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To Ensure That a Free Trade Agreement Does Not Result in Trade Diversion

Free trade agreements are designed to open up new markets by removing trade barriers between countries. However, despite the benefits of such agreements, there is always the risk of unintended consequences. One such consequence is trade diversion.

Trade diversion occurs when a free trade agreement diverts trade away from efficient producers outside the agreement and towards less efficient producers within the agreement. This can occur when a member country, rather than importing goods from the most efficient producer outside the agreement, imports goods from a less efficient producer within the agreement because of lower tariffs or other preferential treatment.

To ensure that a free trade agreement does not result in trade diversion, there are several things that can be done.

Firstly, member countries should ensure that the agreement includes a Most Favored Nation clause. This clause requires each member country to provide the same level of treatment to all other member countries as it provides to its most favored non-member country. This discourages member countries from diverting trade towards less efficient producers within the agreement.

Secondly, member countries should ensure that the agreement includes a rule of origin clause. This clause specifies the minimum amount of processing that a product must undergo in a member country to qualify for preferential treatment under the agreement. This helps to ensure that member countries do not import goods from outside the agreement and simply re-export them to other member countries to take advantage of preferential treatment.

Thirdly, member countries should ensure that the agreement includes provisions for monitoring and enforcement. This will enable them to detect and address instances of trade diversion, and to enforce the rules of the agreement to ensure fair and free trade between member countries.

Finally, member countries should ensure that they undertake a thorough analysis of the potential impact of the agreement before signing it. This will help them to identify any potential risks and take steps to mitigate them.

In conclusion, while free trade agreements can provide significant benefits, there is always the risk of unintended consequences such as trade diversion. To ensure that a free trade agreement does not result in trade diversion, member countries should include a Most Favored Nation clause, a rule of origin clause, provisions for monitoring and enforcement, and undertake a thorough analysis of the potential impact of the agreement. By doing so, member countries can ensure that the agreement promotes fair and free trade between all parties.

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