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.
At what point should customs duties be collected – at the
initial port of entry into the CU or at the final import
destination? Collecting import duties at the first port of
entry into the CU (say, in the coastal member with the
more developed port and transit facilities) could be one
way of ensuring freer movement of goods within the CU
and minimizing intra-CU border controls. Indeed, if all
trade taxes were collected at the point of first entry and
administered or distributed centrally, member countries would not need to monitor the passage across their borders
of goods originating outside the CU for duty collection
purposes. This method would greatly enhance efficiency
by reducing transaction costs at internal border posts, but
it requires the existence of the appropriate institutional
capacity to administer the revenues and, most important,
a high level of trust among members. Both of these measures tend to be harder to achieve as the number and
diversity of member states increase. The mechanism is
more likely to be sustainable if customs duties are deemed
to be community property of the CU and are used for collectively determined community purposes, or if members
can devise a mechanism for identifying imports according to their final destinations. A potential issue is the
possibility of some diversion in revenue collections (and
even economic activity) away from landlocked and less
developed countries and toward the more developed
trading hubs in the region.
Alternatively, customs duties could be collected at
the final destination or the final consumption point. Although conceptually straightforward, this type of agreement can be complex to implement and can be very costly.
In fact, to be workable, it requires that significant border
controls remain or that goods be shipped in some sort of
transit and bonding facility all the way to the final destination, where duties would be collected. Not only would
the logistical costs of running such facilities be substantial,
but they would also tend to diminish some of the expected
gains from establishing a CU. For instance, they could discourage the establishment of regional value chains or processing chains (using imported inputs) or the generation
of retail and wholesale services in intermediate locations
between the initial port of entry and the final destination.
It is clear from the foregoing discussion that the collection
and allocation of customs revenue in a customs union setting
are not only technical issues, but also (perhaps more important) a question of trust. Good technical coordination and
enforcement generally promote trust among CU members.
Conversely, lack of trust would require more stringent and
cumbersome controls on intrabloc transit and stricter application of the agreed disposition of revenue. This is clearly an
area in which harmonization of border management (customs procedures), cooperation, modernization, and capacity
building could be very useful.