Assume that the most efficient producer of butter is New Zealand. Before joining the EEC/EU, the UK imposed a tariff on all imports of butter. After joining the EEC/EU, European- made butter was cheaper than that from New Zealand. Therefore, the customs union would cause

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Trade diversion occurs when a country joins a customs union and ends up importing goods from a less efficient producer within the union rather than from a more efficient producer outside the union. In this case, the UK shifts its import source from New Zealand to European producers due to changes in tariffs, despite New Zealand being the most efficient producer.

Assume That the Most Efficient Producer of Butter Is New