Country A and Country B entered into a free trade agreement recently. After this, Country A starts importing heavy machinery from CountryB. Country A used to previously import such machinery at lower rates from another country. Which of the following has occurred in this scenario?

Question

Quizplus · Accepted Answer

This scenario is an example of trade diversion, where a country starts importing a product from a higher-cost producer within the trading bloc, instead of continuing to import from a lower-cost producer outside the bloc. This goes against the idea of efficiency gain, and there is no evidence of trade creation or trade deficit in this scenario.

Country a and Country B Entered into a Free Trade