Trade diversion financial definition of trade diversion
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trade diversion a redirection of INTERNATIONAL TRADE resulting from the formation of a CUSTOMS UNION or FREE TRADE AREA. A customs union/free trade area involves the removal of trade obstacles such as TARIFFS and QUOTAS on trade between member countries but the erection, or continuance, of trade barriers against nonmember countries. This serves to increase trade between member countries (see TRADE CREATION), but a part of this increase is at the expense of nonmember countries whose imports are now displaced from the customs union/free trade area. Thus, unlike across-the-board tariff cuts, there may be little net benefit to world economic welfare. See also WORLD TRADE ORGANIZATION.