Implementing a regional free-trade agreement may have an effect in which, due to reduced tariffs, a nation in the agreement begins to import a product it had previously produced itself. This effect is called:
A) trade creation.
B) trade diversion.
C) reciprocal trade agreements.
D) the employment effect of FTAs.

Question

Quizplus · Accepted Answer

Trade creation occurs when a country starts importing goods from a more efficient producer within the free-trade area, leading to a shift from domestic production to imports due to reduced tariffs.

Implementing a Regional Free-Trade Agreement May Have an Effect in Which