Exercise 2. Make an annotation on the following text.

Text 2.The Silent Success of Customs Unions

Customs Unions are the silent success story of regional integration, now surpassing Free Trade Areas in trade volumes and prevalence among neighboring countries, the quintessential natural trading partners. Yet their importance has often been concealed from the literature because CUs are few in number compared to other agreements.

Customs Unions (Cus), regional trade agreements committing members to zero internal tariffs and a common external tariff (CET), are few in number compared to the sprawling of Free Trade Areas (FTAs), accounting for less than 10% of trade agreements. But this statistic conceals the fundamental importance Cus now play in the world trade system: we show that natural trading partners form Customs Unions rather than Free Trade Areas, leading Cus to carry more trade than FTAs.

The European Customs Union, which now includes also Turkey to form the world’s largest CU in economic terms, accounts for 25% of world trade alone. Since 2010, this CU is bordered eastwards by the Eurasian Customs Union – one can now travel from Porto to Almaty, passing eleven countries but only encountering a single customs point. With the exception of Chile, Latin America divides into three customs unions, the Andean Community, MERCOSUR and CARICOM. Various Customs Unions are active in Africa and the Middle East, too. In contrast, all FTAs combined account for only 15% of world trade. It is clear that countries choose to manage their most important trade links through the institution of a Customs Union.

Neighbouring countries have quickly turned to forming Cus in the past decades. By 2012, 10% of country pairs have been engaged in an FTA, while less than half – 4.5% –in a Customs Union. Since Cus tend to have more members than FTAs, the discrepancy is much less striking than when counting the number of agreements. However, turning to neighbouring countries – those which share a common land border – reverses the pattern. 45% of pairs were engaged in a Customs Union in 2012! This high number – and its rapid increases in 1992 – is driven by the popularity of Cus in Europe, Africa and Latin America. In contrast, FTAs rank a distant second with 28%. Neighbouring countries are natural trading partners; and neighbours are prone to turning to CU.

Souce: Gnutzmann, H. The Silent Success of Customs Union / H. Gnutzmann, A. Mkrtchyan // SSRN Website [Electronic resource]. –2014. –29 p. – Mode of access: http://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID 2490929_code1016450.pdf?abstractid=2490929&mirid=1. – Date of access: 21.04.2015.

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