Assume that the formation of a customs union turns out to include the lowest-cost world producer of the product in question.Which effect could NOT occur for the participating countries?
A) trade creation-production effect
B) trade creation-consumption effect
C) trade diversion
D) scale economies and competition

Question

Quizplus · Accepted Answer

Trade diversion does not occur when a customs union includes the lowest-cost world producer, as trade diversion refers to the replacement of lower-cost imports from outside the union with higher-cost imports from within the union. Since the lowest-cost producer is within the union, imports come from the most efficient source, preventing trade diversion.

Assume That the Formation of a Customs Union Turns Out