Sugar costs $130 domestically and $120 from a partner, with a 40% external tariff. What happens when a customs union removes the tariff between members?

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Question

Sugar costs $130 domestically and $120 from a partner, with a 40% external tariff. What happens when a customs union removes the tariff between members?

Accepted Answer

Buyers switch from the $130 domestic producer to the $120 partner — trade creation saving $10 a tonne — Award 1 mark. Working: before the union the partner's price was $120 × 1.4 = $168, so domestic supply won.

Answer

Buyers stay with the domestic producer, since $130 is still cheaper

Answer

Buyers switch to the partner at $168

Answer

Nothing changes, because the tariff applies to members as well

Answer

Buyers switch from the $130 domestic producer to the $120 partner — trade creation saving $10 a tonne

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