Italy has dropped its resistance to an E.U. trade agreement with South Korea, which will wipe out $2 billion in annual duties on E.U. exports. Italians argued that the agreement, which eliminates E.U. duties on South Korean cars, would put undue pressure on its own automakers.
a. What is a free-trade agreement? What is its aim?
b. Explain how a tariff on E.U. car imports changes E.U. production of cars, purchases of cars, and imports of cars.
c. Illustrate your answer to part (b) with an appropriate graphical analysis.
d. Explain who wins and who loses from the move to free trade in cars.
e. Explain why Italian automakers opposed cuts in car import tariffs.