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CSR refers to the idea that companies need to invest in socially and environmentally relevant causes in order to interact and operate with concerned parties having a stake in the company’s work. CSR is termed as “Triple-Bottom-Line-Approach”, which is meant to help the company promote its commercial interests along with the responsibilities it holds towards the society at large. CSR is different and broader from acts of charities like sponsoring or any other philanthropic activity as the latter is meant to be a superficial or surface level action as part of business strategy, but the former tries to go deep and address longstanding socio-economic and environmental issues.

Small or Medium Enterprises (SMEs) should be asked to promote CSR by taking into account their respective fiscal capacity and not over-stretching their rather limited resources. According to the United Nations Industrial Development Organization (UNIDO), CSR based on Triple Bottom Line (TBL) Approach, can help countries in the developing bracket to accelerate their socio-economic growth and help them become more competitive. TBL approach encourages private companies and institutions to align their activities in a socially, economically and environmentally viable way. This will help countries achieve Sustainable Development Goals (SDGs) in the long run. Companies should be encouraged to take up cost-effective CSR programmes that help the society and the environment according to the UNIDO.

Need of CSR

CSR is responsible for generating a lot of goodwill to companies either directly or indirectly. These include:

• Making employees more loyal and help companies retain them in the long run.
• Make companies more legitimate and help them in accessing a greater market share.
• Since companies act ethically, they face less legal hurdles.
• Bolster the goodwill of companies amongst the general public and help in strengthening their “brand value”.
• Help in the stabilization of stock markets in both the short and long run
• Help in limiting state’s involvement in corporate affairs as companies self-regulate and act as most ethical.

CSR helps companies and their components like their shareholders to help in the development of a country’s economy on a macro-level. They motivate companies to cooperate and communicate with each other, their customers and the administrative machinery.

The various advantages granted to various stakeholders are explained below:

• The Standard of living gets better with the introduction of more amenities.
• Companies engage in large-scale “capacity building” due to which the society becomes more prosperous and wealthier.

• Creates a more balanced world and healthier environmental systems.
• Ecosystems become healthier due to balancing efforts of the corporates.
• Management of waste is improved.
• Cleaner and greener environment is created.
• Advantages to corporates.
• Creates greater societal acceptance and respect.
• Helps the company to grow fiscally and makes it more competitive.
• Helps the company to interact with various stakeholders and helps them understand their needs.
• Employees and their family feel proud to be associated with a balanced corporate organization.

CSR LAWS IN INDIA

The Companies Act, 2013, a successor to The Companies Act, 1956, made CSR a compulsory act. Under the notification dated 27.2.2014, under Section 135 of the new act, CSR is compulsory for all companies- government or private or otherwise, provided they meet any one or more of the following fiscal criterions:

• The net worth of the company should be Rupees 500 crores or more
• The annual turnover of the company should be Rupees 1000 crores or more
• Annual net profits of the company should be at least Rupees 5 crores.

If the company meets any one of the three fiscal conditions as stated above, they are required to create a committee to enforce its CSR mandate, with at least 3 directors, one of whom should be an independent director.

The responsibilities of the above-mentioned committee will be:

• Creation of an elaborate policy to implement its legally mandated CSR activities. CSR acts should conform to Schedule VII of the Companies Act, 2013.
• The committee will allocate and audit the money for different CSR purposes.
• It will be responsible for overseeing the execution of different CSR activities.
• The committee will issue an annual report on the various CSR activities undertaken.
• CSR policies should be placed on the company’s official website, in the form and format approved by the committee.
• The board of directors is bound to accept and follow any CSR related suggestion put up by the aforementioned committee.
• The aforementioned committee must regularly assess the net profits earned by the company and ensure that at least 2 percent of the same is spent on CSR related activities.
• The committee must ensure that local issues and regions are looked into first as part of CSR activities.

Features of CSR Laws

The broad and important features of the CSR laws are as follows:

• Quantum of money utilized for CSR purposes are to be compulsorily included in the annual profit-loss report released by the company.
• The CSR rules came into force on 1st April 2014 and will include subsidiary companies, holdings and other foreign corporate organizations which are involved in business activities in India.
• CSR has been defined in a rather broad manner in Schedule VII of Companies Act, 2013. The definition is exhaustive as it includes those specific CSR activities listed in Schedule VII and other social programmes not listed in schedule VII, whose inclusion as a CSR activity is left to the company’s discretion.

Per Section 135 of the Companies Act (“CSR provisions”), every company with net worth of INR 500 crore, or turnover of INR 1000 crore or more or net profit of 5 crore or more is mandated to spend 2% of average net profit of the preceding three (3) years on corporate social responsibilities/CSR activities.

Since the time CSR provisions were first introduced, the list of CSR activities enumerated under Schedule VII of the Companies Act have been amended by the government from time to time. Most of the items enumerated under Schedule VII since its inception has been framed around activities pertaining to social welfare and charitable activities with key focus on eradicating extreme hunger and poverty, promotion of education, gender equality and empowering women, reducing child mortality, improving maternal health, ensuring environmental sustainability and protection of national heritage amongst others.

For instance, the pre-amended item (ix) under Schedule VII of the Companies Act pertained to contributions and funds that could be made to technology incubators located within academic institutions.

Activities which may be included by companies in their Corporate Social Responsibility Policies relating to:

• Eradicating hunger, poverty and malnutrition, promoting health care including preventive health care and sanitation including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation and making available safe drinking water.

• Promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly and the differently abled and livelihood enhancement projects.

• Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups.

• Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water including contribution to the Clean Ganga Fund set-up by the Central Government for rejuvenation of river Ganga.

• Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional art and handicrafts;

• Measures for the benefit of armed forces veterans, war widows and their dependents;

• Training to promote rural sports, nationally recognised sports, Paralympic sports and Olympic sports

• Contribution to the Prime Minister’s national relief fund or any other fund set up by the central govt. for socio economic development and relief and welfare of the schedule caste, tribes, other backward classes, minorities and women;

• Contributions or funds provided to technology incubators located within academic institutions which are approved by the central govt.

• Rural development projects
• Slum area development.

Known as a B/P book, bills payable book is a subsidiary or secondary book of accounting where all bills of exchange, which are payable by the business, are recorded. The total value of all the bills payable for an accounting period is transferred to the books of accounts.

Where the number of bills received or bills issued is large, it would lead to saving of time if, instead of journalizing each receipt of bill or issue of bill, we were to maintain suitable registers (or books) and record the transactions there. Two books would be required one for bills received and another for bills issued. The rulings for the two books are given below.

The book will be totaled monthly. In case of the Bills Receivable Book, the total of the amount column will be posted to the debit of the Bills Receivable Account. The accounts of the parties from whom the bills are received will be credited with the amounts appearing against their names.

In case of the Bills Payable Book, the total of the amount column will be posted to the credit of the Bills Payable Account and the accounts of the parties who drew the bills (or at whose request the bills were accepted) will be debited. It must be remembered that in the case of other transactions relating to bills, journal entries will have to be passed with the only exception of discounting.

When a bill is discounted, the entry will be made on the debit side of the Cash Book the amount received being entered in the bank column and the amount of the discount being entered in the discount column. In the case of endorsement in favour of a creditor or for dishonour, the entry concerned will be through the journal.

In a mid to large sized business where the number of bills exchanging hands is large in number, it is tough to journalize all bills drawn. All such bills are entered in an accounting ERP or a register depending on the business, furthermore, all these entries are transferred to the respective ledger accounts at a regular interval, often monthly.

A bill receivable for a “drawer” is a bill payable for a “drawee”. Bills payable account will usually have a credit balance, as it is supposed to be paid at maturity, it acts as a liability for the business. Generally, every bill has a 3-day grace period.

Sample Format of a B/P Book

The person, who draws the bill of exchange, is called a “drawer” and the customer, on whom it is drawn, is called a “drawee” or an “acceptor”.

IMF

The International Monetary Fund (IMF) is an international organization, headquartered in Washington, D.C., consisting of 190 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world while periodically depending on the World Bank for its resources.

Formed in 1944 at the Bretton Woods Conference primarily by the ideas of Harry Dexter White and John Maynard Keynes, it came into formal existence in 1945 with 29 member countries and the goal of reconstructing the international payment system. It now plays a central role in the management of balance of payments difficulties and international financial crises. Countries contribute funds to a pool through a quota system from which countries experiencing balance of payments problems can borrow money. As of 2016, the fund had XDR 477 billion (about US$667 billion).

Through the fund and other activities such as the gathering of statistics and analysis, surveillance of its members’ economies, and the demand for particular policies, the IMF works to improve the economies of its member countries. The organization’s objectives stated in the Articles of Agreement are: to promote international monetary co-operation, international trade, high employment, exchange-rate stability, sustainable economic growth, and making resources available to member countries in financial difficulty. IMF funds come from two major sources: quotas and loans. Quotas, which are pooled funds of member nations, generate most IMF funds. The size of a member’s quota depends on its economic and financial importance in the world. Nations with larger economic importance have larger quotas. The quotas are increased periodically as a means of boosting the IMF’s resources in the form of special drawing rights.

According to the IMF itself, it works to foster global growth and economic stability by providing policy advice and financing the members by working with developing countries to help them achieve macroeconomic stability and reduce poverty. The rationale for this is that private international capital markets function imperfectly and many countries have limited access to financial markets. Such market imperfections, together with balance-of-payments financing, provide the justification for official financing, without which many countries could only correct large external payment imbalances through measures with adverse economic consequences. The IMF provides alternate sources of financing.

IBRD

The International Bank for Reconstruction and Development (IBRD) is an international financial institution, established in 1944 and headquartered in Washington, D.C., United States, that is the lending arm of World Bank Group. The IBRD offers loans to middle-income developing countries. The IBRD is the first of five member institutions that compose the World Bank Group. The initial mission of the IBRD in 1944, was to finance the reconstruction of European nations devastated by World War II. The IBRD and its concessional lending arm, the International Development Association (IDA), are collectively known as the World Bank as they share the same leadership and staff.

Following the reconstruction of Europe, the Bank’s mandate expanded to advancing worldwide economic development and eradicating poverty. The IBRD provides commercial-grade or concessional financing to sovereign states to fund projects that seek to improve transportation and infrastructure, education, domestic policy, environmental consciousness, energy investments, healthcare, access to food and potable water, and access to improved sanitation.

The IBRD is owned and governed by its 189 member states, with each country represented on the Board of Governors. The IBRD has its own executive leadership and staff which conduct its normal business operations. The Bank’s member governments are shareholders which contribute and have the right to vote on its matters. In addition to contributions from its member nations, the IBRD acquires most of its capital by borrowing on international capital markets through bond issues at a preferred rate because of its AAA credit rating.

IMF Vs. IBRD

1. Purpose of Loan:

The main purpose of loan provided by I.M.F. is to promote exchange stability and to make the balance of payments deficits; where-as the I.B.R.D. provides loans to developing countries for reconstruction and development by facilitating the investment of capital for productive purpose mainly to develop the infrastructure for the development.

2. Period of Loan:

The International Monetary Fund provides medium-term loans to the developing member countries for a period of ten years; where-as the World Bank offers long-term loans for developing countries for a period of fifty years.

3. Terms of the Loan:

I.M.F. as a creditor institution has always insisted upon fulfilment of certain conditions by the debtor countries. Thus, I.M.F. loan is on stringent terms and it insists always on an agreed programme of action to eliminate within a reasonable time all the causes responsible for the dis-equilibrium in the balance of payments. There is no such conditionality clause in I.B.R.D. Loan.

4. Levies service charges and high rate of interests:

The IMF advances loans to member countries and levies service charges at 0.5 per cent on purchase of currencies other than purchases from reserve bank tranche. In addition, fund levies charges on balances of member currencies determined every year. Loan from I.B.R.D. bears a high rate of interest. Its rate of interest is 1/2 to 1 per cent above the cost of borrowing during the preceding six months but is below the market rates.

5. Parties of the Loan:

I.M.F. provides loans only to the governments of member countries which have subscribed their quota as fixed by the fund; from time to time in terms of S.D.Rs. (Special Drawing Rights) and members over currencies. No other party except the member Government is authorised to borrow from the fund.

The I.B.R.D. (World Bank) on the other hand may advance loans to Governments or to any of their political sub-divisions or even to private business or agricultural enterprises in the territories of members. If it is not a loan to the Government the Bank asks the member Government to guarantee the repayment of loan. But I.B.R.D. meets only the foreign exchange component-of the project.

6. Borrowings not from Other Resources:

I.M.F. advances loans to member countries only out of the fund’s own resources. It does not borrow money from other sources. But I.B.R.D. lends fund directly either from its own resources or from the funds it borrows from the market. The I.B.R.D. may guarantee the loans advances by other or it may participate in loans whereas I.M.F. cannot do so.

It neither guarantees nor does it contribute to the capital of private or other institutions. Thus, these two international lending institutions aim at assisting the developing countries. IMF’s. main function is to stabilise the exchange value of currencies and meet the balance of payments problems whereas I.B.R.D. advances loans for the development program­mes in member countries mainly to develop infrastructural facilities. It lends to member country Governments or to any private firm on the guarantee of the Government of that country.

It comprises two institutions: The International Bank for Reconstruction and Development (IBRD), and the International Development Association (IDA).

World Bank Group

The World Bank Group is an extended family of five international organizations, and the parent organization of the World Bank, the collective name given to the first two listed organizations, the IBRD and the IDA:

• International Bank for Reconstruction and Development (IBRD)
• International Development Association (IDA)
• International Finance Corporation (IFC)
• Multilateral Investment Guarantee Agency (MIGA)
• International Centre for Settlement of Investment Disputes (ICSID)

The World Bank’s activities are focused on developing countries, in fields such as, human development (e.g., education, health), agriculture and rural development (e.g., irrigation, rural services), environmental protection (e.g. pollution reduction, establishing and enforcing regulations), infrastructure (e.g. loads, urban regeneration and electricity) and governance (e.g. anti-corruption, legal institutions development).

The IBRD and IDA provide loans at preferential rates to member countries, as well as grants to t e poorest countries. Loans or grants for specific projects are often linked to wider policy changes in the sector or the economy.

For example, a loan to improve coastal environmental management may be linked to development of new environment institutions at national and local levels and to implementation of new regulations to limit pollution. The activities of the IFC and MIGA include investment in the private sector and providing insurance respectively.

Organizational Structure:

Together with four affiliated agencies created between 1956 and 1988, the IBRD is part of the World Bank Group. The Group’s headquarters in Washington, D.C. It is an international organization owned by member governments; although it makes profits, these profits are used to support continued efforts in poverty reduction.

Technically the World Bank is part of the United Nations system, but its governance structure is different. Each institution in the World Bank Group is owned by its member governments, which subscribe to its basic share capital, with votes proportional to shareholding. Membership gives certain voting rights that are the same for all countries but there are also additional votes which depend on financial contributions to the organization.

As a result, the World Bank is controlled primarily by developed countries, while clients have almost exclusively been developing countries. Some critics argue that a different governance structure would take greater account of developing countries’ needs.

As of November 1, 2006, the United States held 16.4% of total votes, Japan 7.9%, Germany 4.5% and the United Kingdom and France each held 4.3%. As major decisions require an 85% super-majority, the US can block any such major change.

World Bank Group Agencies:

The World Bank Group consists of:

1. The International Bank of Reconstruction and Development (IBRD), established in 1945, which provides debt financing on the basis of sovereign guarantees;
2. The International Financial Corporation (IFC), established in 1956, which provides various forms of financing of without sovereign guarantees, primarily to the private sector;
3. The International Development Association (IDA), established in 1960, which provides concessional financing (interest-free loans or grants), usually with sovereign guarantees;
4. The Multilateral Investment Guarantee Agency (MIGA), established in 1988, which provides insurance against certain types of risks, including political risk, primarily to the private sector;
5. The International Centre for Settlement of Investment Disputes (ICSID), established in 1966, which works with governments to reduce investment risk.

The term “World Bank” generally refers to the IBRD and IDA, whereas the World Bank Group is used to refer to the institutions collectively.

Governments can choose which of these agencies they sign up to individually. The IBRD has 185 member governments and other institutions have between 140 and 176 members. The institutions of the World Bank Group are all run by a Board of Governors meeting once a year. Each member country appoints a governor, generally its Minister of Finance.

On a daily basis the World Bank Group is run by a Board of 24 Executive Directors to whom the governors have delegated certain powers. Each Director represents either one country (for the largest countries), or a group of countries. Executive Directors are appointed by their respective governments or the constituencies.

The agencies of the World Bank are each governed by their Articles of Agreement that serve as the legal and institutional foundation for all of their work.

The Bank also serves as one of several implementing agencies for the UN Global Environment Facility (GEF).

Common Markets

A common market is a formal agreement where a group is formed among several countries in which each member country adopts a common external tariff. In a common market, countries also allow free trade and free movement of labor and capital among the members in the group. This trade arrangement is aimed at providing improved economic benefits to all the members of the common market.

Conditions Required to be Defined as a Common Market

To be defined as a common market, the following conditions must be satisfied:

• Tariffs, quotas, and all barriers regarding importing and exporting goods and services among members of the common market are eliminated.
• Common trade restrictions such as tariffs on other countries are adopted by all members of the common market.
• Production factors such as labour and capital are able to move freely without restriction among member countries.

Benefits of a Common Market

1. Free movement of people, goods, services, and capital

In addition to the removal of tariffs among member countries, the key benefits of a common market include the free movement of people, goods, services, and capital. Therefore, a common market is often regarded as a “single market” as it allows the free movement of production factors without the obstruction created by national borders.

2. Efficiency in production

For an economy, a common market facilitates efficiency among members – factors of production become more efficiently allocated, resulting in stronger economic growth. As the market becomes more efficient, inefficient companies eventually shut down due to fiercer competition.

Companies that remain typically benefit from economies of scale and increased profitability, and innovate more to compete in a more intensely competitive landscape.

Costs of a Common Market

1. Less competitive countries may suffer

The transition to a common market comes with a few drawbacks. For one, companies that have previously been protected and subsidized by the government may struggle to remain afloat in a more competitive landscape. The migration of production factors to other countries may hinder the economic growth of the country they leave and lead to increased unemployment there.

2. Trade diversion

Trade diversion occurs when efficient non-members are crowded out of the common market. Furthermore, a country may exhibit depressed wages if it faces an influx of migration of production factors where supply exceeds demand.

List of Common Markets:

1. Andean Community (CAN)
2. Caribbean Community Single Market (CARICOM)
3. Central American Common Market (CACM)
4. Economic and Monetary Community of Central Africa (CEMAC)
5. European Economic Area (EEA) between the European Countries (EC), Norway, Iceland and Liechtenstein

Proposed Common Markets:

1. Eurasian Economic Community (EAEC)
2. Southern African Development Community (SADC)
3. Southern Common Market (SCM)
4. ASEAN Economic Community (AEC)
5. African Economic Community (AEC)
6. Gulf Cooperation Council (GCC)
7. vii. North American Union (NAU)
8. viii. Economic Community of West African States (ECOWAS)
9. Economic Community of Central African States (ECCAS)
10. South Asia Free Trade Agreement (SAFTA)

Economic Unions

An economic union is a type of trade bloc which is composed of a common market with a customs union. The participant countries have both common policies on product regulation, freedom of movement of goods, services and the factors of production (capital and labour) and a common external trade policy. When an economic union involves unifying currency, it becomes an economic and monetary union.

Purposes for establishing an economic union normally include increasing economic efficiency and establishing closer political and cultural ties between the member countries. Economic union is established through trade pact.

Additionally, the autonomous and dependent territories, such as some of the EU member state special territories, are sometimes treated as separate customs territory from their mainland state or have varying arrangements of formal or de facto customs union, common market and currency union (or combinations thereof) with the mainland and in regards to third countries through the trade pacts signed by the mainland state.

Proposed

• African Economic Community (AEC) – proposed for 2023
• Andean Community (CAN)
• Arab Customs Union and Common Market – proposed for 2020
• CANZUK
• Central American Common Market (CACM)
• Closer Economic Relations of Australia and New Zealand
• East African Community (EAC): Extension of existing customs union proposed in 2015
• Economic Community of Central African States (ECCAS)
• Economic Community of West African States (ECOWAS)
• Southern African Development Community (SADC) – proposed in 2015
• Union of South American Nations (USAN)

List of economic unions

• CARICOM Single Market and Economy
• Central American Common Market: Common market since 1960, customs union since 2004.
• Eurasian Economic Union: Customs union since 2010, common market since 2012.
• European Union: Economic union between all EU member states, but those of them inside the Eurozone are also part of an economic and monetary union.
• Gulf Cooperation Council

Monetary Unions

A currency union (also known as monetary union) is an intergovernmental agreement that involves two or more states sharing the same currency. These states may not necessarily have any further integration (such as an economic and monetary union, which would have, in addition, a customs union and a single market).

There are three types of currency unions:

• Informal: Unilateral adoption of a foreign currency.
• Formal: Adoption of foreign currency by virtue of bilateral or multilateral agreement with the monetary authority, sometimes supplemented by issue of local currency in currency peg regime.
• Formal with common policy: Establishment by multiple countries of a common monetary policy and monetary authority for their common currency.

The theory of the optimal currency area addresses the question of how to determine what geographical regions should share a currency in order to maximize economic efficiency.

Advantages

• A currency union helps its members strengthen their competitiveness in a global scale and eliminate the exchange rate risk.
• Transactions among member states can be processed faster and their costs decrease since fees to banks are lower.
• Prices are more transparent and so are easier to compare, which enables fair competition.
• The probability of a monetary crisis is lower. The more countries there are in the currency union, the more they are resistant to crisis.

Disadvantages

• The member states lose their sovereignty in monetary policy decisions. There is usually an institution (such as a central bank) that takes care of the monetary policy making in the whole currency union.
• The risk of asymmetric “shocks” may occur. The criteria set by the currency union are never perfect, so a group of countries might be substantially worse off while the others are booming.
• Implementing a new currency causes high financial costs. Businesses and also single persons have to adapt to the new currency in their country, which includes costs for the businesses to prepare their management, employees, and they also need to inform their clients and process plenty of new data.
• Unlimited capital movement may cause moving most resources to the more productive regions at the expense of the less productive regions. The more productive regions tend to attract more capital in goods and services, which might avoid the less productive regions.

Convergence and Divergence

Convergence in terms of macroeconomics means that countries have a similar economic behaviour (similar inflation rates and economic growth). It is easier to form a currency union for countries with more convergence as these countries have the same or at least very similar goals. The European Monetary Union (EMU) is a contemporary model for forming currency unions. Membership in the EMU requires that countries follow a strictly defined set of criteria (the member states are required to have specific rate of inflation, government deficit, government debt, long-term interest rates and exchange rate). Many other unions have adopted the view that convergence is necessary, so they now follow similar rules to aim the same direction.

Divergence is the exact opposite of convergence. Countries with different goals are very difficult to integrate in a single currency union. Their economic behaviour is completely different, which may lead to disagreements. Divergence is therefore not optimal for forming a currency union.

A customs and monetary union are a type of trade bloc which is composed of a customs union and a currency union. The participant countries have both common external trade policy and share a single currency. Customs and monetary union are established through trade pact.

A customs union is a group of countries that abolish tariffs and import quotas between member nations and also adopt a common external tariff on imports from non-member countries. A monetary union is a group of countries that agree to share a common currency e.g., the Euro and operate with a common monetary and exchange rate policy.

Additionally, the autonomous and dependent territories, such as some of the EU member state special territories, are sometimes treated as separate customs territory from their mainland state or have varying arrangements of formal or de facto customs union, common market and currency union (or combinations thereof) with the mainland and in regards to third countries through the trade pacts signed by the mainland state.

Proposed

• 2012 East African Community (EAC)
• 2018 Common Market for Eastern and Southern Africa (COMESA)
• Economic Community of Central African States (ECCAS)
• Economic Community of West African States (ECOWAS)
• Gulf Cooperation Council
• 2023 African Economic Community (AEC)

List of customs and monetary unions

• Economic and Monetary Union of the European Union (1999/2002) with the Euro for the Eurozone members
• de facto San Marino – European Union
• de facto Andorra – European Union
• de facto Monaco – European Union
• de facto Switzerland–Liechtenstein
• de facto the OECS Eastern Caribbean Currency Union with the East Caribbean dollar in the CSME (2006)
• Economic and Monetary Community of Central Africa (CEMAC)
• West African Economic and Monetary Union (UEMOA)
• de facto the Common Monetary Area (CMA) in the Southern Africa Customs Union (SACU)

A Customs Union is generally defined as a type of trade bloc which is composed of a free trade area with a common external tariff. Customs unions are established through trade pacts where the participant countries set up common external trade policy. Common competition policy is also helpful to avoid competition deficiency.

Purposes for establishing a customs union normally include increasing economic efficiency and establishing closer political and cultural ties between the member countries. It is the third stage of economic integration. Every economic union, customs and monetary union and economic and monetary union includes a customs union.

The purpose of a customs union is to make it easier for member countries to trade freely with each other. The union reduces the administrative and financial burden of barrier trading and fosters economic cooperation among nations.

However, member countries do not enjoy the liberty to form their own trade deals. The countries in the customs union usually restructure their domestic economy and economic policies in order to maximize their gain from membership in the union. The European Union is the largest customs union in the world in terms of the economic output of its members.

A customs union generates trade creation and diversion that helps with economic integration. Below are the advantages and disadvantages of customs unions.

Meaning

It avoids the problem that the free trade zone needs to be supplemented by the principle of origin to maintain the normal flow of commodities. Here, instead of the principle of origin, a common ‘foreign barrier’ is built. In this sense, the customs union is more exclusive than the free trade zone.

It makes the ‘national sovereignty’ of the member countries to be transferred to the economic integration organization to a greater extent, so that once a country joins a customs union, it loses its right to autonomous tariffs. In reality, the more typical customs union is the European Economic Community established in 1958.

Main feature

The main feature of the Customs Union is that the member countries have not only eliminated trade barriers and implemented free trade, but also established a common external tariff. In other words, in addition to agreeing to eliminate each other ‘s trade barriers, members of the Customs Union also adopt common external tariff and trade policies. GATT stipulates that if the customs union is not established immediately, but is gradually completed over a period of time, it should be completed within a reasonable period, which generally does not exceed 10 years.

Protect measures

The exclusive protection measures of the Customs Union mainly include the following:

• Reduce tariffs until the tariffs within the union are cancelled. In order to achieve this goal, the alliance often stipulates that the member countries must transition from their current external tariff rates to the unified tariff rates stipulated by the alliance in stages within a certain period of time, until finally canceling tariff.
• Formulate a unified foreign trade policy and foreign tariff rates. In terms of foreign affairs, allied members must increase or decrease their original foreign tariff rates within the prescribed time, and eventually establish a common external tariff rate; and gradually unify their foreign trade policies, such as foreign discrimination policies and import quantities.
• For goods imported from outside the alliance, common different tariffs are levied, such as preferential tax rates, agreed national tax rates, most-favored nation tax rates, ordinary preferential tax rates, and ordinary tax rates, according to the types of commodities and the provider countries.
• Formulate unified protective measures, such as import quotas, health and epidemic prevention standards, etc.

Advantages of Custom Unions

1. Increase in trade flows and economic integration

The main effect of a free-trade agreement is that it increases trade between member countries. It helps improve the allocation of scarce resources that satisfy the wants and needs of consumers and boosts foreign direct investment (FDI).

Customs unions lead to better economic integration and political cooperation between nations and the creation of a common market, monetary union, and fiscal union.

2. Trade creation and trade diversion

The effectiveness of a customs union is measured in terms of trade creation and trade diversion. Trade creation occurs when the more efficient members of the union sell to less efficient members, leading to a better allocation of resources.

Trade diversion occurs when efficient non-member countries sell fewer goods to member countries because of external tariffs. It gives less efficient countries in the union the opportunity to capitalize on their position and sell more goods within the union.

If the gains from trade creation exceed the losses from trade diversion, that leads to increased economic welfare among member countries.

3. Reduces trade deflection

One of the main reasons a customs union is favored over a free trade agreement is because the former solves the problem of trade deflection. This occurs when a non-member country sells its goods to a low-tariff FTA (free trade agreement) country, which then resells to a high-tariff FTA country, leading to trade distortions. The presence of a common external tariff in customs unions helps avoid problems that arise from tariff differentials.

Disadvantages of Customs Unions

1. Loss of economic sovereignty

Members of a customs union are required to negotiate with non-member countries and organizations such as the WTO. This is necessary to maintain a customs union; however, it also means that individual member countries are not free to negotiate their own deals.

If a country wants to protect an infant industry in its market, it is unable to do so by imposing tariffs or other protective barriers due to the liberal trading policies. Similarly, if a country wants to liberalize its trade outside the union, it is unable to do this due to the common external tariff.

2. Distribution of tariff revenues

Some countries in the union do not receive a fair share of tariff revenues. This is common among countries like the UK that trade relatively more with countries outside the union. Around 20%-25% of the tariff revenue is retained by the member who collects the revenue. It is estimated that the cost of collecting this revenue exceeds the actual revenue collected.

3. Complexity of setting the tariff rate

A common problem faced by customs unions is the complexity of setting the applicable tariff rate. The process is very costly and time-consuming. Member countries often find it hard to forgo the trade of certain goods or services because another country in the union is producing it more efficiently. The problem is usually faced by developing countries and is a major issue that the UK is dealing with during Brexit.

Economic Effects

The Customs Union started in Europe and is one of the organizational forms of economic integration. The customs union has two economic effects, static effects and dynamic effects.

Static effect

There are trade creation effects and trade diversion effects. The trade creation effect refers to the benefits generated by products from domestic production with higher production costs to the production of customs union countries with lower costs. The trade diversion effect refers to the loss incurred when a product is imported from a non-member country with lower production costs to a member country with a higher cost. This is the price of joining the customs union. When the trade creation effect is greater than the transfer effect, the combined effect of joining the Customs Union on the member countries is net profit, which means an increase in the economic welfare level of the member countries; otherwise, it is a net loss and a decline in the economic welfare level.

The trade creation effect is usually regarded as a positive effect. This is because the domestic production cost of country A is higher than the production cost of country A ‘s imports from country B. The Customs Union made Country A give up the domestic production of some commodities and change it to Country B to produce these commodities. From a worldwide perspective, this kind of production conversion improves the efficiency of resource allocation.

Dynamic effect

The customs union will not only bring static effects to member states, but also bring some dynamic effects to them. Sometimes, this dynamic effect is more important than its static effect, which has an important impact on the economic growth of member countries.

• The first dynamic effect of the customs union is the large market effect (or economies of scale effect). After the establishment of the customs union, good conditions have been created for the mutual export of products between member countries. This expansion of the market has promoted the development of enterprise production, allowing producers to continuously expand production scale, reduce costs, enjoy the benefits of economies of scale, and can further enhance the externality of enterprises within the alliance, especially for non-member company’s competitive power. Therefore, the large market effect created by the Customs Union has triggered the realization of economies of scale.
• The establishment of the Customs Union has promoted competition among enterprises among member countries. Before the member states formed a customs union, many sectors had formed domestic monopolies, and several enterprises had occupied the domestic market for a long time and obtained excessive monopoly profits. Therefore, it is not conducive to the resource allocation and technological progress of various countries. After the formation of the customs union, due to the mutual openness of the markets of various countries, enterprises of various countries face competition from similar enterprises in other member countries. As a result, in order to gain a favorable position in the competition, enterprises will inevitably increase research and development investment and continuously reduce production costs, thereby creating a strong competitive atmosphere within the alliance, improving economic efficiency, and promoting technological progress.
• The establishment of a customs union helps to attract external investment. The establishment of a customs union implies the exclusion of products from non-members. In order to counteract such adverse effects, countries outside the alliance may transfer enterprises to some countries within the customs union to directly produce and sell locally in order to bypass uniform tariff and non-tariff barriers. This objectively generates capital inflows that accompany the transfer of production, attracting large amounts of foreign direct investment.

The Economic and Monetary Union (EMU) represents a major step in the integration of EU economies. Launched in 1992, EMU involves the coordination of economic and fiscal policies, a common monetary policy, and a common currency, the euro. Whilst all 27 EU Member States take part in the economic union, some countries have taken integration further and adopted the euro. Together, these countries make up the euro area.

An economic and monetary union (EMU) is a type of trade bloc that features a combination of a common market, customs union, and monetary union. Established via a trade pact, an EMU constitutes the sixth of seven stages in the process of economic integration.

An EMU agreement usually combines a customs union with a common market. A typical EMU establishes free trade and a common external tariff throughout its jurisdiction. It is also designed to protect freedom in the movement of goods, services, and people. This arrangement is distinct from a monetary union (e.g., the Latin Monetary Union), which does not usually involve a common market. As with the economic and monetary union established among the 27 member states of the European Union (EU), an EMU may affect different parts of its jurisdiction in different ways.

Some areas are subject to separate customs regulations from other areas subject to the EMU. These various arrangements may be established in a formal agreement, or they may exist on a de facto basis. For example, not all EU member states use the Euro established by its currency union, and not all EU member states are part of the Schengen Area. Some EU members participate in both unions, and some in neither.

Territories of the United States, Australian External Territories and New Zealand territories each share a currency and, for the most part, the market of their respective mainland states. However, they are generally not part of the same customs territories.

Roles of national governments

• Control fiscal policy that concerns government budgets
• Control tax policies that determine how income is raised
• Control structural policies that determine pension systems, labor, and capital-market regulations

The decision to form an Economic and Monetary Union was taken by the European Council in the Dutch city of Maastricht in December 1991, and was later enshrined in the Treaty on European Union (the Maastricht Treaty). Economic and Monetary Union takes the EU one step further in its process of economic integration, which started in 1957 when it was founded. Economic integration brings the benefits of greater size, internal efficiency and robustness to the EU economy as a whole and to the economies of the individual Member States. This, in turn, offers opportunities for economic stability, higher growth and more employment – outcomes of direct benefit to EU citizens. In practical terms, EMU means:

• Coordination of economic policy-making between Member States
• Coordination of fiscal policies, notably through limits on government debt and deficit
• An independent monetary policy run by the European Central Bank (ECB)
• Single rules and supervision of financial Institutions within the euro area
• The single currency and the euro area

Foreign trade policy of India is very important from the viewpoint of developing economies. For example, in India, we have a strong Iron and Coal reserve, these are established industry opportunities, However, for the growth of this industry, we need to import the technical know-how from other countries who pioneer in it. Assuming that we as a country, did not have a foreign trade policy, then it would become both, a daunting task and an expensive effort.

Another area which would bring our country to a standstill is the inability to fulfil the demands of the petroleum products. An absence of a foreign trade policy would massively hinder the economic development of our country.

Appropriate Distribution of labor: Through the Foreign trade policy, a country can create a division of expertise and specialization over a global platform. It assists in producing commodities at a lesser cost, so assume a country has huge natural resources, it can outsource the labor, which means export raw material and import finished goods to countries which have skilled labor. Thus they reduce the cost of production.

Stable Pricing: With the help of Foreign trade policy a country can lead to equality of pricing, to ensure a stable demand and supply situation. A foreign trade policy also enables us to import certain products at the time of a natural calamity when demand is high, this ensures the scarcity is managed without taxing the end consumer.

Consumer Advantage: By proving better quality and quantity of goods. It also assists in raising the standard of living especially for underdeveloped countries.

• It makes full use of natural resources. If some resourcesare in surplus in a country then by foreign trade it can be sold in those countries from where it gets its highest price.
• As a foreign trade we can get cheap and quality goods from other countries.
• It promotes cultural cooperation and mutual confidence among the people of different countries.
• This is the most important source of foreign exchange.
• By imposing the import and export duties government earns revenue.

There are many factors contributing to this, the present trade policies, economic reforms, also India’s intrinsic strengths are most sought after in the global space. The country is also promoting infrastructure and technological developments, which are promising for the economic sector in the years to come. With the forthcoming foreign trade policy, our exports are expected to reach US$ 1000 billion by the year 2022-2023.