Common External Tariff

A common external tariff is an agreement among two or more countries to adopt identical tariff schedules for all goods being imported from other trading partners. Having a common external tariff is the central feature of a customs union, which is an agreement among countries to eliminate internal tariffs and establish a common external tariff. A common external tariff may also include the homogenization of nontariff trade barriers such as quotas and other trade preferences.

When countries participate in the process of regional economic integration, they most often begin by forming a free trade area that eliminates all internal tariffs on imports and exports between the partners. A free trade area, however, may provide incentives to nonmember trading partners to engage in the practice of reexportation (also known as entrepot trade). A company from outside the free trade area may import products into the member country with the lowest external tariff, and then reexport to another member country tariff-free. This situation provides incentives for countries in a free trade area to manipulate external tariffs in order to gain trading advantages. In order to eliminate this activity, countries in a free trade union may form a customs union, in which a common external tariff is instituted.

The European Economic Community (now known as the European Union) established a common external tariff in July 1968. The elimination of most internal tariffs had been completed 11 years earlier with the signing of the Treaty of Rome by member countries Belgium, France, Italy, Luxembourg, the Netherlands, and the Federal Republic of Germany. Just a few weeks after the common external tariff was established in Europe, an agreement to allow the free movement of workers within member states was also adopted. The acceptance of the free movement of labor and capital within member countries is the next stage of regional economic integration and is referred to as a common market.

Mercosur, a trading bloc consisting of Argentina, Brazil, Paraguay, and Uruguay, is another example of regional economic integration that includes a common external tariff. These countries began their formal efforts toward fuller economic integration with the signing of the Treaty of Asunción in 1991. The common external tariff was adopted with the signing of the Treaty of Ouro Preto in 1994. Other examples of economic cooperation initiatives among countries that include a common external tariff are the Caribbean Community (Caricom), the Southern Africa Development Community (SADC), the East African Customs Union, the Andean Community (CAN), and the Gulf Cooperation Council. The European Union has expanded its common external tariff to include San Marino, Andorra, and Turkey, none of which are EU member states.

The North American Free Trade Agreement (NAFTA) eliminated internal trade barriers between Canada, Mexico, and the United States but stopped [Page 298]short of creating a common external tariff. Another prominent trading partnership, the Association of Southeast Asian Nations (ASEAN) Free Trade Area, has also not yet implemented a common external tariff. Countries are sometimes reluctant to adopt a common external tariff because of the loss of flexibility and control over national trade policy that it implies.

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