When products from high-cost suppliers within a customs union replace imports from a low-cost nation that is not a member of the customs union,there exist(s):
A) Dynamic welfare losses
B) Dynamic welfare gains
C) Trade creation
D) Trade diversion

Question

Quizplus · Accepted Answer

This situation creates trade diversion. Trade diversion occurs when a free trade agreement or customs union diverts trade away from more efficient non-members and towards less efficient member countries. In this case, the high-cost suppliers within the customs union replace imports from a low-cost non-member, leading to less efficient trade.

When Products from High-Cost Suppliers Within a Customs Union Replace