Because there are both positive and negative elements, the net national welfare effect can be positive or negative. Chart 9.10 “Trade Harmful Diversion” shows the case where the free trade agreement leads to a reduction in national prosperity. Visually, it seems obvious that the e range is greater than the sum of a and b. In these circumstances, the free trade agreement with the misuse of power would have the effect of bringing down national welfare. Then, countries A and B adopt a free trade agreement, and A eliminates tariffs on imports from Country B. Now, tB -0, but tC remains to you∗. Domestic prices for products from countries B and C are now PB and PTC. Since PB < TPC, Country A would import all of country B`s merchandise under the free trade agreement and would import nothing from Country C. With regard to the lower domestic price, PB, imports would increase on D2-S2, which the blue line indicates. Since the undistorted price (i.e. the price of free trade) in country C is lower than that of country B, trade must be diverted from a more efficient supplier to a less efficient supplier.
In this case, we imported from Australia for imports of P1 (Q4-Q1). That is, we had free trade with Australia Because, with the tariff, the product is cheaper from country C, country A will import the product from country C and will not trade with country B first. Imports are given by the red line, or by the distance D1 – S1. Initial customs revenue is reported by acreage (c-e), the tariff rate multiplied by the quantity imported. In general, a trade reorientation situation in which a free trade area diverts trade from a more efficient supplier outside the free trade agreement to a less efficient supplier under the free trade agreement. This means that a free trade area diverts trade from a more efficient supplier outside the free trade agreement and from a less efficient supplier under the free trade agreement. In some cases, trade diversion will reduce a country`s national well-being, but in some cases national welfare could improve despite trade diversion. We present both cases at the bottom.
However, economists are also concerned that regional trade agreements could make it more difficult to achieve the ultimate goal of global free trade. Diversions can occur when a country joins a free trade area with a common external tariff. The distraction of domestic trade is greater than the diversion of foreign trade.