Draw a figure where nation 2 produces at point F and consumes at point H’.
The relative inefficiency of nation 3 is less than nation 1. Nation 2 and nation 3 form a customs union.
Nation 2 consumes at H’ on indifference curve II’ at price P1=1,
By forming a trade customs union with nation 3 nation 2 produces at F’ at price P3=1.5, at point B’, where B’ is less than H’.
Nation 2 imports commodity X from nation 3 at free trade commodity price of PX=1.5, however with different tastes nation 2 consumes at H* before formation of the customs union and at point B* after formation of the customs union with nation 3.
Point B* shows more consumption of both the commodities X and Y. The trade diverting custom union leads to a net welfare gain for nation 2.