Regional trade agreements imply both trade liberalisation and trade discrimination. While there is a near-consensus among economists that trade liberalisation is desirable, the same cannot be said of trade discrimination. Such discriminatory trade liberalisation is beneficial when it promotes a shift of resources from inefficient domestic suppliers to more efficient producers within the region, i.e. when there is so-called “trade creation”. In contrast, a trading bloc is likely to be harmful if it generates a shift of resources from efficient external producers to inefficient producers within the region, i.e. when there is so-called “trade diversion”.
There are theoretical arguments that support the primacy of trade creation and trade diversion under similar circumstances. Thus, which effect dominates is an empirical matter. Unfortunately, estimating trade creation and trade diversion is no easy task – it requires knowledge of the counterfactual, i.e. what would have happened to trade if there were no trade agreement. As this is unknown, assumptions must be made.