Trade creation tends to more than offset trade diversion for a home country forming a customs union with partner countries when: (1) the tariff rate in the home country is high prior to the formation of the customs union; (2) there are a large number of countries forming the customs union.

Question

Quizplus · Accepted Answer

When the tariff rate is high prior to the formation of the customs union and there are a large number of countries forming the customs union, the trade creation effect is likely to be larger than the trade diversion effect. Therefore, the statement is true.

Trade Creation Tends to More Than Offset Trade Diversion for a Home