Tejvan Pettinger


Trade diversion occurs when tariff agreements cause imports to shift from low-cost countries to higher cost countries. Trade diversion is considered undesirable because it concentrates production in countries with a higher opportunity cost and lower comparative advantage.

Trade diversion may occur when a country joins a free trade area with a common external tariff.

Example of trade diversion


Joining customs union

Net welfare effects to UK

Overall welfare effects

Joining custom unions from a position of free trade


In this case, we used to import from Australia at P1 imports (Q4-Q1). i.e we had free trade with Australia

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