Which statement best distinguishes a customs union from a free trade area?

Which statement best distinguishes a customs union from a free trade area?

• A. A free trade area removes internal tariffs; a customs union does not.
• B. A customs union adopts a common external trade policy.
• C. A free trade area includes free movement of capital; a customs union does not.
• D. A customs union has no trade barriers at all.

Answer: (B)

The main idea here is how members treat trade with countries outside the group. A customs union not only eliminates tariffs between its members but also adopts a common external tariff toward all non-members, so goods entering the union face the same duties no matter which member country they come from. That shared external trade policy is what sets a customs union apart from a free trade area, where internal tariffs are removed but each member keeps its own external tariff schedule. The other statements don’t fit because both arrangements typically remove internal barriers among members, free movement of capital isn’t the defining difference, and a customs union does maintain external duties (so it isn’t “no trade barriers at all”).

The main idea here is how members treat trade with countries outside the group. A customs union not only eliminates tariffs between its members but also adopts a common external tariff toward all non-members, so goods entering the union face the same duties no matter which member country they come from. That shared external trade policy is what sets a customs union apart from a free trade area, where internal tariffs are removed but each member keeps its own external tariff schedule. The other statements don’t fit because both arrangements typically remove internal barriers among members, free movement of capital isn’t the defining difference, and a customs union does maintain external duties (so it isn’t “no trade barriers at all”).