Trade creation will more likely outweigh trade diversion for Country X that forms a customs union if the level of tariffs in Country X prior to the customs union is ________ and the total number of countries forming the customs union is _________?
Correct answer: A. relatively high; relatively large
- A. relatively high; relatively large
- B. relatively high; relatively small
- C. relatively low ; relatively large
- D. relatively low ; relatively small
Explanation
A high initial tariff creates greater scope for trade creation when internal tariffs are removed, while a larger customs union offers more potential partners and suppliers. Thus, high prior tariffs and many member countries make trade creation more likely to outweigh diversion.
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