Question

Suppose that with free trade, the cost to the United States of importing a shirt from Mexico is $15.00, and the cost of importing a shirt from China is $12.00. A shirt produced in the United States costs $20.00.

Suppose further that before NAFTA, the United States maintained a tariff of 80% against all shirt imports. Then, under NAFTA, all tariffs between Mexico and the United States are removed, while the tariff against imports from China remains in effect. Assume that the tariff does not affect the world price of shirts.

In the following table, indicate which country the United States imported shirts from before NAFTA. Then indicate which country the United States imported shirts from under NAFTA. Check all that apply. (Note: Leave the row blank if the United States doesn’t import from either country.)

Scenario	United States Imports from . . .
	Mexico	China
Before NAFTA
Under NAFTA

In the following table, indicate whether each stakeholder gains, loses, or neither gains nor loses as a result of NAFTA.

Stakeholder	Gains	Loses	Neither Gains nor Loses
Mexican producers
Consumers in the United States
U.S. government
Chinese producers

This is an example of trade creation/diversion resulting from a regional agreement.

Answer 1

Given data:

The cost to the United States of importing a shirt from Mexico = $15.00

The cost of importing a shirt from China = $12.00

Shirt produced in the United States costs = $20.00

the United States maintained a tariff = 80%

On May 22, 2020, Office of the U.S. Trade Representative (USTR) released the specific negotiating objectives of the proposed U.S.-Kenya Free Trade Agreement.

First, the fashion apparel industry has expressed strong unanimous support for the proposed U.S.-Kenya FTA

Before NAFTA,

Import price from China = 12*(1+50%) = $18

Import price from Mexico = 15*(1+50%) = $22.50

We can observe after tariff Mexican import price is higher than US domestic price.So, US will import from china only.

Second, the fashion apparel industry calls for the proposed U.S.-Kenya FTA to “do no harm” to the existing supply chain established based on AGOA and ensure a seamless transition between the two trade programs.

Before NAFTA,

Import price from China = 12*(1+50%) = $18

Import price from Mexico = 15*(1+0%) = $15

We can observe after tariff Mexican import price is lower for Mexico.So, US will import from Mexico only.

Third, despite the overall support for the agreement, industry stakeholders hold different views on how liberal the apparel-specific rules of origin should be in the U.S.-Kenya FTA and how long to keep it.

Before NAFTA: Imports from China only

After NAFTA: Imports from Mexico only

We can summarize the outcomes as under.

Stakeholder	Gains	Loses	Neither Gains nor Loses
Chinese products	No	Yes (zero imports from china)	No
Consumers in the United states	Yes (now import price is cheeped)	No	No
U S government	No	Yes (tariff REVENUE IS LOST)	No
Mexican producers	Yes (Now they are able to export)	No	No