Difference between customs union, free trade area and common market.
(i) Free Trade Area :
In this form of economic integration, the member countries abolish completely both tariff and quantitative trade restrictions among themselves. However, each member country is free to maintain its own trade barriers against the non-member countries. An important example of free trade area is the European Free Trade Association (EFTA).
This association was formed in November, 1959. It included such countries as United Kingdom, Austria, Denmark, Norway, Sweden, Portugal. Switzerland and Finland as associate members. Another such association is Latin American Free trade Association (LAFTA). It was formed in June, 1961 by 10 Latin American countries.
Customs Union :
A more formal type of integration among two or more countries is the customs union. In this form of integration, the member countries abolish all anffs and other barriers on trade among themselves. As regards the rest of the world, they adopt a common external tariff and commercial policy.
The customs unions and free trade area are similar in respect of abolition of all trade barriers for the member countries. But the customs union is distinct from the free trade area in respect of the common external tariff against the non-member countries.
In case of free trade area, the member countries retain their own tariff and other trade barriers against the non-member countries. Thus customs union is a more closely-knit form of integration than the free trade area. In a customs union, all the member countries act as a single economic unit against the non-member countries.
(iii) Common Market :
The common market signifies a more unified arrangement among a group of countries than the customs union. The common market involves the abolition of tariff and trade restrictions among the member countries and adoption of a common external tariff. It goes even beyond that and allows free movement of labour and capital among the member nations.
Thus in case of a common market, there is a free and integrated the movement of goods and factors among the member countries. The European Common Market (ECM) called also as the European Economic Community (EEC) is the best example of the common market.
