Suppose the country of Ceria and Lithinia imposed tariffs on imports f

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 known as:

A. trade creation

B. strategic pricing

C. synergy

D. trade diversion

E. protectionism

ANSWER

D