Chapter_8_International_Trade_Agreements

The us clearly gains from the lower cost of the part

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The U.S. clearly gains from the lower cost of the part, Mexico gains through exports to the U.S., and Asia is unaffected since it was not exporting at that tariff level anyway.
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Regional Trade Agreements Numerical Example of Trade Creation and Diversion (Table 11.1) Trade Diversion Now suppose the tariff was 10% instead. Before NAFTA, the U.S. imported the part from Asia for $20.90. After NAFTA, it will import from Mexico at a price of $20. Because of NAFTA, the U.S. switches the source of imports from Asia to Mexico—trade diversion. Producer surplus in Asia falls and producer surplus in Mexico increases. What about the U.S.? Although they gain $0.90 on each part, they lose $1.90 in tariff revenue from each import from Asia.
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Regional Trade Agreements Price Pasia MU S Sme x Sasia Pasia+t Sasia+ t Import Quantity b c d a Smex+t Figure 11.3 Net Loss from Trade Diversion The price faced by the U.S. with the tariff, before NAFTA, is Pasia+t with Asia and Mexico supply curves of Sasia+t and Smex+t At this price, the U.S. equilibrium imports total Q1 at A. Of the total imports, Q2 will be from Mexico at B Q2 B The US gains tariff revenue of (a+b+c+d) After NAFTA, the relevant supply curve is Smex. Equilibrium imports from Mexico are now Q3 at C. MC for Mexico are higher so price stays at Sasia+t The U.S. loses tariff revenue of (a+b+c) Mexico gains producer surplus of (a+b) The effect of NAFTA on the U.S. and Mexico combined is a net loss of c C Q3 A Q1
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Regional Trade Agreements Trade Diversion in a Graph Figure 11.3 shows the free-trade price of the part from Asia, with the free-trade export supply curve for Asia. We assume the U.S. is a small country relative to the potential supply from Asia. Including the tariff, the cost of imported parts from Asia is Pasia+t and the supply curve is Sasia+t. The free-trade supply from Mexico is upward sloping, Smex and inclusive of the tariff is Smex+t. Before NAFTA, both Mexico and Asia face the same tariff.
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Regional Trade Agreements Trade Diversion in a Graph Equilibrium is at A, importing a total of Q1 at a price of Pasia+t. Of total imports, Q2 comes from Mexico at B, since under perfect competition these imports have the same tariff-inclusive price as those from Asia. Tariff revenue is collected on imports from both Mexico and Asia as (a+b+c+d).
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Regional Trade Agreements Trade Diversion in a Graph After Mexico joins NAFTA, it can sell duty-free to the U.S. The relevant supply curve is now Smex and imports from Mexico increase to Q3 at C. The price charged remains Pasia+t since Mexico’s MC has increased along its supply curve, so the price to U.S. has not changed. U.S. loses tariff revenue of (a+b+c).
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