The table below shows the prices in Canada of cotton towels produced in the United States, Canada, and Malaysia. Assume that all cotton towels are identical.

a. Suppose Canada imposes a 20 percent tariff on imported towels from any country. Assuming that Canadians purchase only the lowest-price towels, from which country will Canada buy its towels?
b. Now suppose Canada eliminates tariffs on towels from all countries. Which towels will Canada now buy?
c. Canada and the United States now negotiate a free-trade agreement that eliminates all tariffs between the two countries, but Canada maintains the 20 percent tariff on other countries. Which towels now get imported into Canada?
d. Which of the situations described above is called trade creation and which is called trade diversion?

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Producing Country Canada United States Malaysia Canadian Price (S) Without Tariff 4.75 4.50 4.00 Canadian Price (S) With 20% Tariff 4.75 5.40 4.80