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IAI Actuarial Core Principles · Business Economics · Importance of international trade

A customs union differs from a free trade area in that members of a customs union:

A customs union adopts a common external tariff on imports from non-members, in addition to removing internal tariffs. In a free trade area each member keeps its own external tariff, so the common external tariff is the distinguishing feature.

  1. AAbolish tariffs on each other's goods but each keeps its own external tariff
  2. BAdopt a common external tariff on imports from non-membersCorrect
  3. CShare a single currency and a single central bank
  4. DAllow free movement of labour and capital but retain internal tariffs
  5. Agree only to reduce quotas on agricultural goods

Explanation

Both a free trade area and a customs union remove internal tariffs. The customs union additionally applies a common external tariff, which removes the need for rules of origin. Option 0 describes a free trade area. A single currency is a feature of monetary union.

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