Trade Creation

• Customs union


  When member nations agree to trade completely free between themselves (no tariffs, no embargoes, no quotas) but impose common external trade barriers on all imports coming in from non-member nations, usually a common external tariff
• Trade creation

  Movement from a high-cost domestic producer to a low-cost producer within the customs union
• A country joins a customs union

  Tariffs between member nations are eliminated, leading to free trade
• Tariff elimination between customs union members

  Domestic supply contracts, demand extends, imports from other members increase
• Trade creation

  • Gain of consumer surplus
  • Gain of world efficiency
• When a country joins a customs union, it can now sell its goods and services without tariffs to all other member nations, creating a huge increase in market size and trade
• The benefits of a country joining a customs union include economies of scale, greater market access, technological transfer, and lower prices for consumers