Economy / Foreign Trade / FTAs, Trade Creation, and Trade Diversion
FTAs, Trade Creation, and Trade Diversion
Trade Creation:
- Definition: Trade creation occurs when a free trade area generates trade that would not have existed otherwise.
- Factors:
- Price advantage.
- Specialization benefits.
- Scale benefits.
- General economic buoyancy due to a larger market.
- Results:
- More employment.
- Increased domestic taxes.
- General improvement in welfare.
Trade Diversion:
- Definition: Trade diversion happens when a free trade area redirects trade from a more efficient supplier outside the FTA to a less efficient supplier within the FTA.
- Factors:
- Tariffs are the primary influential factor.
- Results:
- Tariffs hinder the realization of FTA goals.
- Inefficiencies may prevail within the FTA.
