In the report the following points are discussed 1 Analytically the welfare effect of a customs union -whether trade creating, trade diverting, or both -- can be split into two components a tariff reduction component, and a pure trade diversion component. 2 The tariff reduction component is the sole source of any gain in consumers welfare that might result from a customs union. It accounts for both trade creation and the consumption effect. 3 Using as a point of reference an appropriate policy of nonpreferential protection, a customs union necessarily results in pure trade-diversion, and is consequently bad in a welfare sense. 4 The free trade point of view underlying the Vinerian analysis fails to explain why a customs union would ever be preferred to a nonpreferential tariff policy. 5 Recognition of the purposes served by tariffs permits an explanation of the existence of customs unions, and the extension of customs union analysis to a greater variety of issues than has hitherto been the case.