Upon Poland’s entering the European Union, suppose it is discovered that the cost of automobile production in Poland is €20,000 while it is €30,000 in Germany.

Suppose the EU, which has a customs union, has an X percent tariff on automobiles and the costs of production are equal to Y (valued in euros) in Japan.

Comment on whether the addition of Poland to the European Union would result in trade creation or trade diversion under the following scenarios:

a. X = 50, and Y = :18,000

b. X = 100, and Y = :18,000

c. X = 100, and Y = :12,000

 LO.1