Trade diversion occurs when higher-cost external suppliers replace lower-cost suppliers within the free trade area.

Question

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Trade diversion refers to the phenomenon where lower-cost suppliers outside the free trade area are replaced by higher-cost suppliers within the area, leading to economic inefficiencies. This can occur when a free trade area or customs union negotiates reduced or eliminated tariffs on imports from member countries, leading to an increase in trade between these countries but potentially decreasing trade with non-member countries.

Trade Diversion Occurs When Higher-Cost External Suppliers Replace Lower-Cost Suppliers