Trade Diversion Flashcards
(4 cards)
What is Trade Diversion?
When a country joins a customs union and shifts purchases from a low-cost producer outside the union to a higher-cost producer inside the union due to the removal of tariffs within the union.
What is the economic effect of Trade Diversion?
It can reduce overall economic efficiency and increase costs because trade shifts to less efficient producers within the union.
Why might Trade Diversion happen when a country joins a Customs Union?
Tariffs on imports from outside the union remain, making goods from higher-cost producers inside the union relatively cheaper.
What is a negative consequence of joining a Customs Union?
It may cause trade diversion which goes against the general economic arguments for free trade and may increase prices for consumers.
