Though one of the several forms of regional economic grouping, customs unions occupy a unique place in both (a) theory and (b) history of economic integration.
The first customs union, (called the Zollverein) with deep-felt consequences both for the economies of the member states and rest of the world was established by a large number of sovereign German States in 1834, and played a significant role in German unification in 1870.
For thinkers and analysts it was a subject of special attention for well over a century and, in line with this tradition, it is discussed here in detail.
Image Source: mackinac.org
Features:
A customs union has the following salient features:
i. There is a complete removal of all tariff and non-tariff barriers on inter- member trade.
ii. All members have a common set of “common external barriers” (CEBs) against imports from non-member countries. These barriers include both tariff and non-tariff ones.
iii. There may be some specific restrictions even on inter-member movement of goods and services as a safeguard against unfair trade practices, trafficking in drugs and other unacceptable activities.
ADVERTISEMENTS:
iii. Countries forming a customs union are likely to restructure their domestic economies and policies so as to maximise their potential gain from the union. However, the extent, nature and form of such restructuring are, by their very nature, indeterminable.
Effects:
A customs union is expected to generate extensive long-term effects and influence the growth paths of the member countries. In an on-going response to the changing situation, the member governments may weaken some market distortions and strengthen some others.
In view of these possible outcomes, J. Tinbergen distinguished between “positive integration” and “negative integration”, with the former aiming at removing market distortions within a grouping.
But such like distinctive concepts are relevant, if at all, only in the context of a generalised framework of “regional economic integration” and that too only during its formative period.
ADVERTISEMENTS:
In actual practice, no integration is purely “positive” or “negative”. When we look at its effects, they are always a mixture of the two.
It is noteworthy that some economists believe that, compared with no grouping, a regional grouping always increases economic efficiency and welfare because it is a step towards full globalisation. However, this claim is subject to two qualifications:
i. The objective of a regional grouping is that member countries should gain even when non-members have to lose. By implication, therefore, a regional grouping need not increase combined global gain.
ii. Effects of an economic integration are not restricted to short-run reallocation of existing productive resources and once-over institutional restructuring. Inter-country growth rates can vary over a wide range.