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Trade Deflection Creation and Diversion

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Trade Deflection Creation and Diversion

  1. 1. ECON4 TradeDeflection | Creation | Diversion Aquinas College Economics Department
  2. 2. Trade Deflection “Redirection of international trade due to the formation of a free trade area” This can be a massive problem in Free Trade Areas. Aquinas College Economics Department
  3. 3. Prior to Free Trade Area France Before a Free Trade Area an exporting company would have €0.50 to pay Export Tariffs on goods to be in every country When countries enter into FTAs it removes the barriersGermany Exporting UK between countries such as the €3.40 Company €1.10 tariffs are removed This creates benefits for Exporting Companies but problems for the other countries Spain €4.70 Aquinas College Economics Department
  4. 4. During a Free Trade Area France With the tariffs removed €0.50 between the other countries an Exporting company would simply export all the goods for the European Market into the country with the lowest external tariff – In this case itGermany Exporting UK is France with a tariff of €0.50. €3.40 Company €1.10 Then it moves the goods around the free trade area without the external tariffs Spain €4.70 Aquinas College Economics Department
  5. 5. Ways around Trade Deflection• Rules of Origin – These can be imposed to stop exporting companies from outside the area from doing this – These are actively in force in the European Union today Aquinas College Economics Department
  6. 6. Trade CreationExists when an increase in trade results inthe rolling back of trade barrier i.e. tariffsTypically this happens when a country joinsa customs unionConsumers benefit because effectivley thedomestic tariff free market has expanded Aquinas College Economics Department
  7. 7. Price Trade Creation DS Price with tariffP1 Customs Union PriceP DD0 A B C D Quantity Aquinas College Economics Department
  8. 8. Price Trade Creation Net Gain to Country DS Price with tariffP1 GOVT. Lost Revenue Customs Union PriceP DD0 A B C D Quantity Aquinas College Economics Department
  9. 9. Trade DiversionProblem arises when a country has to pay moreas a result of a Common External TariffIt can be seen to subsiding inefficient industrieswithin a customs unionPreviously the UK could buy food cheaper fromUSA than France, however this changed when itentered the Union Aquinas College Economics Department
  10. 10. Price Trade Diversion DS EU Price with tariffP+T World PriceP DD0 A B C D Quantity Aquinas College Economics Department

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