Customs Union
Some of the major reasons for establishing such customs is to increase economic efficiency and establish closer political cultural ties between the participant countries. Customs union is established through trade agreement it is a third stage to economic integration. Some of the major existing customs unions include Central American Common Market, Andean Community, East African Community, European Union Customs Union, Caribbean Community, and the Gulf Cooperation Council.
On the other hand, there exists the proposed customs unions include Economic Community of West African States (ECOWAS), Common Market for Eastern and Southern Africa (COMESA), Southern African Development community (SADC) and Arab Common Market (ACM) among others (Paul Cooke, 2008). There are other types of customs union called the defunct customs. These are those that are outdated and invalid. They are not in functional state or they are not even registered in the trade agreement. Examples of these include Customs and Economic Union of Central Africa and the Customs Union between Lebanon and Syria.
For a country to be in a trade fair with another, there are some binding terms and conditions that it should accomplish. Like for instance, Australia should not seek membership of a proposed customs union if that union is trade diverting. This is because Australia does not meet the required conditions of joining such trade custom unions. Trade diverting customs unions showed that a country forming trade-diverting customs union with a partner country could increase welfare if substitution in consumption were allowed, that only happens where customs union import shifts from a lower cost third country to higher cost partner country.
This possibility has faced a lot of opposing ideas like the assumption that a fixed-coefficient variety in consumption and therefore concluded that a trade-diverting customs union necessarily would lower the welfare of the home country (Timothy, 1999). However, it is noted that the absence of the substitution in consumption is not a sufficient condition for a trade diverting customs union to be welfare reducing when the assumption made that the transformation curve is of a straight line nature. As shown below.
If the transformation is concave inwards, as shown below, and the assumptions of fixed coefficients in consumptions are retained, here the trade-diverting customs may be welfare improving for the home country. However, if substitution possibilities in both production and consumption were ruled out, the non discriminating tariff resulted in the same welfare level (Paul Cooke, 2008).
When considering the case of Australia and its incapacity to seek membership in the proposed customs union, we find there are a lot of factors that made it to be incapacitated. Before Australia could sign any trade agreement, it had already declared its independence. Within a matter of some time, a monetary and customs union of 68 standing years had been dissolved, and the successor of the Australian state was printing his own currencies and implementing stringent controls over trade across the new borders of the republic of Australia (Timothy, 1999). These events confront the international economist with curiosity to know if the trade flows originally generated by the union were simply erased by its disintegration. Some economists also wanted to establish that did the break up engender patterns of trade distraction and trade reversion which proved to be the mirror image of the trade creation and trade diversion which had characterized its constitution.
This study uses the new estimates of the gravity model applied to trade flows in the 1920s to establish an answer to the question. The study has used new to estimates of the gravity model to analyze the effects on European trade patterns in the mid 1920s of the break up of the then Austro-Hungarian empire and its customs union after World War I. The gravity equation has been found to explain up to 70 variance of the trade flows of the principal trading nations in 1924-1926 (Paul Cooke, 2008). More over, ties between the members of Austro-Hungarian Empire remained stronger than any other commercial relationship in Europe. They were second only in intensity, given the economic and demographic factors, to those of the British Empire.
As almost all economists tend to reason out that free trade is desirable, they differ on how best to make the transition from tariffs and quotas to trade free. The three basic approaches to trade reform are unilateral, multilateral, and bilateral. Unilateral reforms are the only effective way to reduce domestic trade barriers (Timothy, 1999). However, bilateral and multilateral approaches dismantle trade barriers. But is spite of this, they still have an advantage over the unilateral reforms. First, the economic gains from the international trade are reinforced and enhanced when many countries agree to a mutual reduction in trade barriers.
Another advantage is that multilateral reductions and trade barriers may reduce political opposition to free trade in each of the countries involved. That is because groups that would oppose the trade reform might join the campaign for free trade if they se opportunities for exporting to other countries in the trade agreement (Paul Cooke, 2008).
The best possible result of trade negotiations is a multilateral agreement. This is because it includes all major trading nations. Then the free trade is widened to allow many participants to achieve the greatest possible gains from the trade. The bilateral arrangements have also some advantages, like the promotion of greater trade among the members, and also hasten the global trade liberation if multilateral negotiations run into difficulties.