Answer:
c. trade diversion effect.
Explanation:
Trade diversion is an economic situation in which countries import their goods from a particular country, often times (less efficient exporter), instead from the more efficient exporter due to formation of free trade agreements between or among the countries involved.
However, while at superficial level, the exporting country will export more of their goods, and the consumers from importing contry will have the price of the goods reduced due to formation of free trade agreement between the countries. The countries would find their short run welfare decreasing due to following reasons:
1. Exporting countries will suffer loss due to reduction in prices of their goods, which will in turn cause reduction in production output, thus, employment level will reduce or mass loss of jobs, reduction in profits, and decrease in payments to fixed cost.
2. Government of importing countries, will lose the money or revenue they normally gain from import tariffs, thereby decreasing the government spending on the economy, which will outrightly have negative effects.
