Question

Assume that U.S. companies are importing the same product from Mexico and Taiwan. The United States enters into an FTA with Mexico but not with Taiwan. Consequently, the United States begins to import more goods from Mexico (due to lower tariffs) than from Taiwan, even though the Mexican products may not be any better or cheaper. This is an example of ________.

Answer 1

Options:

a.trade specialization

b.trade internalization

c.trade creation

d.trade diversion

Answer:D.trade diversion

Explanation: Trade diversion is a term used in international trade to describe the shift in trade between one nation to another by a third party due to trade preference,leading to a reduced volume of trade between the two nations who originally are trade partners.

TRADE DIVERSION OCCURS WHEN THERE IS A SPECIAL INTEREST OR PREFERENCE DISPLAYED BY ONE OF THE TRADING PARTNERS.

The increased volume of trade between the companies in the United States of America and that if Mexico which has led to a reduced volume of trade between the United States of America and Taiwan is a TRADE DIVERSION.