The opposite aspect of trade creation is trade diversion. Trade diversion occurs when higher-cost suppliers within the free trade area replace lower-cost external suppliers. Member countries can trade more with each other than with non-member countries. This could increase trade with a less efficient or more expensive producer because it is located in a member country. Weaker companies may be inadvertently protected with the blocking agreement acting as a trade barrier. In essence, regional agreements have created new trade barriers with countries outside the trading bloc. In simple word, trade diversion is diverted from a non-member country to a member country despite cost inefficiency. For example, a country must stop trading with a low-cost producer in a non-member country and trade with a producer in a member country that has a higher cost.
tags