trade creation

• What is trade creation?

  Trade creation is when a country moves from buying goods from a high cost to a lower cost country.
• How does trade creation occur?

  It occurs by the joining of a trade union that removes tariffs.
• What is the effect of trade creation on consumer surplus?

  Trade creation leads to welfare gain and higher consumer surplus.
• What happens to consumption during trade creation?

  Consumption shifts from a high cost domestic producer to a low cost partner producer.
• Can you provide an example of trade creation?

  • Consumption of wine shifted from domestic producers to efficient French producers.
  • This occurred when the country joined the EU.
• How does the trade creation diagram differ from the tariff diagram?

  The trade creation diagram is the opposite of the tariff diagram as it removes tariffs.