One of the fundamental accounting concepts of the international economy is that a country`s overall balance, which consists of both the current account balance and the balance of capital, must be balanced. This means that, when the current account balance is balanced, the country`s capital balance must be balanced by the same amount. The capital account consists of purchases or sales of foreign currency by the central bank or by individuals. This basic accounting principle can be seen as: in addition to trade diversion and trade creation, which have essentially static effects, participants in free trade zones and customs union unions are also striving to achieve dynamic benefits, such as the expansion of production. B, as companies take advantage of the growing size of the market to increase production and improve efficiency as firms adapt to increased competition. Access to a larger market is particularly important for small countries whose economies are too small to warrant large-scale production. Economists have developed a series of sophisticated models to simulate the changes in economic conditions that can be expected from a trade agreement. These models, based on modern economic theories of trade, are useful when trade barriers are quantifiable, although the results are highly sensitive to the assumptions used to define the parameters of the model. In addition, as part of trade diversion, the importing country loses the customs revenue it has collected for imports that now come from its duty-free bloc partner.
The consumer in the importing partner wins because the imported goods are no longer dependent on customs fees; However, the benefit of the consumer is necessarily less or equal to the shortfall in tariffs, so that the nation as a whole is doing less well. Thus, the diversion of trade harms both the importing country and the rest of the world. These losses are greater than the benefits to the bloc member who obtains exports due to traffic diversions. While removing trade barriers is generally a step towards free trade, there are situations where a reduction in tariffs can effectively increase the effective protection rate for a domestic industry.