Background
Trade creation refers to the economic concept where the formation of a customs union leads to the establishment of new trade routes and the enhancement of existing trade relations between member countries. This phenomenon occurs due to the reduction or elimination of tariffs and other trade barriers within the union, making intra-union trade more profitable and efficient.
Historical Context
The theory of trade creation was prominently discussed by economist Jacob Viner in his seminal work on customs unions in 1950. His analysis laid the groundwork for understanding how regional trade agreements could influence trade flows and economic welfare among participating countries.
Definitions and Concepts
Trade creation is conceptualized as the increase in trade volume between member countries of a customs union due to reduced trade barriers. This new trade displaces higher-cost domestic production, leading to overall welfare gains for the countries involved. The concept is closely associated with:
- Customs Union: A type of trade bloc consisting of a free trade area with a common external tariff.
- Trade Diversion: The shift in trade patterns towards member countries at the expense of more economically efficient third countries.
Major Analytical Frameworks
Classical Economics
Focuses on absolute and comparative advantages. Trade creation contributes to better resource allocation according to countries’ comparative advantages.
Neoclassical Economics
Analyzes trade creation through the lens of efficiency and resource allocation. Emphasizes the welfare gains from lowered tariffs.
Keynesian Economics
Considers the macroeconomic impacts, including potential boosts in aggregate demand due to increased trade.
Marxian Economics
Examines the distributional impacts of trade creation, especially how it affects labor markets and capital flows within member countries.
Institutional Economics
Evaluates the role of policy frameworks and institutional arrangements in facilitating trade creation within a customs union.
Behavioral Economics
Explores how cognitive biases, perceptions, and motivations may influence trade policies and the propensity for countries to enter customs unions.
Post-Keynesian Economics
Considers the macroeconomic stability and sustainability of the welfare gains from trade creation, with a focus on income distribution.
Austrian Economics
Analyzes the spontaneous market adjustments and the role of entrepreneurial discovery in benefiting from trade creation.
Development Economics
Focuses on the impacts of trade creation on economic development, particularly in developing countries within a customs union.
Monetarism
Examines how trade creation can influence money supply, inflation, and exchange rates within a customs union.
Comparative Analysis
Trade creation generally leads to welfare improvements by leveraging the competitive advantages of member countries. However, it is crucial to balance these benefits with the potential welfare losses from trade diversion. The net effect of a customs union depends on the relative magnitudes of trade creation and diversion.
Case Studies
- European Union: One of the most studied examples where trade creation significantly enhanced economic interdependency among member states.
- MERCOSUR: A South American customs union that has faced both trade creation and diversion effects.
Suggested Books for Further Studies
- “The Customs Union Issue” by Jacob Viner
- “International Economics: Theory and Policy” by Paul Krugman and Maurice Obstfeld
- “The Politics of International Economic Relations” by Joan Edelman Spero
Related Terms with Definitions
- Trade Diversion: The replacement of more efficient non-member imports with less efficient member-based production due to a customs union.
- Customs Union: A trade agreement in which member countries agree to remove tariffs and adopt a common external tariff against non-members.
- Tariff: A tax imposed on imported goods and services to restrict trade, protect domestic industries, or generate revenue.
