The advantages of a customs union

   Without a unified external tariff, trade flows would become distorted. If, for example, Germany imposes a 10% tariff on Japanese cars, while France imposes a 2% tariff, Japan would export its cars to French car dealers, and then sell them on to Germany, thereby avoiding 80% of the tariff. This is avoided if a common tariff is shared between Germany and France (and other members of the customs union.)

A common external tariff effectively removes the possibility of arbitrage and, some would argue, is one of the fundamental building blocks of economic integration.

The disadvantages of a customs union

Union members must negotiate collectively with non-members or organizations like the WTO as a single group of countries. While this is essential to maintain the customs union, it means that members are not free to negotiate individual trade deals.

For example, if a member wishes to protect a declining or infant industry it cannot do so through imposing its own tariffs. Equally, if it wishes to open up to complete free trade, it cannot do so if a common tariff exists.

Also, it makes little sense for a particular member to impose a tariff on the import of a good that is not produced at all within that country.

For example, the UK does not produce its own bananas, so a tariff on banana imports only raises price and does not protect domestic producers. The current EU tariff on bananas imported from outside the EU is 10.9%.

There is also a potential disadvantage to a single member in how the tariff revenue is allocated. Members that trade relatively more with countries outside the union, such as the UK, may not get their 'fair share' of tariff revenue.

The UK's status as a customs union member is one of the dilemmas facing the UK as a result of Brexit. If it wishes to create individual trade deals with, say the USA and China, it cannot retain its currret status as a full member of the customs union.

Common Market

A common (or single) market is the most significant step towards full economic integration. In the case of Europe, the single market is officially referred to a the 'internal market'.

The key feature of a common market is the extension of free trade from just tangible goods, to include all economic resources. This means that all barriers are eliminated to allow the free movement of goods, services, capital, and labour.

In addition, as well as removing tariffs, non-tariff barriers are also reduced and eliminated.

For a common market to be successful there must also be a significant level of harmonisation of micro-economic policies, and common rules regarding product standards, monopoly power and other anti-competitive practices. There may also be common policies affecting key industries, such as the Common Agricultural Policy (CAP) and Common Fisheries Policy (CFP).

Full Economic Union

Economic union is a term applied to a trading bloc that has both a common market between members, and a common trade policy towards non-members, although members are free to pursue independent macro-economic policies.

The European Union (EU) is the best known Economic union, and came into force on November 1st 1993, following the signing of the Maastricht Treaty(formally called the Treaty on European Union.)

Monetary Union

Monetary union is the first major step towards macro-economic integration, and enables economies to converge even more closely. Monetary union involves scrapping individual currencies, and adopting a single, shared currency, such as the Euro for the Euro-17 countries, and the East Caribbean Dollar for 11 islands in the East Caribbean. This means that there is a commonexchange rate, a common monetary policy, including interest rates and the regulation of the quantity of money, and a single central bank, such as the European Central Bank or the East Caribbean Central Bank.

Fiscal Union

A fiscal union is an agreement to harmonize tax rates, to establish common levels of public sector spending and borrowing, and jointly agree national budget deficits or surpluses. The majority of EU states agreed a fiscal compact in early 2012, which is a less binding version of a full fiscal union.

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