Question

Q4 Suppose there are three countries, the EU, Mexico, and Asia, in the world and the EU imports electronics from either Mexico or Asia (or both). Assume that Mexico is a small supplier and Asia is a large supplier and the free-trade prices of electronics from Mexico and Asia are PMEXICO=$1,200 and PASIA=$1,000, respectively, and the EU initially imposes a 15% tariff on both Mexico and Asia. Now the EU forms an FTA with Mexico.

(a)Use a graph of import demand and export supply curves to show the impact of this FTA on EU's consumer surplus, government revenue, and welfare. Is the EU better off or worse off with the FTA?

(b)Suppose after the FTA with the EU, Mexico invests in its electronics industry and lowers its marginal cost such that its free-trade price is PMEXICO=$1,100. How would the graph and the answer in part (a) change?

Your answer: