The negative effects of trade diversion are reduced when:
A)trade diversion is more than offset by trade creation.
B)consumers in the importing nation have a change in their buying habits.
C)there is a cost increase in nations outside the region.
D)the freetrade agreement includes more members.

Question

The negative effects of trade diversion are reduced when:
A)trade diversion is more than offset by trade creation.
B)consumers in the importing nation have a change in their buying habits.
C)there is a cost increase in nations outside the region.
D)the free­trade agreement includes more members.

Quizplus · Accepted Answer

When trade diversion is more than offset by trade creation, the negative effects of trade diversion are reduced. This means that the increase in trade within the regional trade bloc replaces some of the external trade so that the total volume of trade increases. As a result, the diversion of trade is less damaging since the benefits from an increased overall trade outweigh the costs of diverting trade.

The Negative Effects of Trade Diversion Are Reduced When