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What is the difference between a free trade zone, a customs union and an economic union?

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What is the difference between a free trade zone, a customs union and an economic union?

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What is the difference between a free trade zone, a customs union and an economic union? The economic integration of different countries results in the simplification of trade, capital and personal transfers, and it provides economic and social progress. However it is not always understood what exactly defines the different forms of economic integration.

Are there defined steps toward integration?

Yes, in the first and easiest stage, there is a trade agreement. It includes usually only reduced customs tariffs for goods of the participating countries, but the customs tariffs will not be totally eliminated. This stage is very simple and practically ineffective. Therefore, it is often skipped and replaced by the second stage.

A free trade zone is the second stage which is more often agreed on. In a free trade zone, products and services of the member countries can be traded within the zone without any customs barriers. The countries individually retain the right to demand import customs duties for goods from outside countries. In order to ensure that these differences do not lead to avoiding import tariffs for products of third party countries, the origin of the goods which are traded within the free trade zone is tracked using a “certificate of origin“.
Some products can be excluded from the customs-free trade zone such as sensible goods like fuel or tobacco.

What comes next?

The third stage of an economic integration is a customs union. Within it, the countries define together the import customs for products from other countries. To enable this, a strong economic collaboration which follows a common customs policy is necessary. But also in this form, exceptions are possible. Russia, Kazakhstan and Belarus have already formed a customs union in 2010 which was transformed into a joint economic area in 2012. Since January 2014, they even developed it further into a Eurasian Economic Union. But a joint market for pharmaceutical products will be formed only in 2016, for electricity in 2019 and a joint market for oil, gas and financial services is planned for 2025.

Is it nothing but hot air?

No, such exclusions in integration projects are common. The European Union, with its deep economic and even political integration, a joint currency and with strong supranational institutions, still has restrictions on the exchange of some goods. For example, fuel, alcohol and coffee can be transported only within limits over the borders. Therefore, it is very import for integration projects that the politics for the further removal of barriers is strong and then the economic integration will follow the political one.

Article supplied by Russia Consulting

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