Suppose the U S faces the domestic situation in the market for wrist watches as depicted in the diagram below Assume the U.S is a "small" country in the market for wristwatches.
(A) What will be the price of a wristwatch in the U.S. in autarky?
(B) Suppose the U S opens up trade with two other countries, Canada and Switzerland. We can buy the same wristwatch from Canada for $30 and from Switzerland for $20. With free trade, from which country will the U.S. import wristwatches?
C) Now suppose the U.S. imposes a 100 percent ad valorem tariff on all imports of wristwatches.
(i) What will be the price of a wristwatch to U.S. consumers if it is imported from Canada?
(ii) What will be the price of a wristwatch to U.S. consumers if it is imported from Switzerland?
(iii) As a result. from which country will the U.S. import wristwatches now?
Suppose the U.S. and Canada form a customs union and together maintain the 100 percent ad valorem tariff on imports of wristwatches from Switzerland.
(i) From which country will the U.S. import wristwatches now? Why?
(ii) Has trade been created as a result of the customs union? If so, how?
(iii) Has trade been diverted as a result of the customs union? If so, how?
(iv) How can you tell whether the customs union is, on balance, beneficial to the U S?