Inclusivity Essentials_ Creating Accessible Websites for Nonprofits .pdf
Trade Deflection Creation and Diversion
1. ECON4
Trade
Deflection | Creation | Diversion
Aquinas College Economics Department
2. Trade Deflection
“Redirection of international trade due to
the formation of a free trade area”
This can be a massive problem in Free
Trade Areas.
Aquinas College Economics Department
3. Prior to Free Trade Area
France Before a Free Trade Area an
exporting company would have
€0.50
to pay Export Tariffs on goods
to be in every country
When countries enter into FTAs
it removes the barriers
Germany Exporting UK between countries such as the
€3.40 Company €1.10 tariffs are removed
This creates benefits for
Exporting Companies but
problems for the other
countries
Spain
€4.70
Aquinas College Economics Department
4. During a Free Trade Area
France With the tariffs removed
€0.50 between the other countries an
Exporting company would
simply export all the goods for
the European Market into the
country with the lowest
external tariff – In this case it
Germany Exporting UK is France with a tariff of €0.50.
€3.40 Company €1.10
Then it moves the goods
around the free trade area
without the external tariffs
Spain
€4.70
Aquinas College Economics Department
5. Ways around Trade Deflection
• Rules of Origin
– These can be imposed to stop exporting
companies from outside the area from doing
this
– These are actively in force in the European
Union today
Aquinas College Economics Department
6. Trade Creation
Exists when an increase in trade results in
the rolling back of trade barrier i.e. tariffs
Typically this happens when a country joins
a customs union
Consumers benefit because effectivley the
domestic tariff free market has expanded
Aquinas College Economics Department
7. Price
Trade Creation
DS
Price with tariff
P1
Customs Union Price
P
DD
0 A B C D Quantity
Aquinas College Economics Department
8. Price
Trade Creation
Net Gain to Country DS
Price with tariff
P1
GOVT.
Lost
Revenue Customs Union Price
P
DD
0 A B C D Quantity
Aquinas College Economics Department
9. Trade Diversion
Problem arises when a country has to pay more
as a result of a Common External Tariff
It can be seen to subsiding inefficient industries
within a customs union
Previously the UK could buy food cheaper from
USA than France, however this changed when it
entered the Union
Aquinas College Economics Department
10. Price
Trade Diversion
DS
EU Price with tariff
P+T
World Price
P
DD
0 A B C D Quantity
Aquinas College Economics Department
Hinweis der Redaktion
In this Graph P is the price at which the product inside the customs union is supplied at. Before the nation enters into the customs union it places a tariff on the good in the domestic market of P1. This means at P1, Domestic Demand is at 0C. However at this price domestic supply is only at 0B. This means that the nation has to import BC. However when the nation enters the customs union, the price falls to P. This results in Domestic Demand increasing to 0D and Domestic Supply decreasing from 0B to 0A. This means that imports to the country have now increased from BC to AD. The difference between BC and AD is called trade creation.
Before entry into the EU the UK as a whole demanded 0D food, and was subjected to World Prices so had to import AD. However when the UK joined the EU the price of food from external countries increased to P+T. As a result domestic demand for say Australian food fell from 0D to 0C. This means it is not cheaper to import from France or Germany than it is the USA or Canada.