This post (edited for publication) is contributed to our blog as part of a series of work produced by students for assessment within the module ‘Public International Law’. We offer this module in the second year of Bristol Law School’s LLB programme. It is led by Associate Professor Dr Noelle Quenivet. Learning and teaching on the module includes the use of online portfolios within a partly student led curriculum. The posts in this series show the outstanding research and analytical abilities of students on our programmes. Views expressed in this blog post are those of the author only who consents to the publication.

What are the (dis)similarities between a Free Trade Area and a Customs Union?

Author: Karen Kisakye

Introduction

Though there are not that many, the (dis)similarities between a free trade area and a customs union are very clear. In this post I will focus on the internal and external elements, taking a broad approach to their application.

I have derived the definitions of a free trade area and a customs union from the World Trade Organization (WTO) as it is the largest organization that regulates trade today across most, if not all, States. The definitions are contained in Article XXVI (8)(a) and (b) of GATT 47.

Both a free trade area and a customs union have no borders within their blocks (ie among the Member States). This is the internal element. However, all Member States of a customs union have a common external tariff against third parties. This is the external element (see Herdegen, International Economic Law (OUP 2013) 274).

Using these elements, this blog will explore the effectiveness of a free trade area versus a customs union. The effects of these (dis)similarities will highlight their (dis)advantages which I shall use to show their irrelevance in regards to both developing and developed countries today.

Achievements

The rules that govern free trade areas and customs unions are contained in what forms them, ie a free trade agreement (see table below). Though each free trade agreement may be slightly different from one another, the WTO Trading Overarching Fundamental Principles govern them. With these principles, the common aim of free trade areas and customs unions is to increase trade and boost economic growth through the reduction or elimination of tariffs and I believe they have achieved this (see video on Free Trade v Protectionism).

Karen kisakye
Free trade agreements © Karen Kisakye

Effectiveness

The effectiveness of free trade areas and customs unions is better explored through their (dis)advantages. The main advantage of both is increased economic growth. How is this achieved?

The internal element earlier addressed enables block Members to trade with lesser or no tariffs. This boosts sales and profits as well as domestic competitiveness.

However, the lack of a common external tariff in a free trade area means that member States of such a block will be free to charge different tariffs on non-member States. This enables them to protect growing domestic industries; however, it creates an uneven playing field as non-member States will import to States with the lowest tariffs (Herdegen, International Economic Law (OUP 2013) 274) only or if not, at least first. This diverts trade (at 3 para 1) and begins to crack the economic system of the free trade area block, thereby not really increasing trade (fairly). Consequently, States tend to change their free trade area into a customs union (see eg CARICOM in Herdegen, International Economic Law (OUP 2013)275).

However, customs union members are not allowed to negotiate individual trade deals with third countries. This makes it impossible for a State to benefit from strong State alliances with non-members and can thus lead to a State being unable to target economic growth accordingly.

Relevance

However, while the advantage of increasing trade has been proven in practice, it is argued that the system of free trade agreements in the form of free trade areas and customs unions has been exhausted.

Due to the overwhelming evidence before us, it is generally assumed that free trade equals economic growth. That obviously seems to be true for the developed States today. However, I disagree with this assumption when it comes to developing States today.

I do not disagree with the fact that free trade that takes place through these blocks does indeed promote economic growth. Rather, free trade areas like MERCOSUR (at 1, para 1) and the Common Market for Eastern and Southern Africa (consisting of developing member States), have only achieved this in part and in fact have not managed  to fully reflect the economic growth of the developed States today. Why is it so?

First, today’s developing environment is different from the one when the developed countries were developing. Developing States today face different challenges or factors than yesterday’s developing and now developed countries (Lester, World Trade Law: Text, Materials and Commentary (Hart 2012) 27).

Free trade areas and customs unions may promote economic growth but in today’s political and economic environment, for developing countries, letting borders down for free trade means anything from sacrificing protection of weak industries to risking security, both of goods and persons.

I stand with the free traders who argue that the developed countries of today, historically did not rely on free trade areas or customs (see videos Free Trade Does not Make Countries Richer and Ha-Joon Chang on IMF, WTO, World Bank and Protectionism) to develop their industries and are now denying developing countries the same courtesy (Lester, World Trade Law: Text, Materials and Commentary (Hart 2012) 26, 41-51).

Secondly, the WTO does not provide enough protection for the industries of developing countries through Articles XII, XI:2, XII OR XIII:B of GATT 47 or other means (see eg European Union–Developing Country FTAS, 1563)

In conclusion, the key similarity is the elimination of internal borders and the promotion of trade and the difference is the absence or existence of a common external tariff. This is dependent on States abiding by the rules which they do not always do and is also subject to restrictions that States do not fancy.

Consequently, these cracks, together with the minimal or slow progress in the economic growth of developing countries, reflect the need for a new system. Different era means different issues and challenges and thus different mechanisms.