Notes

On page 315 is a diagram showing the trade diversion effect. If you understand it, great! If not, I have put another diagram on the board. Copy it into your notes. The explanation for the diagram is here:
Assume if Canada had a closed economy the market price for Tshirts would be $10. Let's assume later that an open economy exists. China and Mexico can both produce Tshirts at a lower cost than Canada. China would produce and sell them for a price of $7. Mexico would produce and sell them for $8. China is the lower cost (ie. more efficient) producer so initially we would buy our tshirts from China. Domestic output would be Q1, imports would be Q8 - Q1 (the horizontal distance from A to B). Later, let's assume that Canada places a 20% tariff on tshirts from both nations. Thus, after the tariff is imposed, the Mexican price is $9.60 ($8 x 1.2) and the Chinese price is $8.40 ($7 x 1.2). Since China is still the lower cost producer, we would buy our tshirts from China. Domestic output would be Q3, imports would be Q6 - Q3 (the horizontal distance from R to S).
NOW, LET US ASSUME THAT CANADA AND MEXICO JOIN A TRADING BLOC! Thus, that would mean that Canada would drop tariffs on Tshirts from MEXICO. Now, the prices to compare would be the $8.40 Chinese price (which STILL includes the 20% tariff) and the $8 Mexican price (which NOW does NOT include the 20% tariff). Since the Mexican price is now cheaper, we would buy our tshirts from Mexico. Domestic output would be Q2, imports would be Q7 - Q2 (the horizontal distance from J to K).
TRADE has been 'diverted' (ie. switched) AWAY from the more efficient/lower cost producer outside the group (CHINA) TO the less efficient/higher cost producer inside the group (Mexico)