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.
A variety of approaches have been employed. While results inevitably vary depending on the methodology, the time period, the trading bloc in question and the level of aggregation in the data, two general messages arise from the large set of studies investigating trade creation and trade diversion in RTAs around the world:
First, trade creation tends to be the norm in RTAs – and trade diversion is the exception.
Second, when trade diversion is observed, its magnitude is normally relatively small.