Cobden-Chevalier Treaty and Customs Union Comparison
The Cobden-Chevalier Treaty of 1860
In 1860, Napoleon III opted for free trade by signing the trade treaty between France and Britain known as the Cobden-Chevalier Treaty. This treaty abolished customs duties for imports of raw materials and lowered them for semi-processed or processed goods. It also included a most favored nation clause, whereby if one of the two countries granted tariff advantages to a third country, those same advantages would automatically apply to the other signatory.
Before this treaty, the steel industry was forced to invest heavily in order to cope with competition. Despite these challenges, the French steel industry was strengthened, and its production tripled in just a few years—particularly the production of steel. While activities that relied on traditional methods were adversely affected by this treaty, the producers of wine and luxury items benefited significantly.
Free Trade Areas vs. Customs Unions
Defining the Free Trade Zone
A free trade zone is an agreement between two or more countries to dispense with customs and other trade barriers, while each country maintains its own independent trade policy against non-member countries. A prominent historical example of this is the Cobden-Chevalier Treaty.
Understanding the Customs Union
A customs union is a free trade area that also provides a common external tariff; in this arrangement, member states establish a unified trade policy toward states that are not members. One of the main purposes for the creation of customs unions is to increase economic efficiency and unity among member states. Historical examples include the Zollverein and the Benelux.
Key Differences and Border Controls
If there is no flat rate, every state maintains a different foreign policy. To prevent a product from a non-member state from entering the business community through the state with the lowest tariff and then being transferred to a member state with a higher rate, a free trade area must establish specific rules of origin and conduct revisions at the border.
By contrast, a customs union with a common tariff removes all border checks between member states, as any product imported from a non-member state is subject to the same rate regardless of the port of entry. While establishing a free trade area allows for greater financial autonomy for member countries than a customs union, it creates problems in the treatment of re-exports of goods and imported inputs, as these remain subject to different rates depending on the country of entry.