When Spain and Portugal joined the European Community (EC) in 1986, the United States feared that a result of this change might be a shift in demand for agricultural products by Spain and Portugal away from the United States and toward other Community members. In response, the United States threatened to impose stiff tariffs on a variety of exports of the rest of the EC to the United States. Using offer curve diagrams for (a) the United States and Spain/ Portugal, (b) Spain/Portugal and the rest of the EC, and (c) the United States and the rest of the EC, illustrate and explain the effects of these potential events on the terms of trade and volume of trade for the various economic units.

Question

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The Answer is The potential entry of Spain and Portugal into the European Community (EC) in 1986 raised concerns for the United States regarding a potential shift in demand for agricultural products. In response, the United States threatened to impose stiff tariffs on a variety of exports from the rest of the EC to the United States.

(a) The offer curve diagram for the United States and Spain/Portugal would show a potential decrease in demand for agricultural products from the United States, leading to a shift in the offer curve to the left. This would result in a decrease in the terms of trade for the United States and a decrease in the volume of trade between the United States and Spain/Portugal.

(b) The offer curve diagram for Spain/Portugal and the rest of the EC would show a potential increase in demand for agricultural products from other EC members, leading to a shift in the offer curve to the right. This would result in an increase in the terms of trade for Spain/Portugal and an increase in the volume of trade between Spain/Portugal and the rest of the EC.

(c) The offer curve diagram for the United States and the rest of the EC would show a potential decrease in demand for agricultural products from the United States, leading to a shift in the offer curve to the left. This would result in a decrease in the terms of trade for the United States and a decrease in the volume of trade between the United States and the rest of the EC.

Overall, the potential events would lead to a decrease in the terms of trade for the United States and an increase in the terms of trade for Spain/Portugal and the rest of the EC. The volume of trade would decrease between the United States and Spain/Portugal, and the rest of the EC, while increasing between Spain/Portugal and the rest of the EC.

When Spain and Portugal Joined the European Community (EC) in 1986