Customs Union/ Free-Trade Area

There are instances where a group of countries will decide to completely eliminate all tariffs between them, without eliminating tariffs on goods imported from the rest of the world.

This is called a regional agreement or preferential agreement between the  countries involved.

In the case where this group of countries also unify their tariffs against the rest of the world, with zero tariffs internally, this is called a customs union.

The European Economic Community (EEC) is one example of a customs union, and another is MERCOSUR, established in 1995, which includes Argentina, Brazil, Paraguay and Uruguay.

In contrast, if the group of countries maintains their own tariffs against the rest of the world, with zero tariffs internally, then this is called a free-trade area.

Examples of free-trade areas are the Canada-U.S. Free Trade Agreement (CUSFTA) of 1989, which later led to the North American Free Trade Agreement (NAFTA) of 1994, which consists of Canada, the United States, and Mexico.


R. Feenstra, 2004, "Advanced International Trade," pp.175-179