economics medium MCQ

What is the fundamental difference between a Free Trade Area (FTA) and a Customs Union?

  1. An FTA allows free movement of labor, while a Customs Union does not
  2. An FTA eliminates internal tariffs but members retain individual external tariffs, whereas a Customs Union adopts a common external tariff
  3. A Customs Union only trades in services, while an FTA trades only in goods
  4. An FTA is regulated by the WTO, while a Customs Union is regulated by the IMF

Answer: An FTA eliminates internal tariffs but members retain individual external tariffs, whereas a Customs Union adopts a common external tariff

In an FTA (like NAFTA/USMCA), members trade freely among themselves but set their own tariffs against non-members. In a Customs Union (like the early EU or Mercosur), members not only eliminate internal tariffs but also agree on a unified, common external tariff policy applied to all non-member nations, requiring a higher degree of political and economic integration.

Topic International Economics - Trade
Exam Relevance UPSC Prelims, SSC CGL
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