4.1.5 Pros and cons of regional trade agreements


4.1.5 Pros and cons of regional trade agreements


  • Encourages specialisation based upon comparative advantage
  • Trade creation, whereby higher cost domestically-produced goods are substitued for lower cost imports within the trade bloc
  • Economies of scale from increasing output
  • Increase in output will lead to increase in employment as labour is in derived demand
  • Trade protection -> producers within the region are protected from competition from cheaper non-members


  • Trade diversion, whereby lower cost goods produced by non-members are substitued for higher cost goods within the trade region
  • Inefficient producers in the bloc are protected
  • Retaliation of non-members -> they may form their own trade blocs, leading to trade wars


In the case of trade creation, joinging a trade agreement can have a positive impact for consumers as it gives them better access to cheaper goods produced by other countries in the union, thus increasing their consumer surplus. It also encourages specialisation, which can lead to economies of scale as countries concentrate on increasing production in the good/service that they have comparative advantage on. As average costs fall (due to economies of scale), producers can pass this on to consumers by lowering costs, which, again, can lead to cheaper prices for consumers within the trade region. However, in the case of trade diversion, domestic consumers will be worse off as they lose out on importing cheaper goods from non-members, which would decrease their consumer surplus as they will now have to import more costly goods from other producers in the trade bloc. Also, it can lead to trade wars with non-members, making it harder for domestic consumers to import niche products that are produced specifically in non-member countries.


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