BUS613: Advanced International Business

A Special Case of PTA CUs have been around for a long time and were once more prevalent than FTAs. Early efforts toward economic integration were generally driven by the desire to establish a political union, and the members were willing to relinquish some political autonomy. Early examples include the Zollverein, formed in 1834 by several German principalities, which turned out to be a step toward political unification, and the 1847 customs union between Moldavia and Walachia, a precursor to the creation of Romania.

More recently, CUs appear to have become less popular, at least with respect to the number of arrangements. As is thoroughly documented by Acharya et al. (ch. 2 in this volume), almost 85 percent of the regional integration arrangements notified to the World Trade Organization (WTO) through 2009 consisted of FTAs. This trend reflects the nature of the current wave of regionalism, which has been broadly characterized by smaller crossregional deals, flexibility, selectivity, and, most important, speed. Recent FTAs are inclined to be pragmatic and to focus more on strategic commercial market access and less on geographic considerations or political ambitions. They generally involve a small number of partners (frequently, just two), which are often geographically distant from each other. They tend to achieve significant preferential and reciprocal trade liberalization within a short time while simultaneously preserving a member's sovereignty over its trade policy vis-à-vis the rest of the world, including its option of joining other preferential trade agreements (PTAs).

By contrast, CUs usually involve a relatively large number of geographically contiguous countries (see table 5.1 for a selected listing). They generally take longer to negotiate and implement than do PTAs, and they entail a certain loss of policy-making autonomy. By 2009, they accounted for less than 10 percent of the regional integration arrangements notified to the WTO. CUs are less numerous than PTAs, but they generally have much larger memberships. They also tend to cover much larger geographic areas. The four main CUs in Latin America – the Central American Common Market (CACM), the Andean Community (CAN), the Caribbean Community (CARICOM), and the Southern Cone Common Market (Mercosur, Mercado Común del Sur) – include almost all the region's economies. The existing and planned CUs in Sub-Saharan Africa – the Economic and Monetary Community of Central Africa (Communauté Économique et Monétaire de l'Afrique Centrale), the East African Community (EAC), the Southern African Customs Union (SACU), the West African Economic and Monetary Union (WAEMU), the Economic Community of West African States (ECOWAS), the Common Market for Eastern and Southern Africa (COMESA), the Southern African Development Community (SADC), and the Economic Community of Central African States (ECCAS) – take in virtually every country in the region. Many countries in the Middle East and North Africa regions are members of the Gulf Cooperation Council (GCC), the Arab Customs Union (ACU), or both. Although a CU is no longer the most popular option, it remains a central component of regional integration strategy in many developing regions. For many developing countries, the design and implementation of a CET, along with the elimination of intraregional trade barriers, continue to be key drivers of trade policy reform and to occupy an important place in policy debates. Given that customs duties constitute a significant source of government revenues in most of those countries, choosing the appropriate mechanism for collecting and allocating customs revenues is an important challenge for officials.