To prevent trade deflection, member states of a trade bloc may require 'rules of origin' for goods traded between them. Which of the following explains why rules of origin are necessary in a Free Trade Area (FTA) but are not required in a Customs Union?
Members of an FTA maintain a common external tariff, whereas members of a customs union set independent national tariffs, which eliminates the incentive for trade deflection.
Members of an FTA eliminate all non-tariff barriers and harmonise product standards, whereas members of a customs union retain national regulatory autonomy, making origin checks unnecessary.
Members of an FTA retain the right to set independent external tariffs on imports from non-members, creating an incentive for trade deflection; a customs union eliminates this by adopting a common external tariff.
Members of a customs union allow the free movement of labour and capital, which eliminates trade deflection by equalising factor prices, whereas an FTA restricts factor mobility.
