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Suppose that Thailand and India are potential trading partners of China. Thailand is a member of ASEAN but India is not. Presume the import price of textiles from India (P India) is 50 per unit under free trade and is subject to a 20 percent tariff. As of January 1st 2010, China and Thailand entered into the China-ASEAN free trade area, eliminating tariffs on Thai imports. Use the following figure to answer these questions:

1. Before the China-ASEAN free-trade area, how much does China import from each trading partner? What is the import price? Compute the tariff revenue.

2. What is the effect of the China-ASEAN free-trade area on the welfare of Thailand and India?

3. Based on your answer to part (b), what is the impact of the China-ASEAN free-trade area on the welfare of China?

4. After the China-ASEAN free-trade area, how much does China import from each trade partner? What is the import price? What is the total tariff revenue of China?

5. As mentioned in the Headlines: China- ASEAN Treaty Threatens Indian Exporters, the China-ASEAN agreement may lead to a similar one between India and China. How would this affect China’s imports from each country? What would be the effect on welfare in Thailand, China and India if such an agreement was signed?

Microeconomics, Economics

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