What are Regional Trade Agreements?
Regional trade agreements (RTAs) are agreements between two or more nations and their governments for doing trade between themselves so that they can import less from countries that are outside their region.
The primary purpose of any regional trade agreement is for economic integration and that’s how trade blocs are formed. RTAs are categorized into 5 stages:-
1. Preferential trading area
2. Free trade area
3. Customs union
4. Common market
5. Economic and monetary union
Trade diversion is an economic term related to international economics in which trade is diverted from a more efficient exporter towards a less efficient one by the formation of a free trade agreement or a customs union.
Trade diversion reduces a country’s national welfare because in this scenario a country shifts its source of imports from a more efficient country to a less efficient country because of the tariff preferences in a customs union.