4.1.5 Pros and cons of regional trade agreements

Evaluation

In the case of trade creation, joinging a trade agreement can have a positive impact for consumers as it gives them better access to cheaper goods produced by other countries in the union, thus increasing their consumer surplus. It also encourages specialisation, which can lead to economies of scale as countries concentrate on increasing production in the good/service that they have comparative advantage on. As average costs fall (due to economies of scale), producers can pass this on to consumers by lowering costs, which, again, can lead to cheaper prices for consumers within the trade region. However, in the case of trade diversion, domestic consumers will be worse off as they lose out on importing cheaper goods from non-members, which would decrease their consumer surplus as they will now have to import more costly goods from other producers in the trade bloc. Also, it can lead to trade wars with non-members, making it harder for domestic consumers to import niche products that are produced specifically in non-member countries.