In the context of regional economic integration, which of the following equations is not correct?

The correct answer is - Free Trade Area = Customs Union - Common external tariff

Key Points

• Free Trade Area ≠ Customs Union - Common external tariff
  • This equation is mathematically misleading and conceptually incorrect in economics.
  • A Free Trade Area (FTA) involves removal of internal tariffs among member countries but allows each country to maintain its own external trade policy.
  • A Customs Union includes all FTA features plus a Common External Tariff (CET) against non-members.
  • You cannot "subtract" CET from a Customs Union to define an FTA — the institutional structures and rules of origin mechanisms are fundamentally different.

Additional Information

• Free Trade Area (FTA)
  • Examples: NAFTA (now USMCA), ASEAN Free Trade Area (AFTA).
  • Countries reduce or eliminate tariffs among themselves.
  • Each member sets independent external tariffs on non-members.
  • Requires rules of origin to prevent trade deflection.
• Customs Union
  • Examples: European Union Customs Union, MERCOSUR.
  • Combines FTA features with a common external tariff for non-members.
  • Reduces complexity of trade among members by eliminating the need for rules of origin.
• Common Market
  • Includes all features of a Customs Union.
  • Adds free movement of labor and capital between member countries.
  • Example: European Economic Area (EEA).
• Economic Union
  • Includes Common Market features.
  • Adds monetary coordination (e.g., common currency like the Euro) and macro-economic policy alignment.
  • Represents a deeper level of regional integration.