ABSTRACT
Trade creation occurs when the lowering of trade barriers between partners enables one partner to supply the other partner with products it previously produced for itself. Trade diversion refers to the increase in trade between partners at the expense of third nations, which nations, though the lowest-cost producers, lose their markets as a result of tariff discrimination. The limiting case is that of pure trade diversion with no trade creation. The analysis so far is taken to apply to the Eastern European nations after World War II, all of which experienced a reduction in trade relative to the pre-war period. The Soviet Union, however, experienced an increase in trade once it began to trade with the nations of Eastern Europe after World War II. In the foreign-trade negotiations, the foreign trade organization offers to buy less. This appears to the exporter as a decline in demand by the importer.
