What does trade creation refer to?

Trade creation refers to the process where trade between countries increases as a result of the formation of a trade agreement or free trade area, primarily due to shifting production to a lower-cost producer. This occurs when countries eliminate tariffs or barriers, allowing goods to move more freely between them. As a result, consumers benefit from lower prices and a greater variety of goods, while producers in the member countries may be able to capitalize on a larger market.

In this context, the focus is on how free trade allows nations to specialize in the production of goods they are more efficient at making—contributing to overall economic welfare. By moving production to a lower-cost producer, resources are utilized more efficiently, and there is an overall increase in economic output.

The other options do not accurately describe trade creation. The concept is specifically linked to the advantages gained from lowering costs through more competitive markets rather than the effects of shifting production to a higher-cost producer, reducing tariffs without considering their impact on trade flows, or increasing trade barriers, which would generally lead to trade diversion rather than trade creation.