Can Trade Agreements Curtail Trade Creation and Prevent Trade Diversion?

This paper investigates how pre‐existing preferential trade agreements ( PTAs ) dilute the trade creation effect and shield the trade diversion effect of new PTAs . Countries having pre‐existing PTAs enjoy smaller gains in intra‐bloc trade because of the dilution effect and experience smaller losses or even gains in extra‐bloc trade because of the shielding effect. The findings support the proposition that PTAs could be used to fend off future trade diversion.