Suppose that the U.S. government is under heavy pressure from the Rollerblade andK2 companies to put the brakes on imports of Bauer in-line skates from Canada. Theprotectionists demand that the price of a $200 pair of in-line skates must be raised to$250 if their incomes are to be safe. The U.S. government has three choices: (1) freetrade with no protection, (2) a special tariff on in-line skates backed by vague claimsthat Canada is using unfair trade practices (citing Section 301 of the Trade Act of1974), and (3) forcing Bauer to agree to a voluntary export restraint. The three choiceswould lead to these prices and annual quantities:

Note that the $80 tariff reduces imports by 4 million pairs a year, the same reductionthat the VER arrangement would enforce.

a.Calculate the U.S. net national gains or losses from the tariff, and the U.S. gains orlosses from the VER, relative to free trade. Which of the three choices looks bestfor the United States as a whole? Which looks worst?

b.Calculate the net national gains or losses for Canada, the exporting country, fromthe tariff and the VER. Which of the three U.S. choices harms Canada most?Which harms Canada least?

c.Which of the three choices is best for the world as a whole?

With Free Trade With an $80 Tariff With a VER Domestic U.S. price per pair $200 $250 $250 World price per pair $200 $170 $170 Imports of in-line skates (millions of pairs) 10 6 6