Assume that U.S.companies are importing the same product from Mexico and Taiwan.The United States enters into an FTA with Mexico but not with Taiwan.Consequently, the United States begins to import more goods from Mexico (due to lower tariffs)than from Taiwan, even though the Mexican products are not any better or cheaper.This is most likely an example of ________.
A)trade specialization
B)trade internalization
C)trade creation
D)trade diversion

Question

Quizplus · Accepted Answer

This is an example of trade diversion, which occurs when an FTA leads to a shift in trade away from a more efficient and lower-cost producer outside of the agreement toward a less efficient and higher-cost producer within the agreement. In this case, the United States is diverting trade from Taiwan to Mexico, despite the fact that the Mexican products are not any better or cheaper, due to the lower tariffs afforded by the FTA with Mexico.

Assume That U