Assessing the impact of RTAs
Regional trade agreements imply both trade liberalization and trade discrimination. While there is a near-consensus among economists that trade liberalization is desirable, the same cannot be said of trade discrimination. Such discriminatory trade liberalization 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.
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.