trade creation


Also found in: Wikipedia.
Trade creationclick for a larger image
Fig. 188 Trade creation.

trade creation

an increase in INTERNATIONAL TRADE (and economic welfare) that results from the reduction or elimination of trade barriers such as TARIFFS and QUOTAS. Tariff cuts, etc., may be instigated by a single country, by the formation of a CUSTOM UNION or FREE TRADE AREA, or, more generally, by international negotiation (see WORLD TRADE ORGANIZATION).

The trade-creating effect of a tariff cut is illustrated in Fig. 188, which, to simplify matters, is confined to one country (A) and one product.

DD and SS are the domestic demand and supply curves for the product in country A. W is the world supply price of the product. Initially, country A imposes a tariff on imports of the product, raising its price in the home market to Wt. At price Wt, domestic production is shown by OP, domestic consumption by OC, and imports by PC.

The removal of the tariff reduces the price of the product in the home market to W. At price W, imports increase to P1C1, domestic production falls to OP1, and domestic consumption increases to OC1. The home market obtains an increase in economic welfare from this expansion of trade, indicated by the two triangles XYZ and RST XYZ is the ‘production gain’ resulting from the reallocation of factor inputs to more efficient uses; RST is the ‘consumption gain’ resulting from lower prices to consumers.

See TRADE DIVERSION, GAINS FROM TRADE.

References in periodicals archive ?
Contract notice for Support for trade creation of promoters in the priority areas of Roissy countries France
Viner was the first who used the term trade creation and trade diversion, he was also the first one who explained that the welfare increased because intra-union trade expanded with the abolition of tariffs on imports from member countries.
In Chapter 7, Chow and Hsu use a CGE simulation with GTAP data and find that trade creation gains would increase along with the increasing number of TPP member states (p.
16) Trade diversion and trade creation are central concepts in Viner, who introduces the distinction in a study of different arrangements of regional integration.
Many of those arguing for a hard Brexit don't appear to know a customs union from a farmers' union, a single market from a cattle market, inter-industry trade from intraindustry trade, trade creation from trade diversion, a tariff barrier from a non-tariff barrier and an integrated supply chain from a daisy chain.
It will lead to trade creation, greater employment, efficient movement of goods and services through market expansion.
Making a presentation on the state of negotiations with Thailand, Shafiq Shahzad, Deputy Secretary (Asia-Pacific), Ministry of Commerce, said that quantitative estimates show that the proposed FTA between Pakistan and Thailand would lead to both trade creation and trade diversion, though the net welfare impact would be positive for both countries.
SAFTA can become instrument for trade creation, help stimulate competition, attract capital inflows and encourage transfer of technology.
Even with Iran's potential to re-direct FDI away from other regional economies, it is expected that as sanctions are lifted, the associated regional economic opportunities, particularly with regard to new trade and energy routes, will lead to greater trade creation as opposed to trade diversion for all countries concerned.
One can start with the textbook consequences, namely, the potential costs of trade diversion (losing some of our export markets to competing TPP members if we don't join), and the potential benefits of trade creation (expanded exports into more open markets we will gain if we join).
Moreover, the partial equilibrium model facilitates the estimation of trade creation, trade diversion, tariff revenues, and welfare implications associated with liberalizing trade barriers (see, for example, McKay, Milner, and Morrissey 2000; Greenaway and Milner 2006; Zouhon-Bi and Nielsen 2007).
Indeed, various theories indicate that preferential trade agreements may have both positive and negative effects because it can lead to trade creation as well as trade diversion.