In world welfare terms whether or not a trade agreement increases world welfare depends on whether trade creation is smaller than trade diversion.

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In world welfare terms, whether or not a trade agreement increases world welfare depends on whether trade creation is larger than trade diversion. Trade creation, which is beneficial, occurs when a trade agreement leads to the replacement of more expensive domestic production with cheaper imports from member countries. Trade diversion, which can be harmful, happens when cheaper imports from non-member countries are replaced by more expensive imports from member countries.

In World Welfare Terms Whether or Not a Trade Agreement