When a country applies the same tariff to all nations, it will always import from the most efficient producer, since the more efficient nation will provide the goods at a lower price. With the establishment of a different forms of Regional economic integration, the same country either reduces or eliminates all the trade barriers for the member countries participaing in the agreement. And if the agreement is signed with less cost efficient nations then their products become more cheaper in those importing countries which are the part of this agreement. So, the Importing nations starts to import products from those countries which have less competative advantage rather than those countries which have more competative advantage. Or in other words, after the establishment of the agreement, the importing country would acquire products from a higher-cost producer, instead of the low-cost producer from which it was importing until then. Eventually, this would cause a trade diversion.

1. TRADE DIVERSION

2. DEFINATION
Trade diversion is an economic term related
to international economics in which trade
is diverted from a more efficient exporter
towards a less efficient one by the
formation of different forms of regional
economic integration.

3. THEROTICAL
EXPLANATION
When a country applies the same tariff to all nations, it will
always import from the most efficient producer, since the more
efficient nation will provide the goods at a lower price.
With the establishment of a different forms of Regional
economic integration, the same country either reduces or
eliminates all the trade barriers for the member countries
participaing in the agreement.
And if the agreement is signed with less cost efficient nations
then their products become more cheaper in those importing
countries which are the part of this agreement.

4. THEROTICAL
EXPLANATION
So, the Importing nations starts to import products from
those countries which have less competative advantage
rather than those countries which have more competative
advantage.
Or in other words, after the establishment of the
agreement, the importing country would acquire products
from a higher-cost producer, instead of the low-cost
producer from which it was importing until then.
Eventually, this would cause a trade diversion.

5. EXAMPLE-1 OF TRADE
DIVERSION
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 the EU the common external
tariff made it more expensive to import lamb from New
Zealand than from 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 and the UK.

6. EXAMPLE-2 OF TRADE
DIVERSION
A CASE OF USA & SPAIN
EU's common external tariff on wheat import was 20%.
Before 1986, EU imported wheat from USA.
IN 1986, Spain formally joined EU.

7. EXAMPLE-2 OF TRADE
DIVERSION
BEFORE 1986
COUNTRY COST OF
PRODUCTIO
N
COMMON
EXTERNAL
TARIFF
TOTAL COST
USA $3.00 $0.60 $3.60
SPAIN $3.20 $0.64 $3.84

8. EXAMPLE-2 OF TRADE
DIVERSION
AFTER 1986
COUNTRY COST OF
PRODUCTION
COMMON
EXTERNAL
TARIFF
TOTAL COST
USA $3.00 $0.60 $3.60
SPAIN $3.20 $0.00 $3.20

9. CONCLUSION OF
EXAMPLE-2
Clearly, we can see that how the Total Cost for Spain has
come down with elimination of tariffs.
Now EU imports Wheat majorly from Spain.
Thus by diverting trade from USA.

10. LIMITATIONS OF
TRADE DIVERSION
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 against more overall
surplus.