{{trade bloc Trade creation is an

economic An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with the ...

term related to

international economics International economics is concerned with the effects upon economic activity from international differences in productive resources and consumer preferences and the international institutions that affect them. It seeks to explain the patterns and ...

in which

trade Trade involves the transfer of goods and services from one person or entity to another, often in exchange for money. Economists refer to a system or network that allows trade as a market. An early form of trade, barter, saw the direct excha ...

flows are redirected due to the formation of a

free trade area A free-trade area is the region encompassing a trade bloc whose member countries have signed a free trade agreement (FTA). Such agreements involve cooperation between at least two countries to reduce trade barriers, import quotas and tariffs, and ...

or a

customs union A customs union is generally defined as a type of trade bloc which is composed of a free trade area with a common external tariff.GATTArticle 24 s. 8 (a) Customs unions are established through trade pacts where the participant countries set up ...

. The issue was firstly brought into discussion by

Jacob Viner Jacob Viner (3 May 1892 – 12 September 1970) was a Canadian economist and is considered with Frank Knight and Henry Simons to be one of the "inspiring" mentors of the early Chicago school of economics in the 1930s: he was one of the leading fig ...

(1950), together with the

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 becom ...

effect. In the former case after the formation of economic union, the cost of the goods considered is decreased, leading to an increase of efficiency of economic integration. Hence, trade creation's essence is in elimination of customs tariffs on inner border of unifying states (usually already trading with each other), causing further decrease of price of the goods, while there may be a case of new trade flow creation of the goods between the states decided to economically integrate. The opposite takes place in case of trade diversion, when the trade flow is diverted from actually cost-efficient partner state to less efficient one – but which became a member of economic union and made its goods cheaper within a union, but higher compared to the rest of the world. In practice, both trade creation and diversion effects take place due to formation of economic union. Efficiency of economic integration of specific union right now is assessed as a final outcome between trade creation and diversion effects: it is cost-effective in case of prevailing of the trade creation effects, and vice versa.

Occurrence of trade creation

When a

is formed, the member nations establish a

amongst themselves and a

common external tariff A common external tariff (CET) must be introduced when a group of countries forms a customs union. The same customs duties, import quotas, preferences or other non-tariff barriers to trade apply to all goods entering the area, regardless of which ...

on non-member nations. As a result, the member nations establish greater trading ties between themselves now that

protectionist Protectionism, sometimes referred to as trade protectionism, is the economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, and a variety of other government regulations. ...

barriers such as

tariffs A tariff is a tax imposed by the government of a country or by a supranational union on imports or exports of goods. Besides being a source of revenue for the government, import duties can also be a form of regulation of foreign trade and po ...

import quota An import quota is a type of trade restriction that sets a physical limit on the quantity of a good that can be imported into a country in a given period of time. Quotas, like other trade restrictions, are typically used to benefit the producers ...

s, non-tariff barriers and

subsidies A subsidy or government incentive is a form of financial aid or support extended to an economic sector (business, or individual) generally with the aim of promoting economic and social policy. Although commonly extended from the government, the ter ...

have been eliminated. The result is an increase in trade among member nations in the good or service of each nation's

comparative advantage In an economic model, agents have a comparative advantage over others in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior to trade. Comp ...

. In other words, increase in trade causes greater revenues, (more profitable).

Downside of trade creation

The creation of trade is important to the nation entering the customs union in that increased

specialization Specialization or Specialized may refer to: Academia * Academic specialization, may be a course of study or major at an academic institution or may refer to the field in which a specialist practices * Specialty (medicine), a branch of medical ...

may hurt other industries. Arguments for protectionism, such as the

infant industry argument The infant industry argument is an economic rationale for trade protectionism. The core of the argument is that nascent industries often do not have the economies of scale that their older competitors from other countries may have, and thus need ...

national defense National security, or national defence, is the security and defence of a sovereign state, including its citizens, economy, and institutions, which is regarded as a duty of government. Originally conceived as protection against military attac ...

, outsourcing, and issues with health and safety regulations are brought to mind. However, customs unions are typically formed with friendly nations, eliminating the national defense argument.

External links

Regional Integration and Cooperation in Sub-Saharan Africa: Are Formal Trade Agreements the Right Strategy?
- this ''

Harvard Institute for International Development The Harvard Institute for International Development (HIID) was a think-tank dedicated to helping nations join the global economy, operating between 1974 and 2000. It was a center within Harvard University, United States. Foundation and leadership ...

'' discussion paper from 1997 argues that " ere is little reason to expect significant economic gains from formal trade agreements at this time. Such agreements, in and of themselves, are unlikely to yield appreciable benefits unless they are preceded by decisions within member countries to follow more general open trade strategies." It summarizes the conclusion of empirical research that there has been "little, if any, impact on intra-regional trade" (i.e. trade creation) from

developing nation A developing country is a sovereign state with a lesser developed industrial base and a lower Human Development Index (HDI) relative to other countries. However, this definition is not universally agreed upon. There is also no clear agreem ...

customs union formation. Many possible reasons are listed for the lack of trade creation evidence, given that

developed nation A developed country (or industrialized country, high-income country, more economically developed country (MEDC), advanced country) is a sovereign state that has a high quality of life, developed economy and advanced technological infrastruct ...

customs unions do seem to have "stimulated increased trade and economic growth". International trade

Occurrence of trade creation

Downside of trade creation

See also

External links