Which scenario best illustrates trade diversion in a tariff context?

• A. A tariff causes imports to shift from one supplier to another country with a lower price
• B. Domestic consumers pay higher prices due to mandates
• C. Domestic producers increase output without imports
• D. Tariffs eliminate all imports entirely

Answer: (A)

Trade diversion happens when policy changes alter the relative prices of sources, so buyers switch where they import from even if another source would be cheaper in the world market. In this scenario, the tariff changes the cost landscape enough that imports move to a different country that has a lower post-tariff price. That shift is the essence of diversion: demand is redirected toward a supplier that benefits from the tariff arrangement, rather than staying with the globally cheapest source.