Trade Diversion versus Trade Creation in Joining a Trade Bloc: US Market for Imported Compact Cars
(Figure 11.2)

Assume that Britain joins the European Union (EU), as it did in 1973, removing all tariffs on goods from the EU while leaving the same tariffs on goods from outside the EU. Under the simplifying assumptions made here, German cars now cost only £5,500 in Britain (instead of that plus the £1,000 tariff), while the price of Japanese cars in Britain remains £6,000 because they still incur the tariff. British purchasers of imported cars switch to buying only German cars. In addition, seeing the price of imported cars fall to £5,500 in Britain, they buy more (at point B). Press "Show point B" to show this point on the graph. Clearly, British car buyers have something to cheer about. They gain the areas a and b in consumer surplus, thanks to the bargain. Press "Show areas a and b" to show these areas on the graph. But the British government loses all its previous tariff revenue, the area a + c. Press "Show tariff loss" to show this area on the graph.
Press "Continue" when you are ready to move on. The "Reset" button will clear the graph.