Suppose that the united states currently imports 1.0 million pairs of shoes from china at $20...

Suppose that the united states currently imports 1.0 million pairs of shoes from china at $20 each. With a 50% tariff, this made the consumer price in the United States $30.The price of shoes in Mexico is $25 suppose that as a result of free trade agreement with Mexico, the United states imports 1.2 million pairs of shoes from Mexico and none from china. What are the gains and losses to U.S consumers, U.S producers, and U.S government and the world as a whole?

Solutions

Expert Solution

a) US consumers are paying $5 extra for Mexican import than Chinese import without tariff
With the tariff, US consumers were paying ( 1 million * $10 ) = $10 million
Net consumer surplus is -10 million USD

for Mexican import, there were paying
1.2 million * 5 = 6 million
net gain against Chinese import
10 million - 6 million = 4 million

b) US producers could have sold shoes to $30 in the domestic market but because of Mexican import, they could sell it at $25. They will have to bear $5 per pair
1.2 million * 5 = 6 million
Net losses = 6 million USD

c) US government is losing all its tariff because of Mexican import

1 million * $10 = 10 million USD

d) Trade is a win-win situation for all the nations and its consumers as well as producers.
China is producing cheaper shoes which means US consumers will be benefited from Chinese import at less cost and that will result in higher consumer surplus. However, because of the tariff, US consumers are at a disadvantage Chinese producers also lost because of the tariff as their product is uncompetitive.

Rahul Sunny answered 1 year ago

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