Regional Trading Blocs

Regional trading blocs have become common in recent decades. They remove trade borders between neighboring countries to expand local markets and bolster trade by streamlining regulations, tariffs, and economic policies. These blocs can also come in the form of customs unions, which essentially create one shared market between several countries and dictate trade policies between countries in the union and those outside it.

A customs union (CU) is a form of trade agreement under which certain countries preferentially grant tarifffree market access to each other's imports and agree to apply a common set of external tariffs to imports from the rest of the world. That is, they enter into a free trade agreement (FTA) and apply a common external tariff (CET) schedule to imports from nonmembers.1 A CU can be thought of as a deeper form of integration than an FTA, generally requiring more coordination and a greater loss of autonomy.

The aims of this chapter are to provide, from an economics perspective, an overview of the key features of CUs and to examine some design issues that may be of interest to policy makers and (nonspecialist) analysts. The discussions are meant to be relatively conceptual and nontechnical, but real-world illustrations are provided when available.

To begin with, the main economic costs and benefits of opting for a CU, relative to those for an FTA, are discussed, and selected issues regarding the design and determinants of a common external tariff are examined. Although a number of arguments seem to suggest that CUs may be subject to more protectionist pressures than FTAs, the existing literature does not provide an unequivocal answer. There then follows a conceptual discussion of the implications of the various administrative options related to the collection and sharing of customs duties; this, it is shown, is not only a technical issue, but also (and perhaps more important) a question of trust among member countries. The chapter concludes with an overview of a number of systemic aspects of CUs. Readers interested in the more operational and detailed aspects of CUs are referred to the excellent surveys in Development Network Africa (2007).


Source: Jean-Pierre Chauffour and Jean-Christophe Maur, https://openknowledge.worldbank.org/bitstream/handle/10986/2329/634040PUB0Pref00Box0361517B0PUBLIC0.pdf
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