Trade Creation and Diversion Revisited: Accounting for Model
Trade Deflection Creation and Diversion
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Aquinas College Economics Departmen Trade Deflection | Creation | Diversion ECON4
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Transcript of Trade Deflection Creation and Diversion
Aquinas College Economics Department
Trade
Deflection | Creation | Diversion
ECON4
Aquinas College Economics Department
Trade Deflection
“Redirection of international trade due to the formation of a free trade area”
This can be a massive problem in Free Trade Areas.
Aquinas College Economics Department
Prior to Free Trade Area
Exporting
Company
France€0.50
UK€1.10
Spain€4.70
Germany
€3.40
Before a Free Trade Area an exporting company would have to pay Export Tariffs on goods to be in every country
When countries enter into FTAs it removes the barriers between countries such as the tariffs are removed
This creates benefits for Exporting Companies but problems for the other countries
Aquinas College Economics Department
During a Free Trade Area
Exporting
Company
France€0.50
UK€1.10
Spain€4.70
Germany
€3.40
With the tariffs removed between the other countries an Exporting company would simply export all the goods for the European Market into the country with the lowest external tariff – In this case it is France with a tariff of €0.50.
Then it moves the goods around the free trade area without the external tariffs
Aquinas College Economics Department
Ways around Trade Deflection
• Rules of Origin– These can be imposed to stop exporting
companies from outside the area from doing this
– These are actively in force in the European Union today
Aquinas College Economics Department
Trade Creation
Exists when an increase in trade results in the rolling back of trade barrier i.e. tariffsTypically this happens when a country joins a customs union
Consumers benefit because effectivley the domestic tariff free market has expanded
Aquinas College Economics Department
Trade Creation
Quantity
Pri
ce
DS
DD
Price with tariff
Customs Union Price
P1
P
A B C D0
Aquinas College Economics Department
Trade Creation
Quantity
Pri
ce
DS
DD
Price with tariff
Customs Union Price
P1
P
A B C D0
GOVT. Lost
Revenue
Net Gain to Country
Aquinas College Economics Department
Trade Diversion
Problem arises when a country has to pay more as a result of a Common External Tariff
It can be seen to subsiding inefficient industries within a customs union
Previously the UK could buy food cheaper from USA than France, however this changed when it entered the Union
Aquinas College Economics Department
Trade Diversion
Quantity
Pri
ce
DS
DD
EU Price with tariff
World Price
P+T
P
A B C D0
