A customs union imposes common external policies on nonparticipants in order to combat trade diversion.

Question

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This is true. Trade diversion occurs when a country shifts its imports from a more efficient producer outside the customs union to a less efficient producer within the customs union, due to the customs union's common external policies that result in higher tariffs on non-participating countries' products. A customs union aims to combat this trade diversion by imposing common external policies on non-participants.

A Customs Union Imposes Common External Policies on Nonparticipants in Order