The formation of a customs union can lead to increased trade creation as a result of reduced trade barriers and increased integration among member countries. However, the benefits of trade creation may not be enough to justify forming a customs union with high-cost trading partners. This is because such a union could lead to significant trade diversion losses, as inefficient producers within the high-cost partner countries would be protected at the expense of efficient producers in lower-cost non-member countries.
The case of the East African Customs Union / Common Market (EAC) provides a useful example. The EAC was formed in 2005, and its main objective was to promote economic integration and development by reducing trade barriers among its member countries (Kenya, Tanzania, Uganda, Rwanda, Burundi, and South Sudan). The EAC has eliminated tariffs on goods traded within the bloc and implemented policies to facilitate the movement of goods, services, capital, and people.
On the one hand, the formation of the EAC has led to increased trade creation among member countries, especially in sectors such as agriculture, manufacturing, and services. Tariff elimination has resulted in lower prices for consumers and increased opportunities for businesses to expand their markets. The EAC has also contributed to regional stability and cooperation, helping to address common challenges such as insecurity and disease.
On the other hand, the EAC has faced significant challenges in terms of trade diversion losses. High tariffs on imports from non-member countries have led to complaints from countries outside the bloc, particularly those with more competitive industries. For example, Kenya has been accused of protecting its domestic sugar industry through high tariffs on imports from Brazil, which are cheaper than domestic alternatives. This has resulted in higher prices for consumers and reduced access to cheaper goods.
Furthermore, some critics argue that the EAC benefits certain member countries more than others, as some countries have a comparatively lower cost of production and may enjoy a greater competitive advantage in certain sectors. For instance, Kenya has a more diversified economy with strong manufacturing and services sectors, while countries like Rwanda and Burundi are more reliant on agriculture. This may result in uneven gains and potential tensions among member countries.
In conclusion, while trade creation gains can be a significant benefit of forming a customs union, they may not be enough to justify the formation of such a union with high-cost trading partners. The EAC example shows that high tariffs on imports from non-member countries can lead to trade diversion losses, which may outweigh the benefits of increased trade among member countries. It is therefore important for countries to carefully consider the potential costs and benefits of customs unions before deciding to join or form one.
Even if trade creation gains exceed trade diversion losses, this is not an adequate explanation as to
why a country might wish to form a customs union with high-cost trading partners." Discuss this
with reference to the East African Customs Union / Common Market
1 answer