Because of NAFTA, the U.S. shifts some of its imports from Europe to Mexico (a member of NAFTA). This is an example of
A) trade deflection.
B) trade diversion.
C) protectionism.
D) rules of origin.

Question

Quizplus · Accepted Answer

This scenario exemplifies trade diversion, which occurs when preferential trade agreements divert trade away from countries outside the agreement towards members of the agreement. In this case, NAFTA's preferential treatment of Mexican goods incentivizes the U.S. to shift some of its imports from Europe to Mexico. Trade deflection refers to the redirection of trade within an existing trade flow, protectionism refers to policies aimed at shielding domestic industries from foreign competition, and rules of origin set out the criteria for determining the country of origin of a product for trade purposes.