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3 April 2019

EXPLAINER: What is a customs union?

by IFT

  • A customs union is a group of states who have agreed to apply the same import tariffs to products originating from states outside, and to abolish them between one another.

For goods to be eligible for preferential treatment under Free Trade Agreements, companies have to show that the goods truly originate from the exporting state. This means proving that they have been made with sufficient local content. Customs unions obviate the need for “Rules of Origin” checks between members, which tend to be complex to track and demonstrate.

On their own, customs unions do not remove the need for physical checks on goods (such as on Sanitary and Phytosanitary measures) between members, nor much of the documentation that cross-border trade usually requires. But parties do agree to levels of harmonisation in areas like intellectual property and common standards in competition and state aid.

  • Customs unions differ in coverage and form. The EU Customs Union (EUCU) covers all tariff lines; Turkey’s customs union with the EU customs union is limited to industrial and processed agricultural products; and San Marino’s includes everything except for steel and coal products.
  • Not being a party to the Common Commercial Policy (CCP), Turkey has its own trade remedy authority (which defends against unfair practices, such as dumping), and is able to negotiate its own trade agreements. But it may not change the tariffs shared with the EUCU on covered goods. Decisions regarding the EUCU’s trade policy are made by the European Union, and have so far involved only nominal (non-voting) input from non-EU states with whom it is in a customs union.

This therefore limits Turkey’s external trade policy capacity. While Turkey will remain free to negotiate trade agreements covering areas not included in the customs union (such as services), since it must keep to the EU’s common external tariff on goods, in practice Turkey is not able to negotiate comprehensive free trade agreements.

  • The customs union has made these subsequent negotiations with EU FTA partners asymmetrical. In its trade negotiations with Mexico, for example, the European Union negotiated the lowering of tariffs across the customs union for imports from Mexico, and the lowering of Mexico’s tariffs for imports from the EU, but not for Mexico tariffs on imports from Turkey. Turkey has subsequently been trying to negotiate a trade agreement with Mexico, but from a position of having already had its goods market opened, its negotiating power is diminished and it has not been successful.
  • Given the role of trade as a foreign policy tool, this limitation has consequences beyond the economics of trade.



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