Trade Diversion

• What is the trade diversion argument primarily concerned with?

  A key negative aspect of customs unions
• What does trade diversion refer to in the context of customs unions?

  Movement from a low-cost foreign producer to a high-cost producer
• Why is trade diversion considered a negative outcome in terms of global resource allocation?

  It diverts trade from efficient to inefficient producers
• What is the initial trading relationship between the UK and Thailand before the UK joins the EU Customs Union?

  Free trade
• Before the UK joins the EU Customs Union, how is the excess demand in the UK satisfied?

  Imports from Thailand
• What is the direct consequence of the UK joining the EU Customs Union regarding trade with Thailand?

  Adoption of a common external tariff
• What is the effect of the common external tariff on the price of Thai goods in the UK?

  It increases the price
• How does the imposition of a common external tariff affect EU producers in the UK market?

  They become more competitive
• According to the lecture, are EU producers more competitive than Thailand due to a comparative advantage?

  No, only because of the tariff
• What happens to the UK's domestic supply of textiles after joining the Customs Union and the imposition of the tariff?

  It extends (increases)
• What happens to the UK's demand for textiles after joining the Customs Union and the imposition of the tariff?

  It contracts (decreases)
• After the UK joins the EU Customs Union, from where do the UK's textile imports primarily come?

  The EU
• According to the lecture, why does Thailand lose out on trade with the UK after the UK joins the EU Customs Union?

  The common external tariff
• What does the black triangle on the diagram represent?

  A dead weight loss of consumer surplus
• What does the black triangle specifically indicate?

  Loss of domestic efficiency
• Why is the increase in UK domestic supply considered inefficient?

  Higher cost than Thailand's supply
• What does the box on the diagram represent in terms of efficiency?

  A loss of EU efficiency
• According to the lecture, why are EU producers considered less efficient in this scenario?

  They lack comparative advantage over Thailand
• What does the lecturer say the box represents?

  Extra cost of inefficient EU production
• What does the lecture conclude is the overall impact of trade diversion?

  Thailand loses, EU gains inefficiently
• Besides trade diversion, what other generic arguments against tariffs are applicable in this context?

  Higher prices, loss of consumer surplus
• What other negative impacts are mentioned that can result from joining a customs union?

  Retaliation, regressive effects
• How does the lecturer describe the effect on low-income consumers of a tariff?

  They are likely to suffer
• In the context of trade diversion, what is a common external tariff?

  A tariff imposed on countries outside union
• Besides higher prices and loss of consumer surplus, what is another negative impact of a tariff?

  Dead weight loss of efficiency