Are there risks of creating trade diversion due to economic integration?

Yes, there are risks of creating trade diversion due to economic integration.

Economic integration, such as the formation of a free trade area or a customs union, can indeed lead to trade diversion. Trade diversion occurs when a country opts to import goods from a member of its economic bloc, rather than from a more efficient producer outside the bloc. This is often due to the preferential treatment, such as lower tariffs, given to member countries.

For instance, suppose the UK, a member of a hypothetical economic bloc, can import wheat from either Canada or France. Canada, not a member of the bloc, can produce wheat more efficiently and at a lower cost than France. However, due to the preferential treatment given to France as a member of the bloc, the UK might choose to import wheat from France instead. This is an example of trade diversion, where trade is diverted from a more efficient producer to a less efficient one due to economic integration.

Trade diversion can have several negative impacts. Firstly, it can lead to a loss of economic efficiency. In the example above, the UK ends up paying more for wheat than it would have if it had imported from Canada. This could lead to higher prices for consumers and a potential decrease in the country's overall welfare.

Secondly, trade diversion can also lead to a deterioration of relationships with non-member countries. If a country consistently favours imports from within its economic bloc, it could strain its trade relationships with countries outside the bloc. This could potentially lead to retaliatory measures, such as increased tariffs, from these countries.

Lastly, trade diversion could potentially lead to a decrease in competition. If a country consistently imports goods from within its economic bloc, it could lead to a situation where a few producers dominate the market. This could potentially lead to higher prices and lower quality goods for consumers.

In conclusion, while economic integration can have many benefits, such as increased trade and economic cooperation among member countries, it also carries the risk of trade diversion. This could lead to a loss of economic efficiency, strained relationships with non-member countries, and decreased competition.