Regional Trade Agreements (RTA) were developed following the rise of Bilateral Agreements. RTAs are trade agreements that involve two or more countries confined to a common region. Countries in close proximity tend to form trade agreements because of similar consumer tastes and shorter travel distance. Two types of RTAs are Free Trade Agreements and the Customs Union. As regional economic integration reduces trade barriers; producing static and dynamic effects.
Static effects are efficiencies that are formed through trade creation and diversion. In trade creation, barriers are broken down and production becomes more efficient because of comparative advantage. Trade diversion occurs because trade shifts to the countries that are members of the RTA, even if non-member countries are more efficient with no trade barriers. Dynamic effects occur when the overall size of the market increases due to the elimination of trade restrictions. When RTAs are established, and trade barriers between the countries are eliminated, the size of the market for a particular company grows from its home country to include all of the RTA member countries.
By Carl Phelps, Research Associate for GLOBAL ID, LLC.
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