Economic integration results in trade creation and trade diversion. Trade creation leads to advantages while trade diversion is not desirable from an economists point of view.

Trade Creation

Trade creation takes place when domestic consumers in member countries import more goods from other members as import prices fall due to a removal of tariff and quotas; production will shift to lower cost producer.

 

trade creation

In the above diagram, when Thailand and Malaysia form a trading bloc, Thailand will remove tariffs from Malaysian imports. Trade will go to more efficient Malaysian producers. The blue shaded regions shows that world efficiency wil be regained as now more efficient producer is producing the good and there are lower prices which lead to regaining of consumer surplus.

 

Increased income resulting from specialization & benefits of scale can further this by creating increased demand for imports from non-member countries.

Initial effects are the increase in consumer welfare resulting from more goods and lower prices, while the long-run effects include enhance competitive advantage and increasing specialization.

Trade Diversion

When a customs union is created and tariffs differentials between members and non-member result in trade flows being diverted toward higher cost producers.

trade diversion

In the upper image, once the UK joined the EU, it had to place tariffs on the Palm Oil that it used to import from Malaysia at lower prices. The trade now is diverted to EU nations inspite of the fact that they are inefficient in producing palm oil. 

The blue shaded regions show a loss in efficiency due production by inefficienty Europeon producers. Morever, the prices for consumers have increased from from Pm to Peu  which results in loss of consumer surplus.

 

In other words, lower cost imports from outside the union have been replaced by high cost imports from within the union.

Watch a Video

 

New Youtube Channel - ThinkIGCSE

Hi Everyone, I have launched a new YouTube channel with more than a 100 videos on  Economics and Business Studies, tailored specifically for IGCSE and A Level and IBDP students.

Subscribe now and join us on this learning journey: @thinkIGCSE

Exciting News!

IMPORTANT MESSAGE

Quizzes and worksheets on this website have been developed in Flash format. Flash is no more supported by browsers. Therefore, you might see blank pages on some instances. Install Flash player plugin for Chrome from Chrome Web Store. Click here 

Similarly, for other web browsers you will have to activate the relevant flash player plugins.

JOIN OUR ONLINE COURSES

WHO'S ONLINE

We have 662 guests and no members online

Crosswords

PDF FILE

Download

MindMaps

PDF FILE

Download

Save
Cookies user preferences
We use cookies to ensure you to get the best experience on our website. If you decline the use of cookies, this website may not function as expected.
Accept all
Decline all
Read more
Analytics
Tools used to analyze the data to measure the effectiveness of a website and to understand how it works.
Google Analytics
Our website uses Google Analytics to understand how you interact with our site and improve your browsing experience. These cookies collect information in an anonymous form, including the number of visitors to the site, where visitors have come from, and the pages they visited. The data helps us analyze trends and user behavior to enhance our website's functionality and content.
Accept
Decline
Marketing
Set of techniques which have for object the commercial strategy and in particular the market study.
Marketing
Our website uses Google marketing cookies to deliver personalized ads and measure the effectiveness of our advertising campaigns. These cookies track your online activity to help us show you relevant ads on Google services and partner websites.
Accept
Decline