An example of how trade diversion results in a suboptimal
Situation is auto parts trade between Mexico and the United
States.After NAFTA:

Question

Quizplus · Accepted Answer

After the implementation of NAFTA, the elimination of tariffs between Mexico and the United States led to an increase in the purchasing of auto parts from Mexico by the United States. This was due to the reduced cost of Mexican auto parts compared to other producers such as East Asia, who were previously the lowest-cost producer. This resulted in trade diversion, whereby the United States shifted its purchases from East Asia to Mexico, even though the latter may not have been the most efficient or optimal producer of auto parts.

An Example of How Trade Diversion Results in a Suboptimal