BUS613: Advanced International Business

The use or allocation of the collected duties is an important consideration. Should the customs revenues collected be treated as community property, or as income accruing to each member state? Generally, it is necessary to establish a regional, supranational institution or a secretariat to ensure smooth operations of the union. Although such an institution could be funded through direct contributions from members – for example, WAEMU provides for an additional tax of 1 percent on imports – treating customs revenues as the collective property of the union may be a more useful financing mechanism. In some cases, such as the EU, the union may decide to allocate (a fraction of) these revenues to a joint fund to finance regional development initiatives or to provide support to poorer CU members. Of course, pooling customs revenues necessitates a high level of coordinating capacity and a certain degree of trust among members. This arrangement seems more likely to be sustainable when tariff revenues do not constitute an important part of government revenue for individual members – as is the case in the EU, but usually not for developing economies.

In other cases, CUs treat customs revenues as the property of individual members. Collected duties are allocated either according to the final destination or in line with an agreed sharing formula. Such a formula could provide for a simple reallocation based on negotiated and fixed shares, or it could involve a more complex range of economic and demographic variables. SACU, for instance, has a fairly complicated revenue-sharing system in which the share accruing to each member is calculated from three basic components: a customs pool, an excise pool, and a development component. The customs pool is allocated according to each country's share of total intra-SACU trade, including reexports. The excise component is allocated on the basis of gross domestic product (GDP). The development component (fixed at 15 percent of the total excise pool) is distributed to all SACU members according to each country's per capita GDP; that is, countries with lower per capita income will receive more.

Most existing customs unions allocate revenues according to the final-destination principle. This method, although apparently simple in theory, requires a mechanism for identifying the final destination of each shipment entering the union; the destination country would then claim the appropriate duty amount. One way to handle this procedure is to keep the imported shipment in bonded facilities until it reaches the country of ultimate consumption. This may work for whole shipments of final goods that are entirely consumed in the destination country, but it may not be the appropriate mechanism for an imported shipment that undergoes transformation in an intermediate country before reaching its final destination. Indeed, incentives could emerge for some members to collect revenues on imports that are then wholly transshipped or minimally "transformed" or "repackaged" before being exported duty-free elsewhere in the CU. In such cases, burdensome internal border controls, guarantee mechanisms, or even some rules of origin are needed within the CU to determine what fraction of the collected duties should go to which member. This could be an important issue for small landlocked economies that rely on their larger coastal neighbors for transit and that could lose revenues as a result of leakages or fraud. When trade flows are sufficiently symmetrical, a member's losses could be offset by the gains it realizes when goods imported into its territory (for which it collects the tariff) are consumed in a neighbor's.