Trade creation

The issue was firstly brought into discussion by Jacob Viner (1950), together with the trade diversion effect.

The opposite takes place in case of trade diversion, when the trade flow is diverted from actually cost-efficient partner state to less efficient one – but which became a member of economic union and made its goods cheaper within a union, but higher compared to the rest of the world.

In practice, both trade creation and diversion effects take place due to formation of economic union.

Efficiency of economic integration of specific union right now is assessed as a final outcome between trade creation and diversion effects: it is cost-effective in case of prevailing of the trade creation effects, and vice versa.

The creation of trade is important to the nation entering the customs union in that increased specialization may hurt other industries.