Common External Tariff

Common External Tariff. A common external tariff is a unified schedule of import duties adopted by the member states of a customs union. This policy requires all participating countries to apply identical tariff rates on goods entering the union from non-member nations, while typically allowing for the free movement of goods internally. The primary objectives are to eliminate trade deflection, harmonize commercial policy towards the rest of the world, and foster deeper economic integration among the union's members. Its implementation is a defining feature distinguishing a customs union from a mere free-trade area.

Definition and purpose

The core principle mandates that all participants, such as the European Union or the Southern Common Market, levy the same import duties on products from external countries like the United States or China. This prevents non-members from exploiting lower tariff jurisdictions within the union, a practice known as trade deflection. By establishing a unified trade barrier, the policy aims to streamline customs administration and present a cohesive external trade policy. It serves as a foundational instrument for deeper integration, often paving the way for a single market and closer political cooperation, as envisioned in treaties like the Treaty of Rome.

Historical development

The concept gained prominence in the 19th century with formations such as the German Zollverein, which standardized tariffs among German states before political unification. Its most significant modern application began with the establishment of the European Economic Community under the Treaty of Rome in 1957. The EEC implemented its common external tariff in stages, completing it by 1968, which was a milestone in the project of European integration. Other regional bodies followed this model, including the Andean Community established by the Cartagena Agreement and the Economic Community of West African States. The General Agreement on Tariffs and Trade and its successor, the World Trade Organization, provide the multilateral framework within which such regional tariff agreements are negotiated and notified.

Structure and rates

The tariff schedule is typically a complex document classifying thousands of products under systems like the Harmonized System. Rates are not uniform across all goods but are set according to the union's economic objectives; they may be zero for critical raw materials, low for intermediate goods, and higher for finished products to encourage local production. Within the EU, the common external tariff is managed by the European Commission and is detailed in the Integrated Tariff of the European Communities. Setting the rates often involves intense negotiation among members, balancing the interests of protectionist industries in some countries with the free-trade leanings of others, a dynamic evident in debates within MERCOSUR and the Eurasian Economic Union.

Economic effects

Economists analyze the impact through models like Jacob Viner's concepts of trade creation and trade diversion. The policy can create trade by encouraging members to buy more efficiently from within the union, but it may also divert trade by making imports from more efficient external producers like Japan or South Korea more expensive. This protectionist aspect can benefit internal industries but may lead to higher prices for consumers and reduced competitive pressure. The net effect depends on the height of the tariff walls and the economic complementarity of the member states, factors studied by institutions like the International Monetary Fund and the World Bank.

Administration and enforcement

Administration is usually delegated to a supranational body. In the European Union, the European Commission proposes changes, which are then adopted by the Council of the European Union. Enforcement is carried out by national customs authorities like the U.S. Customs and Border Protection for imports into Puerto Rico or French Guiana, which are part of the EU customs territory. Revenue collection is often governed by a complex revenue-sharing key, a subject of negotiation in bodies like the East African Community. Disputes over classification or origin are adjudicated through the union's legal mechanisms, such as the Court of Justice of the European Union.

Examples and regional blocs

The most integrated example is the European Union's common external tariff, applied across its member states from Germany to Cyprus. Other major customs unions employing this policy include the Southern Common Market in South America, the Eurasian Economic Union led by Russia, and the Gulf Cooperation Council. The African Continental Free Trade Area aims to eventually establish a continent-wide customs union with its own common external tariff. Historical examples also include the defunct Council for Mutual Economic Assistance among Soviet Union allies and the Central American Common Market. Category:International trade Category:Tariffs Category:Customs unions