As a result of the formation of a free trade area between six member countries in the Pacific Rim, one member country found that its lower-cost external suppliers were replaced by higher-cost suppliers within the free trade area. This is an example of:.

Trade diversion custom union

Explanation:

Free trade area refers to the economic integration in which some of the countries come together and form a custom union, PFA, etc. In this type of economic integration, there are certain benefits or lower tariff rates given to the member nation.

Suppose there is a custom union. Trade diversion refers to a situation in which the trade is diverted from the cost efficient producer outside the custom union to a cost inefficient producer inside the custom union.

Therefore, this is an example of trade diversion custom union.