The theory of customs unions is a branch of tariff theory. Viner and Vanke are the prominent contributors of this theory. However, Meade, Lipsey and Lancaster also have their share in its development. The theory deals with the effects of geographically discriminatory charges in trade barriers. It is, thus, a special case of the theory of international discrimination.
The object of a customs union is to give preferential treatment to imports from member countries and to discriminate against imports from non-member countries. As such, the tariff structure and the economic relations within the union may tend to alter consumption and production pattern, the terms of trade and may cause even a change in the rate of economic growth, and consequently in the growth and distribution of income between and within member countries leading to alteration in the distribution of economic welfare.
We may, thus, dichotomise the economic effects of customs unions into: (i) Production Effect, and (ii) Consumption Effect.