Regional trade agreements
In 1947 when negotiators drafted the original GATT
treaty, they recognized that from time to time, some
countries might want to push ahead with greater trade
liberalizations. Although GATT preferred nondiscriminatory
tariffs, it did not intend to impede the gains
from trade that could be had if only a few members
were willing to reduce their tariffs even further. Therefore,
it allowed the formation of two types of regional
trade agreements—free trade areas and customs
unions. In a free trade area, the members maintain
their original external tariffs with the rest of the world,
but engage in free trade with one another. In a customs
union, all member countries set the same external tariff
for imports from non-members and eliminate the
tariffs on imports from members. When GATT members
form a customs union, the common external tariff
can be no higher than a weighted average of the tariffs
of the member countries before the customs union
was formed.