Question

Suppose that the U.S. government is under heavy pressure from the Rollerblade and K2 companies to put the brakes on imports of Bauer in-line skates from Canada. The protectionists demand that the price of a $200 pair of in-line skates must be raised to $250 if their incomes are to be safe. The U.S. government has three choices: (1) free trade with no protection, (2) a special tariff on in-line skates backed by vague claims that Canada is using unfair trade practices (citing Section 301 of the Trade Act of 1974), and (3) forcing Bauer to agree to a voluntary export restraint. The three choices would lead to these prices and annual quantities:

	With Free Trade	With an $80 Tariff	With a VER
Domestic U.S. price per pair	$200	$250	$250
World price per pair	$200	$170	$170
Imports of in-line skates (millions of pairs)	10	6	6

Note that the $80 tariff reduces imports by 4 million pairs a year, the same reduction that the VER arrangement would enforce.
a. Calculate the U.S. net national gains or losses from the tariff, and the U.S. gains or losses from the VER, relative to free trade. Which of the three choices looks best for the United States as a whole? Which looks worst?

b. Construct a diagram which displays the various calculated gains and losses. Will Canada prefer the U.S. tariff or the VER? Explain. (No gain and loss calculation required.)

Answer 1