Suppose the country of Ceria and Lithinia imposed tariffs on imports from all countries,and then they set up a free trade area,scrapping all trade barriers between themselves but maintaining tariffs on imports from the rest of the world.Now,Ceria begins to import sugar from Lithinia.However,Ceria had previously been importing sugar from another country,Cadnia,which produced sugar more cheaply than Ceria or Lithinia.This is an example of
A)trade creation.
B)strategic pricing.
C)synergy.
D)trade diversion.
E)protectionism.

Question

Quizplus · Accepted Answer

This is an example of trade diversion, as Ceria is now importing sugar from Lithinia instead of Cadnia, which previously offered a cheaper option. The free trade area between Ceria and Lithinia has diverted Ceria's trade from a more efficient producer to a less efficient one, resulting in higher costs for Ceria's consumers.

Suppose the Country of Ceria and Lithinia Imposed Tariffs on Imports