Journal of Business & Economic Policy

Expansion of a Free Trade Area: A Numerical Simulation of Trade Displacement
David L. Buehler

Abstract
Trade creation, trade diversion, and trade displacement caused by the enlargement of a free trade area are examined by simulating a Ricardian model with a continuum of goods. The model is expanded to include four countries in order to simultaneously account for these three trade effects resulting from enlargement. Differentiating the countries by skill level, the simulation shows the potential for negative welfare effects on the existing members caused by the enlargement. The results demonstrate that low-skilled members of a free trade area are most vulnerable to the trade displacement effects caused by expansion.

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