Trade diversion

Total cost of good becomes cheaper when trading within the agreement because of the low tariff.

This is as compared to trading with countries outside the agreement with lower cost goods but higher tariff.

[1] The terms were used by 'old' Chicago School economist Jacob Viner in his 1950 paper The Customs Union Issue.

[7] In its literal meaning the term was however incomplete, as it failed to capture all welfare effects of discriminatory tariff liberalization, and it was not useful when it came to non-tariff barriers.

[citation needed] Viner's article became and still is the foundation of the theory of international economic integration.

It considered only two states comparing their trade flows with the rest of the world after they abolish customs tariffs on inner border of their union.