Suppose Canada has a 20% tariff on the import of carpets,and Canada currently imports this product from India at a with-tariff price of $22.The with-tariff price of identical carpets from the United States is $24.Now suppose a free-trade agreement with the U.S.eliminates the tariff and so the no-tariff price from the U.S.is $20.Canada now purchases carpets from the U.S.This is an example of

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Trade diversion occurs when a country switches its source of imports to a country with which it has a free trade agreement (FTA), rather than from a country with which it does not, even if the latter can produce the goods more cheaply before tariffs. In this case, Canada switches from importing carpets from India to the U.S. due to the elimination of tariffs on U.S. carpets, despite the fact that carpets from India were cheaper before the tariff was removed.

Suppose Canada Has a 20% Tariff on the Import of Carpets,and