We talked in class about free trade areas, customs unions and common markets. We also discussed basic principles of the WTO, including trade should not be discriminatory and should head in the direction of fewer rather than more barriers. And finally we discussed the welfare impacts of tariffs and other trade barriers on a country, including consumers, producers and government. Suppose three countries US ($8), Mexico ($6) and China ($4) make a good at the prices in parenthesis. Now consider the following alternative scenarios:
Scenario 1: The current tariff rate is $5
a. If there are no free trade arrangements, from which country’s producers will US consumers buy the product?
b. If we now signed NAFTA, from which country’s producers will US consumers buy the product?
c. Are US consumers and the country as a whole better off or worse off with NAFTA and why?
Scenario 2: The current tariff rate is $3
d. If there are no free trade agreements, from which country’s producers will US consumers buy the product?
e. If we now signed NAFTA, from which country’s producers will US consumers buy the product?
f. Are US consumers and the country as a whole better off or worse off with NAFTA and why?
g. What is the difference in the two scenarios? What does that tell you about the impact of free trade agreements?