Question

occurs when lower - cost external suppliers are replaced by higher - cost suppliers within the free trade area.

a. trade diversification
b. trade diversion
c. trade qualification
d. trade synergy
e. trade creation

Explanation:

Trade diversion happens when lower - cost external suppliers are replaced by higher - cost suppliers within a free trade area due to the preferential trade arrangements within the area. Trade diversification is about spreading trade across different products or markets. Trade qualification is not a relevant term here. Trade synergy refers to combined benefits from trade. Trade creation is the increase in trade due to the formation of a free trade area, not the replacement of suppliers as described.

Answer:

B. Trade diversion