Question

The following information is for all three questions. Suppose the country of Coventry is joining a customs union (CU). It can buy Product S from the country of Plata or the country of Soyuz. Plata is not in the CU, while Soyuz is in the CU. Before joining the CU, Coventry has a tariff on all imports of Product S. After joining the CU, Coventry does not have a tariff on the Product S imported from other countries in the CU, but maintains its tariff on the Product S imported from countries outside the CU. The tariff, when applicable, is $7. (Use the Basic Tariff Model in this analysis and assume no foreign retaliation on this product.)

1. The price of Product S from Plata is $62 and the price of Product S from Soyuz is $73. Suppose Coventry changes from not being in the CU to being in the CU.

(a) Who is Coventry's supplier of Product S before joining the CU? After joining the CU?

(b) Is there a trade creation effect in this case?

(c) Is there a trade diversion effect in this case? Why?

(d) What happens to the Coventry Total Surplus for Product S because it joined the CU? Why?

2. The price of Product S from Plata is $62 and the price of Product S from Soyuz is $65. Suppose Coventry changes from not being in the CU to being in the CU.

(a) Who is Coventry's supplier of Product S before joining the CU? After joining the CU?

(b) Is there a trade creation effect in this case?

(c) Is there a trade diversion effect in this case? Why?

(d) What happens to the Coventry Total Surplus for Product S because it joined the CU? Why?

Answer 1