Suppose Argentina joins Chile in a free trade agreement. Before the agreement, A

Question

Suppose Argentina joins Chile in a free trade agreement. Before the agreement, Argentina imports 10 million pounds of salmon from Japan at $10 and adds a tariff of $4 on each pound. It takes $11 to produce a pound of salmon in Chile.

a. Once the free trade area is formed and Argentina no long puts a tariff on salmon from Chile, what will be the cost to Argentina of the salmon trade diverted to Chile?

b. How much extra imports would have to be demanded in Argentina to offset the trade-diversion cost?

c. Suppose that Japanese salmon farmers want to ship their salmon through Chile to take advantage of the free trade area formed by Argentina and Chile. What rules would prevent them from taking advantage of the free trade agreement?

Explanation / Answer

a) Cost of Trade diversion to Argentina for Government will be 4*10=$40 Million worth of tariff collected for Import from Japan

Consumer will Benefit by $3 /Pound since they earlier have to pay $14 now they only need to pay $11 hence consumer will now save 3*10=$30 Million

Hence Nett Loss to Argentina= 40-30=$10 Million

b) Extra Imports required to overcome this Nett loss =3*x=$10 million this gives additional Import required =3.34Million

c)There is Generally rule of origin imposed by countries to avoid trade deflection hence ther will be tariff charged by Argentina for such import from Chile where country of origin is Japan and hence Chile will be Preferential country of origin for imports of salmon in Argenntina but Japan will be Non preferential.

Also apart from that ther will be other factors such as transportation cost etc which will resist imports from Japan through Chile

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