When lower cost external suppliers are replaced by higher cost suppliers within a free trade area,there is trade creation.

Question

Quizplus · Accepted Answer

Trade creation occurs when lower cost external suppliers are replaced by lower cost suppliers within a free trade area, not higher cost suppliers. This is because free trade areas aim to reduce costs and increase efficiency by promoting trade between members, and replacing lower cost external suppliers with higher cost ones goes against this goal.

When Lower Cost External Suppliers Are Replaced by Higher Cost