In a free-trade area without harmonized external tariffs, to eliminate the risk of trade deflection, parties will adopt a system of preferential rules of origin. Instead, they may establish and maintain whatever tariff regime applying to imports from non-parties as deemed necessary. While a customs union requires all parties to establish and maintain identical external tariffs with regard to trade with non-parties, parties to a free-trade area are not subject to such requirement.
The crucial difference between customs unions and free-trade areas is their approach to third parties. Both types of trading blocs are related to internal arrangements which parties conclude in order to liberalize and facilitate trade among themselves. It is important to note the difference between customs unions and free-trade areas. It can be considered the second stage of economic integration. If natural persons are also free to move between the countries, in addition to a free-trade agreement, it would also be considered an open border. Such agreements involve cooperation between at least two countries to reduce trade barriers, import quotas and tariffs, and to increase trade of goods and services with each other. A free-trade area is the region encompassing a trade bloc whose member countries have signed a free trade agreement ( FTA).
