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Trade Diversion Theory

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Modern theories In this sub section, we will discuss the process of theoretical developments that govern the new theories of economic integration today. To do so, we shall review and critically analyze the works of some prominent scholars in the theories of economic integration. The best way to start is perhaps with the presentation of Hasson (1962). According to this study, the static analysis of trade creation and trade diversion, which had been carried out by Vener, was insufficient. Vener’s conclusion is that the reason for the formation of customs union is efficient allocation of resources. Although his analysis was pioneering, the conclusion he made was incorrect. In other words, measuring welfare impacts of customs union using static …show more content…

The main economic reason for industrialized countries to enter into any kind of integration is the marginal adjustment of production and consumption. For developing countries, it goes beyond that and in fact, the prime objective of economic integration among developing countries is economic development. To this end, Viner’s analysis of trade creation and trade diversion has little relevance, if any, to the case of developing countries. It is common knowledge that developing countries have generally low productivity and high unemployment. So if trade diversion occurs and moves labor from low-productive sector to high-productive sector, total welfare will increase but the shift in labor from one production line to the other will cause unemployment to …show more content…

Some studies dealing with economic integration in developing countries in particular have argued that protection is economically beneficial to developing countries. For instance, Cooper and Massell (1965a), Sakamoto (1969), and Axline (1977) claimed that the prime objective of integration arrangements among developing countries should be to boost industrial development, which in turn can be achieved through shielding domestic industries against foreign competitors. This is because protecting domestic industries for industrial development has similar effect as import substitution. Therefore, evaluation of the impact of economic integration among developing countries should not be only based on members national income but also based on the changes in the their industrial

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