Customs Union

An agreement between two or more countries to remove trade barriers with
each other and to establish common tariff and nontariff policies with
respect to imports from countries outside of the agreement. The European
Community is the most well-known example. The two primary trade effects of
a customs union are: (a) trade creation -- the shift from consumption of
domestic production toward consumption of member imports and (b) trade
diversion -- the shift from trade with non-member countries in favor of
trade with member countries.