A customs union is a form of trade agreement under which no tariff is paid on goods crossing the borders between signatories.
The European Union customs union was set up in 1958. It operates between its member states, Monaco and the Isle of Man. It means that a radio made in Germany, say, can be exported to another country that is a member of the customs union, such as Spain, without duty needing to be paid or other customs controls.
The members also apply a common external tariff for goods imported from outside the union. That is, the same duties are paid on goods entering the EU, regardless of which country they are entering. They can then move between member countries without any duty needing to be paid.
Tariff area versus free trade
This common external tariff is what distinguishes a customs union from a free trade area. In a free trade area, trade among member countries flows tariff-free, but each country is able to set their own distinct external tariff on goods imported from the rest of the world.
The countries in a customs union negotiate as a bloc when discussing trade deals with countries outside the union. The idea is that members will have more clout when negotiating as part of a large organisation. The EU, for example, has 500 million inhabitants and accounts for about 16% of world trade.
Negotiating as a bloc means the external tariffs applied will tend to reflect the interests and industrial policies of the bloc as a whole, even though member countries might want to export and import different products or services, and may have different priorities.
Customs union versus single market
You’ll often hear the EU referred to as a single market. This is a deeper form of integration: as well as the free movement of goods, it also involves the free movement of services, investment and labour.
Countries can be part of the EU customs union, but not part of the single market – at the time of writing this was true of Turkey, Andorra and San Marino. And Norway, Iceland and Liechtenstein at this time were members of the single market, but not the customs union.
According to the World Bank, the customs union concept is about 200 years old. Early efforts were driven generally by a desire for greater political union, and include the Zollverein, formed in 1834 by several German principalities, and an 1847 agreement between Moldavia and Wallachia (now in Romania).