A customs union is an agreement between countries to cooperate on trade. Member countries benefit in two main ways:

• No internal tariffs: Countries do not charge taxes or customs duties on products traded between them.
• Common external tariff (CET): All member countries agree to set the same tax rates for products imported from countries outside the group.

Key aspects of a customs union:

• It prevents trade deflection, which happens when goods enter the group through the country with the lowest taxes to avoid higher costs elsewhere.
• Because members share a trade policy, goods move freely between them without needing border checks.
• It requires policy coordination, meaning members must work closely together and move some decision-making power to a central group.
• It can lead to trade creation, where more efficient businesses gain more customers, or trade diversion, where members buy from each other even if a non-member produces the same item for a lower cost.

Examples include the East African Community and the European Union.