Custom Union Fundamentals

What is meant by a Custom Union?

• An agreement between two countries to increase import tariffs.

• Military and political cooperation between countries.

• An agreement to remove trade barriers among members and apply a common external tariff.

• A shared currency system for developing countries.

• An organization that regulates only specific commodities.

Which of the following is an example of a Custom Union?

• ASEAN

• MERCOSUR

• APEC

• OPEC

• NATO

According to Jacob Viner, the formation of a Custom Union...

• Always increases member countries' welfare.

• Does not always increase member countries' welfare.

• Only benefits developed countries.

• Causes losses for all members.

• Is purely political.

Which is a characteristic of a Custom Union?

• Each member freely sets its own tariffs for non-members.

• No free trade among members exists.

• Adoption of a common external tariff for non-members.

• Applies only to agricultural products.

• Allows import quotas among members.

The main objective of a Custom Union is to...

• Form a joint military force.

• Facilitate free trade among members.

• Set a common official language.

• Eliminate all domestic taxes.

• Create strict immigration policies.

A static benefit of a Custom Union includes...

• Technological advancement.

• Savings in customs administrative costs.

• Labor specialization.

• Increased investment.

• Economies of scale.

Dynamic benefits of a Custom Union include...

• Abolition of income taxes.

• Trade creation, competition, and innovation.

• Unification of national languages.

• Creation of a global currency.

• Reduction in labor supply.

What is meant by trade creation?

• Shifting imports from efficient to less efficient countries.

• Increased trade due to the removal of tariffs among members.

• A decline in international trade volume.

• Restricting exports to non-members.

• Eliminating all forms of trade.

Trade diversion occurs when...

• A member country increases exports to non-members.

• Imports from an efficient non-member are replaced by imports from a less efficient member.

• There is an increase in welfare for all countries.

• Internal tariffs are increased.

• There is no longer any trade with non-members.

Which of the following is a weakness of a Custom Union?

• Increased economic sovereignty of members.

• Members can freely set external tariffs.

• Erosion of economic sovereignty.

• Lack of any common policies.

• All members must use the same currency.