Trade creation

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Trade creation is an economic term related to international economics in which trade is created by the formation of a customs union.

Occurrence of Trade Creation

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. As a result, the member nations establish greater trading ties between themselves now that protectionist barriers such as tariffs, quotas, and non-tariff barriers such as subsidies have been eliminated. The result is an increase in trade among member nations in the good or service of each nation's comparative advantage.

Downside of Trade Creation

The creation of trade is important to the nation entering the customs union in that increased specialization may hurt other industries. Arguments for protectionism, such as the infant industry argument, national defense, 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, and in the long run serves to create more jobs and output due to specialization.

See also

• Trade diversion

External links

• Regional Integration and Cooperation in Sub-Saharan Africa: Are Formal Trade Agreements the Right Strategy? - this Harvard Institute for International Development discussion paper from 1997 argues that "[T]here 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 customs union formation. Many possible reasons are listed for the lack of trade creation evidence, given that developed nation customs unions do seem to have "stimulated increased trade and economic growth".