Question

EC3100 short-answer questions (10 points each) – answers should be at least a 3/4 page single spaced

1) Explain how a country can both gain and lose from joining a customs union. Draw a diagram to show both the gains (in terms of consumption and production) and the losses (trade diversion) when going from trade with tariffs to trade within a customs union, using examples and real world events to explain.

Answer 1

The establishment of customs unions is beneficial to economies in the long term. It helps small economies tap industries that may not have been accessible with domestic trade only. They can achieve large external economies of scale within the union from transport and infrastructure.

Advantages

1. Trade creation and trade diversion

2. Trade flow snd and economic integration will be increased.

3. Solves the problem of trade deflation.

Disadvantages

1. Loss of economic sovereignty.

2. Complexity of setting tariff rates

3. Distribution of tariff revenues.

Overall examples

The European Union is the largest customs union in the world in terms of the economic output of its members.Also the import tariffs are depending on the product. Pharmaceuticals is as low as 0% and tobacco products is having a 40% import tariff.

Another customs union is south African customs union(SACU) includes South Africa and other few countries.

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