QUESTION 1

(i) Explain the concepts of trade creation and trade diversion

(ii) Assume South Africa imports fish from Nigeria and Ethiopia at the free trade prices of R30 and R20 per ton of wool respectively. In autarky, South Africa's domestic price of fish is R70 and 40 tons of fish are produced and consumed per annum. Use this information, with the aid of a diagram to explain the concept of trade diversion.

NB:Your explanation must touch on the pre tariff, 100 percent tariff and the formation of customs union conditions that prevail. You must also use your own quantities on the horizontal axis.