ChainWhat it assumes · how to break it
Start
A country joins a customs union, removing tariffs on trade with member states and charging a common external tariff on imports from the rest of the world, as members of the EU customs union do.
1
As a result, exporters gain tariff-free access to member markets, so exports to members rise.
tariff-free access · exports
tariff-free access · exports
Assumes: Exports were previously held back by partner tariffs.
But: If partner tariffs were already low, or non-tariff barriers remain, exports rise little.
2
At the same time, imports from members become cheaper and replace domestic output and imports from outside the bloc.
trade creation · trade diversion
trade creation · trade diversion
Assumes: Member goods compete with domestic goods.
But: Where imports from members mainly replace imports from outside the bloc, total import spending changes little.
3
Consequently, if the country's firms are competitive within the bloc, exports rise by more than imports and the trade balance improves.
net exports · international competitiveness
net exports · international competitiveness
Best link to attack
Assumes: Domestic firms are at least as competitive as firms in partner countries.
Assumes: Domestic firms are at least as competitive as firms in partner countries.
But: If partner firms are more efficient, removing tariffs raises imports by more than exports, and the trade deficit with the bloc widens.
End
The trade balance improves only if exports to members rise by more than imports from them; the effect can go either way.
Evaluation chain
- E1However, the effect depends on how competitive domestic firms are compared with firms in the other member countries.
- E2If partner firms have lower costs, better products or larger scale, removing tariffs gives them easier access to the domestic market.
- E3As a result, imports from members rise faster than exports to them.
- E4So joining a bloc can worsen the trade balance for a less competitive member, even though trade in both directions rises.
Another way to attack it: Higher growth from bloc membership raises incomes and so spending on imports, which can worsen the trade balance even when exports rise.
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Questions this answers
- Assess the likely impact of joining a trading bloc on a country's current account.
- Discuss the effects of a customs union on the pattern of trade.
- Explain how trade diversion affects a country's imports.
Diagram
No standard diagram. Data on the share of trade with bloc members before and after joining make good evidence.
Reverse and related
Leaving a customs union → tariffs on trade with former members cut both exports and imports, so the trade balance effect is again uncertain.