What does trade diversion refer to?

What does trade diversion refer to?

• A. A shift in trade towards countries with higher tariffs
• B. A change in trade pattern away from comparative advantages due to trade barriers
• C. The reduction of trade with developing countries
• D. Increased trade among developed countries

Answer: (B)

Trade diversion occurs when trade patterns change due to the imposition of trade barriers, such as tariffs, that result in a shift away from trading with nations that have a comparative advantage in favor of those that do not. It typically involves a scenario where a country diverts its imports from a more efficient producer to a less efficient one, often as a result of preferential trade agreements or regional trading blocs that impose tariffs on external countries. This phenomenon can occur when, for instance, a free trade area is formed that allows member nations to trade with each other at lower tariffs, making it less expensive to import goods from a member country than from a non-member country, even if the non-member country would have produced those goods more efficiently. As a result, resources may not be allocated in the most efficient manner, leading to an overall decrease in global welfare. The other answer choices do not accurately capture the essence of trade diversion. These are more focused on aspects not directly tied to the core mechanism of trade diversion or misinterpret the economic principles involved.

Trade diversion occurs when trade patterns change due to the imposition of trade barriers, such as tariffs, that result in a shift away from trading with nations that have a comparative advantage in favor of those that do not. It typically involves a scenario where a country diverts its imports from a more efficient producer to a less efficient one, often as a result of preferential trade agreements or regional trading blocs that impose tariffs on external countries.

This phenomenon can occur when, for instance, a free trade area is formed that allows member nations to trade with each other at lower tariffs, making it less expensive to import goods from a member country than from a non-member country, even if the non-member country would have produced those goods more efficiently. As a result, resources may not be allocated in the most efficient manner, leading to an overall decrease in global welfare.

The other answer choices do not accurately capture the essence of trade diversion. These are more focused on aspects not directly tied to the core mechanism of trade diversion or misinterpret the economic principles involved.