The Study of Trade Creation and Trade Diversion in the Selected Asian Trade Organizations

Subject Areas : Financial Economics

Ebrahim Hosseini Nasab ¹ , Samira Motaghi ² , Afshin Motaghi ³

1 - Faculty Member, Department of Economics, Tarbiat Modares University
2 - Graduate Student, Department of Economics, Tarbiat Modares University
3 - Graduate Student, Department of Geography, Tehran University

Received: 2015-06-13 Accepted : 2015-06-13 Published : 2008-09-22

Keywords: Trade Diversion, Trade Creation, welfare,

Abstract :

The expansion of regional trade arrangements has been coincided with the growing trend in globalization. The importance of these regional trade arrangements have grown to that extent that now many countries in developing region have considered it as an alternative option to integrating into world economy and thus boosting their foreign trade and ensuring the mutual gain for the member countries. The very objectives of these regional trade arrangements are to reduce tariff barriers and to be the cause of increase in social welfare. But looking at the negotiations that are underway, a question that arise is that whether the formation of such trade unions, in particular in developing regions has been in line with the objective of boosting trade within member countries ?and also whether growth of intra trade has brought about growth in trade with non member countries or not? If regional trade agreements bring about increase in intra trade it is the case for trade creation but if it comes at the cost of reducing trade with non-member countries it is the case for trade diversion. Trade creation works towards the welfare improvement but trade diversion causes the loss of welfare .This paper has attempted to measure the trade creation and trade diversion in regional grouping of countries in Asia. To do so, three known Asian regional organizations namely, the Economic Cooperation Organization (ECO), Gulf Cooperation Council (GCC) and association of south East Asian nations (ASEAN) have been selected for this purpose. Towards this ends the paper has utilized an extended version of a relatively well known gravity model to measure trade creation and trade diversion in these country groupings. Data used in this study covers the period of 2002-2006. The findings of this study indicate that over the period under investigation all the three regions have revealed trade diversion.