It is a fundamental principle of the multilateral trading system1 that countries cannot normally discriminate between one trading partner and another. Customs unions and free-trade areas are the only exceptions permitted for merchandise trade between developed countries2.
When two or more countries form a customs union they agree to:
- eliminate duties (or tariffs) and other restrictive regulations of commerce on substantially all the merchandise trade within the customs union, and
- apply substantially the same duties and other regulations of commerce to the trade of territories not included in the customs union.
The EU is the world’s largest and most integrated customs union. Its internal (or “Single”) market provides for essentially free movement of goods across intra-EU borders for either local products or for those that have cleared customs in any of the countries of the customs union. This arrangement approximates to the internal market of a single state. The EU also acts, in effect, as a single state in international trade negotiations such as the Doha round and free trade agreements with third countries.
Free-Trade Areas and Rules of Origin
When two or more countries form a free-trade area, they agree to eliminate duties and other restrictive regulations of commerce on substantially all the merchandise trade originating in that area. But they retain complete control of their trade relationship with other countries. The best known example is the NAFTA (North American Free Trade Agreement).
“Rules of origin” are required to determine whether an individual product has originated in a free-trade area. They specify the minimum level of processing or manufacture that every merchandise category that would otherwise be subject to duties must have undergone to qualify for duty-free trade within the free-trade area. They are technical in language, complex and often difficult for even experts to understand, as illustrated by the TPRC’s Research Paper on “Rules of Origin in EU Free Trade Agreements” available on the TPRC’s website (see below).
Free-trade area agreements are commonly known as free trade agreements. Many are “comprehensive” in the sense they also cover trade in services, trade-related aspects of intellectual property and other dimensions of trade relationships between countries.
Note (1): The rules of the multilateral trading system are set out in the World Trade Organization Agreements (1994).
Note (2): As provided in Article XXIV of the General Agreement on Tariffs and Trade (GATT), which forms part of the WTO Agreements.