Chapter_8_International_Trade_Agreements

Mexico gains producer surplus of ab the combined

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Mexico gains producer surplus of (a+b). The combined effect of NAFTA is a loss of c. The combined welfare actually falls due to NAFTA.
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Regional Trade Agreements Trade Diversion in a Graph Interpretation of the welfare loss Why does a move to free trade make a country worse off? Asia is the more efficient producer of the good for units Q3-Q2 with MC=Pasia. When production is diverted to Mexico, the extra exports from Mexico are produced at MC=Pasia+t. The combined loss c can be interpreted as the average difference between Mexico’s MC and Asia’s MC times the extra imports from Mexico. This is similar to the “production loss” or “efficiency loss” we saw with a tariff for a small country.
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Regional Trade Agreements Trade Diversion in a Graph Interpretation of the Loss What we have to remember is that even though we moved to free trade between Mexico and the U.S., the tariff with China remained. It is really only a partial step toward free trade, which can clearly be bad for countries involved. This is an example of why some economists oppose regional trade agreements, but support multilateral trade agreements under the WTO.
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International Trade Agreements Trade Diversion in a Graph It is very possible for any particular case to have elements of trade diversion and trade creation. NAFTA and other regional trade agreements have the potential to create net gains for members. However, this is only true if the amount of trade creation exceeds the amount of trade diversion. Now we can use this information to see the effect on Canada and the U.S. of opening free trade.
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Trade Creation and Diversion for Canada In 1989 Canada formed a free trade agreement with the U.S. Five years later, they entered into NAFTA with the U.S. and Mexico. Professor Daniel Trefler at the University of Toronto has analyzed the effects of these free trade agreements on Canadian manufacturing industries. As part of his research, Trefler estimates the amount of trade creation and diversion for Canada in its trade with the U.S.
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Trade Creation and Diversion for Canada He finds the reduction in Canadian tariffs on U.S. goods increased imports of those goods by 54%. Trade Creation Purchasing those goods from the U.S. decreased their imports from other countries by 40%. Trade Diversion Note that 80% of all Canadian imports are from the U.S. and the other 20% are from the rest of the world, so the numbers above must be weighted appropriately.
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Trade Creation and Diversion for Canada 54% of the trade creation is multiplied by the 80% of Canadian imports that come from the U.S. 40% of lost imports from the rest of the world is multiplied by the 20% that typically comes from the rest of the world.
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