Both trade creation and trade diversion are crucial effects found upon the establishment of a free trade area. Trade creation will cause consumption to shift from a high-cost producer to a low-cost one, and trade will thus expand. In contrast, trade diversion will lead to trade shifting from a lower-cost producer outside the area to a higher-cost one inside the area. Such a shift will not benefit consumers within the free trade area as they are deprived the opportunity to purchase cheaper imported goods. However, economists find that trade diversion does not always harm aggregate national welfare: it can even improve aggregate national welfare if the volume of diverted trade is small.
bOth trade creatIoN And trade dIvErsIon are cRuCial Effects FoUnD uPoN thE EstablIshmENt of a Free tRadE arEa. tradE crEATion wIll cause coNsumptIon TO shiFt froM A hiGH-cost PrOducer to a lOW-Cost oNe, and trade Will thUS exPaND. In contRasT, traDe dIVersIon WIll leAd tO trADe shiftIng fRoM a lOWer-cost pRoDucer ouTside tHe area To a higheR-cOst oNe iNside thE aRea. sUch A shiFt Will noT beNefit ConSuMErs witHin tHE FRee TradE Area as tHEY arE dePriVED the opPoRtUnity to purchase cHEAper impoRted GoodS. hOweVER, eCOnomIsts Find that TraDE diVErsion does not alWayS HArm aggregate NAtIonal weLfArE: it CAn EvEn ImPrOve aggregaTE natiONal welfaRe if The vOlume oF dIvERtEd trADe Is small.