trade diversion

Trade diversion occurs when a country joins a regional trade group, like a customs union, and begins importing goods from a less efficient partner nation instead of a more efficient non-member country. This happens because the partner nation's goods become cheaper due to preferential tariff treatment within the group.12

While regional trade agreements can create new trade by lowering barriers between member countries, they can also divert trade away from more efficient global producers. Economist Jacob Viner distinguished between these two effects, noting that trade diversion reduces overall economic efficiency. The World Trade Organization (WTO) has rules, such as Article XXIV of GATT, designed to minimize trade diversion by requiring that members eliminate barriers on substantially all trade among themselves and ensure that external tariffs do not become more restrictive for non-member countries.1