THE IMPACTS OF FORMING A CUSTOMS UNION ON THE IMPORTING COUNTRY AND THE EXPORTING COUNTRY
The onset of globalization enables the world to become a borderless community marked by free trade, economic convergence, global consumers and unrestricted flow of human expertise and technology across all points of the globe. Globalization requires nations to lessen the rigidity of their national trade policies in order to easily form alliances with other states and become more receptive to international investment. Convergence of national economies is inherent in the process of globalization and the ability of every nation-state to participate in this convergence is greatly appreciated. One significant issue in international trade is the presence of customs requirements and tariff. (1996) states that customs requirements and imposition of tariff basically connote expenses and delay for entrance of goods of the exporting country to the importing country. Thus, customs requirements are seen as an impediment to global trade, as exporters are forced to comply with multiple import procedures ().
A strategy for smoothing trade relations and encouraging global trade by abolishing tariffs and other restrictions is through a customs union (2006). A customs union is an alliance of two or more trading countries characterized by a common tariff for non-members and absence of tariff for member-countries. Participating nations in a customs union deliberately establish a single external trade policy applicable to the entire membership. Customs union is said to answer the purposes of enhancing economic efficiency and setting up stronger political and cultural relations among the participating nations ( 2007). The Common Market for Eastern and Southern Africa (COMESA) (2007) cites that a customs union has five major elements: (1) duty-free and quota-free trade among the territories of the member-countries; (2) a shared description and classification of tradable products and goods; (3) a common valuations procedure for tradable goods; (4) a common level of protection and trade policy relative to imports from territories outside the jurisdiction of the customs union; and (5) a common administrative structure governing customs operations, trade policy, and revenue collection. One example of a customs union is the European Union-Turkey Customs Union set up in December 31, 1995 as a collateral process of ensuring the full membership of Turkey in the European Union. This customs union enables freer flow and sharing of goods and products between the two territories without any customs restrictions governing the process (2007).
The formation of a customs union has both advantages and disadvantages. Talking about the short-term impacts of a customs union, it is said that a customs union renders notable effects in production structures, initial tariffs, trade diversion and transaction costs. First, a customs union makes production structures between countries more competitive. Every country in the world has their own goods to offer which either benefit another country or pose competition to it. Countries in the world exist in a competitive trade environment. Considering this situation, a customs union makes specialisation possible for its member-countries. Each country will be encouraged to produce the best and least costly goods that they can deliver which will make competition become more interesting and spontaneous. Secondly, a customs union dictates the level of the tariffs. If members impose high initial tariffs, inefficiencies will worsen and welfare effects from the elimination of the tariffs will be more remarkable. Furthermore, imposition of high tariffs against other world producers will decrease the advantageous impacts of a customs union. Thirdly, if a customs union has a large membership base, the threats of trade diversion and transaction costs would be lower. As more countries decide to participate in the customs union, the share of these countries in the overall international trade would be greater and the threat of trade diversion would be lesser. A customs union implements a protective tariff on world imports while partner countries are tariff free. Thus, the possibility of trade diversion is greater. Trade diversion happens when a more efficient world producer takes over a less efficient partner country producer. If the customs union is able to encourage more countries to join the union, the risk of trade diversion is lowered as diversity of member-countries become possible and the union is ensured of a wide array of technologies and effective production strategies from each country (2006). Corollary to the discussion of membership in a customs union, (1988) points out that it is important for a customs union to include the lowest cost producers in the union membership to guarantee benefits for all member-countries. For instance, if France, the United Kingdom and Germany form a customs union without including the lowest cost producer of cars, any one of these countries has the tendency to look for the lowest cost producer of cars from other world producers outside the union in the long run. Thus, the three countries do not benefit from the customs union (2007). Also, increased membership means lesser transportation and transaction costs. This happens because as a customs union becomes larger, members would feel the need for more effective transport systems for the trade to take place. Hence, border controls of each country would be lessened to augment the efficiency of the trade transport channels. Thus, transaction costs between the countries participating in the customs union are lesser ( 2006).
The long term effect of a customs union comes in the economies of scale. Economies of scale occur due to some improvements in the operations of corporations from the countries participating in the customs union. The formation of a customs union brings about restructuring effects which force firms, employees and governments to adapt. First, customs union entails increased competition as member-countries are given freedom to participate in trade without tariffs. Companies facing heightened competition will attempt to lower their costs to maintain market existence. Secondly, increased competition leads to production efficiency. Firms that wish to participate in a tariff-free trade would try their best to produce greater volumes of goods in order to ensure their continuous participation in the trade process. Firms that continuously attempt to produce in bigger volumes would eventually discover the most efficient methods of production. Thirdly, increased production enables consumers to gain access to diverse goods which would guarantee that high quality products are available in the market. Finally, the absence of tariffs, quotas and other forms of restrictions in a customs union drives domestic producers to implement price reductions to match the rate set by a partner country. This method eradicates excessive profits and tendencies for overstaffing. The long term effects of a customs union on economies of scale depend upon the level of unity and division of benefits between the member-countries (2006).
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