Implementing a regional free-trade agreement may have an effect in which, due to reduced tariffs, a nation begins to import a product from another member country that it had previously imported from outside the new trade region. 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 diversion occurs when a country starts importing goods from a member country of a free trade agreement instead of from a non-member country, due to the removal or reduction of tariffs within the member countries. This shift is not necessarily because the member country is the most efficient producer but because the goods have become relatively cheaper under the agreement.

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