| Trade Diversion |
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TERM The term was coined by Jacob Viner in ''The Customs Union Issue'' in 1950. In its literal meaning the term was however incomplete, as it failed to capture all welfare effects of discrimnatory tariff liberalization, and it was not useful when it came to non-tariff bariers. Economists have however dealt with this incompleteness in two ways. Either they stretched the original meaning to cover all wellfare effects, or they introduced new terms like Trade Expansion or internal versus external trade creation. OCCURRENCE When a Customs Union is formed, the member nations establish a Free Trade Zone amongst themselves and a common external Tariff on non-member nations. Previously a nation may have had a working trade relation with another nation outside the customs union in which each nation produced to their Comparative Advantage s, the common external tariff may now make it not as efficient to trade with that non-member nation than with a nation within the member nation's free trade zone. In this respect, trade is diverted from the nation outside the union to a nation inside the union, lowering the total output of the good or service being traded. DOWNSIDE Diverted trade may hurt the non-member nation economically and politically and create a strained relationship between the two nations. The decreased output of the good or service traded from one nation with a high comparative advantage to a nation of lower comparative advantage works against creating more efficiency and therefore more overall Surplus . EXAMPLE An example of trade diversion is the UK's import of lamb, before Britain joined the EU most lamb imports came from New Zealand, the cheapest lamb producer, however when Britain joined they EU the common external tariff made it more expensive to import lamb from New Zealand than countries inside the union, thus France became the majority exporter of lamb to the UK. Trade was diverted from New Zealand and created between France. SEE ALSO EXTERNAL LINKS |
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