How may Trading Blocs lead to Trade Diversion?

-3 Nations: C, D and E. D is most Efficient at making Pens -C isn't part of any Trade Agreement and introduced a Tariff on Importing Pens. D is willing to supply Pens at a Price of P1. -C Joins a Custom Union and the Tariff on Importing Pens from other Members is Removed. Country E also is here and supplies Pens at P2, which is more expensive (when removing the Tariff on D's Pens) -C switches from Importing Pens from D to E, and so, Trade has been Diverted away from the most efficient producer of Pens -Still, there is a consumer Surplus but a loss of Government Revenue