Trade creation

• What type of agreement is a customs union?

  Agreement where members trade freely and have common barriers
• Within a customs union, what trade restrictions exist between member nations?

  No tariffs, embargoes, or quotas
• What kind of external trade policies do members of a customs union impose?

  Common external trade barriers
• What form does the common external barrier normally take?

  A common external tariff
• What does trade creation refer to in the context of a customs union?

  Movement from high-cost to low-cost producer within the union
• What is the effect of the common external tariff on UK exports to France initially?

  Increases the price of UK exports
• When the UK joins the customs union, what happens to the UK supply curve from France's perspective?

  It shifts downwards
• What is the impact on French demand when the UK joins the customs union and tariffs are removed?

  Extension of demand in France
• What effect does the UK joining the customs union have on domestic supply in France?

  Contraction of domestic supply in France
• What benefit do French consumers gain from the UK joining the customs union?

  A gain of consumer surplus
• What does the reduction in domestic French supply represent when the UK joins the customs union?

  A gain of world efficiency
• What happens to the level of imports from the UK to France after the UK joins the customs union?

  Imports increase significantly
• On the diagram, what does the movement from a high-cost French producer to a lower-cost UK producer represent?

  Trade creation
• Why is the scenario described referred to as "trade creation"?

  New trade opportunities are created
• What impact does joining a customs union have on the market size for the new member?

  Massive increase in market size
• What general benefits can a country gain from joining a customs union?

  Gains from free trade
• What are some specific benefits a country might experience by joining a customs union?

  • Economies of scale
  • Greater market access for domestic producers
  • Greater technological transfer
  • Lower prices for consumers
  • Greater consumer surplus
• What is the fundamental change illustrated by the trade creation diagram?

  Removal of a tariff
• What happens to tariff revenue for the importing country when a nation joins its customs union?

  Loss of tariff revenue
• According to the text, how many nations are within the EU?

  27
• On the trade creation diagram, what quantity represents the level of imports after the UK joins the customs union?

  q3 to q4