(a) Consider the world consisting of three countries: Canada, US and Australia. Producers in country i have a constant marginal cost C_i of producing milk, with C_CA > C_us > C_AU. The milk market is perfectly competitive. Canada initially applies a common MFN tariff t to milk from both the US and Australia. Focus now on the effects of potential regional trade agreements (RTAs) on the home market in Canada. 

(i) Suppose CUSMA eliminates Canadian tariff on milk from the US. Could this RTA lead to trade creation and no trade diversion? If yes, under what circumstances? (I.e., is there a configuration of marginal costs C_i and tariff t that would result in trade creation without any trade diversion?) 

(ii) Suppose CPTPP eliminates Canadian tariff on milk from Australia. Could this RTA lead to trade diversion? If yes, under what circumstances? 

(b) What is the difference between a free trade area (FTA) and a customs union (CU)? 

(c) What are rules of origin? Which type of RTA (FTA or CU) requires specifying rules of origin and why?

Answer rating: 100% (QA)

a i Yes there is a configuration of marginal costs Ci and tariff t that would result in trade creati... View the full answer