Suppose that with free trade, the cost to the United States of importing a backpack from Mexico is $10, and the cost of importing a backpack from China is $9. A backpack produced in the United States costs $14. Suppose further that before NAFTA, the United States maintained a tariff of 75% against all keyboard imports. Then, under NAFTA, all tariffs between Mexico and the United States are removed, while the tariff against imports from China remains in effect. Assume that the tariff does not affect the world price of keyboards.
1. Before NAFTA, the United States imported backpacks from:
a. Neither Mexico nor China
b. China
c. Both Mexico and China
d. Mexico
2. Under NAFTA, the United States imports backpacks from:
a. Mexico
b. China
c. Neither Mexico nor China
d. Both Mexico and China
Answers: 3
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