(Scenario: Electric Fan Trade) U.S. firms can produce and sell electric fans for $25. The United States can also import electric fans from China at $19 each and from Canada at $20 each. Electric fans made in the United States, China, and Canada are identical. Currently, the United States imposes a 30% tariff on imported electric fans. Suppose that the United States forms a free-trade area (NAFTA) with Canada and Mexico. From which country will the United States import fans?

Question

Quizplus · Accepted Answer

Since a free-trade area (NAFTA) has been formed with Canada and Mexico, there will be no tariff imposed on goods traded between these countries. Therefore, it is cheaper for the United States to import electric fans from Canada at $20 each rather than from China at $19 each plus a 30% tariff. Therefore, the United States will import fans from Canada.