In the context of cross-border trade, what is the difference between a Free Trade Agreement (FTA) and a Customs Union?

• A. An FTA eliminates tariffs among member states but retains independent external tariffs; a Customs Union eliminates internal tariffs and adopts a common external tariff.
• B. An FTA eliminates internal tariffs among member states but maintains separate external tariffs; a Customs Union eliminates internal tariffs and adopts a common external tariff.
• C. An FTA requires a common currency; a Customs Union does not.
• D. An FTA requires shared defense commitments; a Customs Union does not.

Answer: (A)

Think of how these agreements handle tariffs. In a Free Trade Agreement, countries agree to remove or greatly reduce tariffs on goods traded among themselves, which makes trade inside the group easier and cheaper. They each keep their own external tariff schedules for imports from outside the group, so external trade policy remains autonomous.

In a Customs Union, the picture changes more deeply: internal tariffs are removed, and all members adopt a common external tariff, meaning imports from outside the group face the same duties no matter which member country they enter through. This creates a unified trade policy toward non-members.

That exact distinction is what the statement captures: tariffs among members are eliminated but external tariffs stay independent in an FTA, whereas a Customs Union eliminates internal tariffs and adopts a common external tariff.

Options mentioning a common currency or shared defense commitments go beyond tariff policy and aren’t defining features of FTAs versus Customs Unions.