A customs union is a grouping of countries with a common external tariff, but with free trade, free movement of labor and capital among themselves. Customs union theory examines the impact on trade in general following the removal of barriers (such as quotas and tariffs) between the countries and their establishment against other countries. --- Advantages of Custom Unions :
Consumers get a wider choice of goods and they also benefit from the advantages of increased productivity which leads to lower prices
--- The main purpose of Customs Union is to extend the trading area for business.
A free trade area is where there are no tariffs between member nations.
A customs union goes a step farther and requires all members to have the same external tariff policy to goods coming in from outside the customs union.
So, if Countries A & B are in a customs union, they would both charge the same tariff on goods imported from Country C. The reason for this is to prevent imports coming into the country with the lowest tariff and then being sent to another country in the union (without a tariff). The producer can send it directly to the end nation. ---- Static and Dynamic effects of Custom Unions :
as for the static effects:
When trade b/w custom union partners increases, this implies a shift in the Union to more efficient, competitive producers Trade Diversion:
When imports from the less expensive world market are replaced by imports from a higher cost/less efficient partner country within the customs union Trade expansion: When lower market prices in one partner country stimulates total domestic demand which is satisfied by increased foreign trade with another partner country I'm not sure about the dynamic effects of customs unions beyond the fact that they include structural adjustment and economic restructuring. *...