Trade diversion

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 or a customs union. Total cost of good becomes cheaper when trading within the agreement because of the low tariff. This is as compared to trading with countries outside the agreement with lower cost goods but higher tariff. The related term Trade creation is when the formation of a trade agreement between countries decreases of price of the goods for more consumers, and therefore increases overall trade. In this case the more efficient producer with the agreement increases trade. 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 or a customs union. Total cost of good becomes cheaper when trading within the agreement because of the low tariff. This is as compared to trading with countries outside the agreement with lower cost goods but higher tariff. The related term Trade creation is when the formation of a trade agreement between countries decreases of price of the goods for more consumers, and therefore increases overall trade. In this case the more efficient producer with the agreement increases trade. The terms were used by 'old' Chicago School economist Jacob Viner in his 1950 paper The Customs Union Issue. An early use of the terms was by Jacob Viner in his 1950 paper The Customs Union Issue. Later in same decade Richard Lipsey noted that not only the location of production but also the location of consumption of goods would be effected by trade agreements. Béla Balassa discussed the concepts in relation to the European Common Market in his paper 1967 Trade Creation and Trade Diversion in the European Common Market. In 2013, Paul Oslington's Contextual History, Practitioner History, and Classic Status: Reading Jacob Viner’s The Customs Union Issue reviewed revisited Viner's original paper.