What is trade creation effect?

Answer 1

The trade creation effect refers to the increase in trade that occurs when a country reduces or eliminates tariffs and other trade barriers, leading to greater efficiency and specialization among trading partners. This effect typically arises within a free trade area or customs union, where member countries can trade more freely with each other, resulting in lower prices and greater availability of goods. As a result, consumers benefit from enhanced choices and lower costs, while producers may shift resources towards more competitive industries. Overall, trade creation promotes economic growth and integration among participating nations.