When products from high-cost suppliers within a customs union replace imports from a low-cost nation that is NOT a member of the customs union, there exist(s)
A) dynamic welfare losses.
B) dynamic welfare gains.
C) trade creation.
D) trade diversion.

Question

Quizplus · Accepted Answer

When products from a low-cost nation that is not a member of the customs union are replaced by high-cost suppliers within the customs union, trade diversion exists, as the customs union members are diverting from more efficient, low-cost suppliers to relatively more expensive domestic or regional producers. This leads to a welfare loss as consumers are now paying a higher price for the same product, creating inefficiencies in the market.

When Products from High-Cost Suppliers Within a Customs Union Replace