out that PTAs can lead to trade creation, if due to the formation of the regional agreement, PTA members switch from inefficient domestic producers and import more from efficient producers from other members of the PTA. In this case, efficiency gains arise from both production efficiency and consumption efficiency. On the other hand, trade diversion takes place if, because of the PTA, members switch imports from low-cost production in the rest of the world and import more from higher-cost producers in the partner countries. Trade diversion lowers welfare of not only the partner countries, but the rest of the world also.
