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Economic Development and Globalisation: Question 5

Syllabus 11.6.2

Multiple choice A2 1 mark

Which of the following best describes a customs union?

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Worked solution

Working through the options

Regional trading blocs form a spectrum of increasing economic integration, and each option above describes one stage of it:

  • Option A describes a free trade area: internal tariffs and quotas are removed between members, but each member keeps its own, independent external trade policy towards non-members.
  • Option B describes a customs union: it has everything a free trade area has, PLUS a common external tariff, all members apply the same tariff rate to imports from outside the union. This shared external tariff is precisely what a customs union adds on top of a free trade area.
  • Option C describes a monetary union: it has everything a customs union has, PLUS a single shared currency managed by a common central bank.
  • Option D describes a full economic (or political) union: it has everything a monetary union has, PLUS unified fiscal policy and shared government institutions.

A customs union is therefore best described by option B: free trade internally, combined with a common external tariff, but without necessarily requiring a shared currency (option C) or full political/fiscal unification (option D).

Final answer

B, a customs union removes internal tariffs and quotas AND agrees a common external tariff on trade with non-members.