What is the difference between trade creation and trade diversion?

  • 0 votes

OCR economics, global economy. This is to do with benefits of trade in LR and SR, I couldn't find any information on it on tutor2u. I know the diagrams but confused about what the difference is between them

Posted Sat 26th May, 2012 @ 21:45 by Blue and Red

2 Answers

  • 1 vote

Trade diversion is when trade in diverted by economic integration e.g. the UK used to buy Kiwi meat before it joined the Single Market.

Trade creation is when trade is created by economic integration e.g. now the UK buys meat from inside the EU.

Does that help?

Answered Mon 28th May, 2012 @ 13:30 by Josie
  • 0 votes

Thank you, this is what I found from Wikipedia:

  • Trade diversion is an economic term related to international economics in which trade is diverted from a more efficient exporter towards a less efficient one by the formation of a free trade agreement.

When a country applies the same tariff to all nations, it will always import from the most efficient producer, since the more efficient nation will provide the goods at a lower price. With the establishment of a free trade agreement, that may not be the case. If the agreement is signed with a less-efficient nation, it may well be that their products become cheaper in the importing market than those from the more-efficient nation, since there are taxes for only one of them. Consequently, after the establishment of the agreement, the importing country would acquire products from a higher-cost producer, instead of the low-cost producer from which it was importing until then. In other words, this would cause a trade diversion.

  • Trade creation is an economic term related to international economics in which trade is created by the formation of a customs union.

When a customs union is formed, the member nations establish a free trade zone amongst themselves and a common external tariff on non-member nations. As a result, the member nations establish greater trading ties between themselves now that protectionist barriers such as tariffs, quotas, and non-tariff barriers such as subsidies have been eliminated. The result is an increase in trade among member nations in the good or service of each nation's comparative advantage.

Answered Mon 28th May, 2012 @ 16:26 by Blue and Red