Question

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

Answer 1

Answer:

trade diversion

Explanation:

Trade diversion results from changing an efficient supplier or trading partner for a not so efficient trading partner. This change usually results from trade agreements or customs unions like NAFTA (or USMCA) or the European Union that benefit less efficient producers.

Trade diversion results in concentrating production in countries with high opportunity costs that do not possess real comparative advantages, but rather political advantages.