Two foreign nations decided to impose tariffs on imports from all countries. They set up a free trade area, removing all trade barriers between themselves but maintaining tariffs on imports from the rest of the world. Country A now begins to import sugar from Country B. Prior to this, Country A was producing sugar at a higher cost so it now benefits from this transaction. This is an example of
A) trade creation.
B) strategic pricing.
C) synergy.
D) trade diversion.
E) protectionism.

Question

Quizplus · Accepted Answer

Trade creation occurs when a country begins to import goods from a partner country within a free trade area because it is cheaper than producing them domestically, leading to increased economic efficiency.

Two Foreign Nations Decided to Impose Tariffs on Imports from All