Suppose that Mexico and Canada form a free trade area, and Canada begins importing steel from Mexico rather than from Germany.There occurs

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Trade diversion occurs when a country starts importing goods from a more expensive source rather than a less expensive source due to the formation of a free trade agreement or area. In this case, Canada shifts its imports from Germany to Mexico because of the free trade area, potentially indicating a move away from the most cost-effective source.

Suppose That Mexico and Canada Form a Free Trade Area