Trade Diversion versus Trade Creation in Joining a Trade Bloc: US Market for Imported Compact Cars
(Figure 11.2)

A welfare loss from trade diversion (in this case, from the 10,000 cars). The general result is that the gains from the trade bloc are tied to trade creation, and the losses are tied to trade diversion. The net effect on well-being, the trade creation gain minus the trade-diversion loss, could be positive or negative. In Panel A, the loss on trade diversion happens to dominate. The gain from trade creation would dominate, however, if the new customs union partners, such as Germany, were almost the lowest-cost suppliers in the world, as assumed in Panel B. Press "Show Panel B" to fill in the Panel B case.