Suppose there are three countries, the EU, Mexico, and Asia, in the world and the EU imports electronics from either Mexico or Asia (or both). Assume that Mexico is a small supplier and Asia is a large supplier and the free-trade prices of electronics from Mexico and Asia are PMEXICO=$1,300 and PASIA=$1,000, respectively, and the EU initially imposes a 20% tariff on both Mexico and Asia. Now the EU forms an FTA with Mexico.
a) Use a graph of import demand and export supply
b) In the above graph, identify the effect of the FTA on Mexico’s
c) Suppose after the FTA with the EU, Mexico invests in its electronics industry and lowers its marginal cost such that its free-trade price is PMEXICO=$1,100. How would the graph and the answer in parts (a) and (b) change?
Please make sure to graph everything in detail and answer all parts of the question fully!
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