2. Trade creation and trade diversion

Suppose that with free trade, the cost to the United States of importing a sweater from Mexico is $20.00, and the cost of importing a sweater from China is $18.00. A sweater produced in the United States costs $25.00.

Suppose further that before NAFTA, the United States maintained a tariff of 15% against all sweater imports. Then, under NAFTA, all tariffs between Mexico and the United States are removed, while the tariff against imports from China remains in effect. Assume that the tariff does not affect the world price of sweaters.

In the following table, indicate which country the United States imported sweaters from before NAFTA. Then indicate which country the United States imported sweaters from under NAFTA. Check all that apply. (Note: Leave the row blank if the United States doesn't import from either country.)

Scenario	United States Imports from . . .
Mexico	China
Before NAFTA
Under NAFTA

In the following table, indicate whether each stakeholder gains, loses, or neither gains nor loses as a result of NAFTA.

Stakeholder	Gains	Loses	Neither Gains nor Loses
Consumers in the United States
U.S. government
Chinese producers
Mexican producers

This is an example of trade -------------------------------- resulting from a regional agreement.

1)diversion

2)creation

2. Trade creation and trade diversion Suppose that with free trade, the cost to the United States of importing a sweater from Mexico is $20.00, and the cost of importing a sweater from China is $18.00. A sweater produced in the United States costs $25.00. Suppose further that before NAFTA, the United States maintained a tariff of 15% against all sweater imports. Then, under NAFTA, all tariffs between Mexico and the United States are removed, while the tariff against imports from China remains in effect. Assume that the tariff does not affect the world price of sweaters. In the following table, indicate which country the United States imported sweaters from before NAFTA. Then indicate which country the United States imported sweaters from under NAFTA. Check all that apply. (Note: Leave the row blank if the United States doesn't import from either country.) United States Imports from . . . Scenario Mexico China Before NAFTA O Under NAFTA In the following table, indicate whether each stakeholder gains, loses, or neither gains nor loses as a result of NAFTA. Stakeholder Gains Loses Neither Gains nor Loses Consumers in the United States O O O U.S. government O O O O O Chinese producers diversion Mexican producers O O creation This is an example of trade resulting from a regional agreement