BUS613: Advanced International Business

The conceptual discussions in this chapter demonstrate that CUs generally require a much greater degree of policy coordination among members than do FTAs. This is because they require member countries to agree to a common external tariff and to set up institutional mechanisms to collect and distribute the tariff revenue. When a country joins a customs union, it agrees to relinquish some of its national sovereignty with respect to the formulation and implementation of trade policy. The fact that a country is willing to surrender such autonomy over trade policy suggests that it considers this loss to be more than offset by the economic benefits of securing access to a larger and more harmonized regional market and of enhancing the depth and effectiveness of the ongoing regional integration. The loss of autonomy may also be acceptable to members because in most cases, CUs are driven by objectives that go beyond trade, such as economic and monetary unions or even political integration, and that require supranational institutions.

Ceding the control of some aspects of national trade policy may yield economic benefits, to the extent that it shelters the trade policy–making process from the influence of special interests, at least at the national level. Committing to a regionally agreed trade policy regime can serve as an effective lock-in mechanism for trade reform efforts and can send a strong signal to investors regarding the predictability of the policy environment. In some cases, it may be more practical for a country to delegate the conduct of trade policy to another (larger) CU member or to a supranational agency. In others, a larger member country can impose its own trade policy or tariff structure on that of the union. In this case, there may be grounds for establishing a regional mechanism, such as a development fund, to compensate other member countries for adopting a tariff structure that is not inherently in their own economic interests.

It should be noted that the loss of autonomy implied by a CU also covers certain aspects of national trade policies, going beyond external tariffs. For instance, whereas FTA members retain full flexibility with regard to future PTA partners, CU members may be limited in their individual choices for future partners Indeed, membership in a CU, at least in principle, prevents an individual member from acting individually, since any agreement with a third party or any change to the CET needs to be decided by the CU as a whole. It can be argued that CUs could help prevent the emergence of a hub-and-spokes trading pattern.

In a world of criss-crossing and overlapping trade agreements, the issue of the loss of autonomy can severely constrain members of CUs in using trade agreements as an effective commercial instrument – at least in theory. In the current wave of regionalism, in which flexibility and speed are valued, membership in a CU, if played by the rules, could constitute a straitjacket for some countries.

In reality, of course, there are numerous cases in which a CU member alone negotiates an FTA with a third party. Examples of such a situation include the FTAs between the EU and South Africa (a member of SACU) and between the United States and Bahrain (a member of the GCC). Similarly, Bolivia, Colombia, Ecuador, Peru, and the República Bolivariana de Venezuela form the Andean Pact (a CU), while Colombia and the República Bolivariana de Venezuela have joined with Mexico to make up the Group of Three, an FTA. In some instances, one CU may overlap another. For example, Lesotho, Namibia, and Swaziland belong to COMESA while also belonging to SACU, and Tanzania is a member of both the SADC and the EAC. Multiple and overlapping memberships in regional trade agreements can create difficulties because different groups can have conflicting operational or liberalization modalities, and so member countries will have to make different, incompatible commitments. This not only could render CUs less effective but could also confuse traders (and even customs officers) as to which commitments or tariff schedules apply to a particular shipment. Unnecessary transaction costs will be created because traders are obliged to find their way around a number of trade regimes with different tariff schedules, different rules of origin, and different procedures.