Trade creation

Updated: Aug 20, 2021

The effect of a customs union in creating or increasing trade between member countries. This new trade results from the reduction in tariffs between the members and is generally welfare-increasing. Trade creation is distinguished from trade diversion, which is the replacement of trade with non-members by trade between members. Trade diversion is generally welfare-decreasing. A customs union is beneficial to its members in the short run if their gains from trade creation exceed their losses from trade diversion.

Reference: Oxford Press Dictonary of Economics, 5th edt.

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