U.S. firms can produce and sell electric fans for $40. The United States can also import electric fans from China at $42 (including tax) each and from Canada at $50 (including tax) each. Electric fans made in the United States, China, and Canada are identical. Currently, the United States imposes a 30% tariff on imported electric fans.
1. Now suppose that the United States forms a free-trade area (NAFTA) with Canada and Mexico. From which country will the
United States import fans, explain why?
A) China B) Canada C) both China and Canada D) neither China nor Canada
2. Suppose that the United States levied a 10% tariffon imported electric fans (rather than the 30% tariff described in thescenario). Would there be trade diversion losses, trade creation gains, or both as a result of the formation of NAFTA? Explain why?
A) only trade diversions losses
B) only trade creation gains C) both trade creation gains and trade diversion gains D) neither trade creation gains nor trade diversion losses.