Legal Definitions - customs union

A customs union is an agreement between two or more politically independent countries to operate as a single territory for customs purposes. This means that these countries eliminate tariffs and other trade barriers on goods moving among themselves. Crucially, they also adopt a common set of tariffs and trade policies for goods imported from countries outside their union. While participating nations maintain their individual sovereignty and governments, they coordinate their external trade policies to present a unified front to the rest of the world.

• Example 1: The European Union (EU)

  The European Union functions as a customs union among its member states. When a company ships olive oil from Spain to Germany, no tariffs or customs duties are applied because both countries are part of the EU customs union. However, if a car manufacturer in Japan wants to export vehicles to any EU country, the same common external tariff rate will apply, regardless of whether the cars first enter through the port of Rotterdam in the Netherlands or through a customs checkpoint in Poland. This illustrates how internal trade is free of tariffs, while external trade faces a unified tariff wall.

• Example 2: A Hypothetical "Andean Trade Bloc"

  Imagine a new "Andean Trade Bloc" formed by Peru, Ecuador, and Bolivia. Under this agreement, a textile company in Peru could export its products to Ecuador or Bolivia without paying any import taxes or tariffs at the border. Simultaneously, if a shipment of electronics arrives from South Korea, it would face the exact same import duty rate whether it's destined for a market in Lima, Peru, or La Paz, Bolivia. This demonstrates the removal of internal trade barriers and the establishment of a common external tariff among independent nations.