Trade Adjustment Costs in Developing Countries: - World Bank ...

244Chad P Bownsignificant distortions in ‘world’ trade flows. For example, when country A imposesa discriminatory tariff on imports from country B, the first-order impact isa simple ‘destruction’ of A’s imports from B and an increase in A’s imports fromthe non-targeted exporter C through the traditional channel of ‘trade diversion’(Viner, 1950). The novel element of the paper is to focus on the tariff’s additionalimpacts on trade with third markets. Specifically, A’s import tariff on B leads Bto ‘deflect’ some of its exports to country C; A’s tariff on B also leads to increasedFirm ACountry Atariff barriertrade destructiontrade creation via importsource diversionCountry CCountry BFirm CFirm Btrade depressiontrade deflectionTrade flow increases relative to free tradeTrade flow decreases relative to free tradeFigure 15.1: Trade flow response to a discriminatory import duty in athree country modelSource: Figure 2 of Bown and Crowley (2007, 181).