessity of signing the Free Trade Agreements (FTA). Later both the countries became members of the trade agreements such as GATT.

They also became party to the NAFTA. Recently, both the countries have decided become the members of the customs union. The main advantage of customs union is that they establish the single market in the whole region. Another important principle of the customs union is reciprocity. That is, when one country increases or reduces the tariff on imports from a particular country, this tariff is applied to all the member countries of the customs union. There is no denying the fact that the main intention of forming the customs union is to increase the revenues of its member countries. In fact, in this competitive world it is necessary to form such unions. It was found that by cooperating with each other it is possible to improve their revenues. Most of the customs unions have a few common features such as economic system, culture, language, and so on. For example, the members of the European customs union the member countries possess some common features such as similar cultural and historical background. This leads to greater understanding between the countries. Also in the case of North America, one can find the common features between America and Canada as they share the similar culture and economic system. There is also provision for the trade negotiations between the member countries. These trade negotiations are made to avoid the potential loss of revenue to the member countries. It is found that both the importing and exporting countries benefit from the customs union. However, comparatively speaking, the exporting countries obtain more benefits. Further, the member countries are given the freedom to protect the sensitive sectors such as agriculture and a few categories of manufacturing such as clothing, textiles etc. The members of the customs union are supposed to impose the common external tariff (CET) on the imports from the third countries. The member countries also should provide preferential access to all the member countries of the customs union.

Recently, it has been suggested that Canada and USA should form their own customs union.(Dymond and Hart, 2005) With this they would lose their earlier trade autonomy such as the right to impose and vary custom duties on imports and exports, right to control the volume of imports and exports, and the right to enforce anti dumping laws and so on. This would mean that the exporting country would benefit as they can produce the goods in order to supply to the members of the customs union. As the importing country cannot impose the anti dumping rules on the exporting country, the importing country in certain situations may lose some revenue. Before establishment of the customs union both the countries enjoyed the right to protect the domestic industries. However, within the customs union it is not possible to protect the interest of the domestic industries. This would mean that the exporting country would benefit from such a system found in the customs union. (Dymond and Hart, 2005)

Another important customs union can be found in the European region. The various European countries including Turkey decided to become part of the customs union which established a single marketing territory. Some scholars have argued that Turkey would gain nearly 1.5% of GDP every year after becoming member of customs union while it loses nearly 1.4 % of GDP every year due to the loss of tariff revenues as it will lose the authority to impose tariff on imports and exports within the European Union. (Harrison et.al, 1996) Since Turkey became a member of the European customs union, it was compelled to give up all the tariffs on the goods imported from other European countries. Hence, the exporting countries benefited because they did not have to pay additional tariff to the goods that were sold to the member countries of their customs union. However, this increased the opportunity for the countries to export more commodities and discouraged imports.

Turkey is also compelled to provide preferential treatment to all the third countries which are given the access by other members of the European customs union. However, at the same time, Turkey obtains the same status in those countries which are given preferential treatment by the European customs union. Hence, the member countries cannot control the decisions regarding import and export destinations. In the case of the third countries the member countries are supposed to reduce their tariffs. Although Turkey loses some amount of revenue due to zero tariffs on the imports, it stands to gain by being able to increase their exports not only to the member countries of the customs union but also to the third countries which are given preferential treatment by the other members of the European customs union. The losses in the form of reduced tariffs on imports can be recovered in the form of the internal taxes or by increasing the exports. Hence, the member countries of the customs union are encouraged to increase their exports. Due to this system, Turkey becomes an open economy in the non agricultural sector although it is allowed to protect the domestic agricultural sector. For example, Turkey can impose tariffs on the agricultural imports. In order to increase the exports the countries are encouraged resort to currency depreciation. In fact, EU was the major trading partner of Turkey. All this shows that in the customs union the exporting country benefits more than the importing country. In fact, the countries do not have the authority to impose anti dumping laws on the exporting countries which are the members of the customs union. However, one can notice the existence of various methods to increase the exports. (Harrison et.al, 1996)

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