economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analy ...

, the effective rate of protection (ERP) is a measure of the total effect of the entire tariff structure on the

value added In business, total value added is calculated by tabulating the unit value added (measured by summing unit profit Price.html" ;"title="he difference between Price">sale price and production cost], unit depreciation cost, and unit Direct labor co ...

per unit of output in each industry, when both intermediate and final goods are imported. This statistic is used by

economist An economist is a professional and practitioner in the social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy. Within this field there are ...

s to measure the real amount of

protection Protection is any measure taken to guard a thing against damage caused by outside forces. Protection can be provided to physical objects, including organisms, to systems, and to intangible things like civil and political rights. Although t ...

afforded to a particular industry by

import duties A tariff is a tax imposed by the government of a country or by a supranational union on imports or exports of goods. Besides being a source of revenue for the government, import duties can also be a form of regulation of foreign trade and polic ...

tariffs A tariff is a tax imposed by the government of a country or by a supranational union on imports or exports of goods. Besides being a source of revenue for the government, import duties can also be a form of regulation of foreign trade and po ...

or other

trade restriction A trade restriction is an artificial restriction on the trade of goods and/or services between two or more countries. It is the byproduct of protectionism. However, the term is controversial because what one part may see as a trade restriction a ...

History

Early work on the concept was undertaken by

Clarence Barber Clarence Lyle Barber (May 5, 1917 – February 27, 2004) was a Canadian economist and academic. Born in Wolseley, Saskatchewan, he received a B.A. in economics from the University of Saskatchewan in 1939. He won a scholarship to Clark Uni ...

. The idea was developed and applied to policy analysis by Max Corden.

Explanation

Consider a simple case: there is a

tradable Tradability is the property of a Good (economics and accounting), good or Service (economics), service that can be sold in another location distant from where it was produced. A good that is not tradable is called non-tradable. Different goods ha ...

good (shoes) that uses one tradable input to produce (leather). Both shoes and leather are imported into the home country. Suppose that in the absence of any tariffs, shoes use $100 worth of leather to make, and shoes sell for $150 in the international markets. Shoemakers around the world add $50 of value. If the home country imposes a 20% tariff on shoes, but no tariff on leather, shoes would sell for $180 in the home country, and the value added for the domestic shoe maker would increase by $30, from $50 to $80. The domestic shoe maker is afforded a 60% effective rate of protection per dollar of value added. This equals

(VA

_d/

VA

_int -

1

, where: : VA_d = domestic value added : VA_int = international value added An alternative that yields an identical answer is that the effective rate of protection equals

(T

- T

_i)

/VA

_int, where: : T_f = the total

tariff A tariff is a tax imposed by the government of a country or by a supranational union on imports or exports of goods. Besides being a source of revenue for the government, import duties can also be a form of regulation of foreign trade and p ...

theoretically or actually paid on the final product : T_i = the total tariffs paid, theoretically or actually, on the ''importable'' inputs used to make that product. The effective rate of protection is used to estimate the protection really afforded to domestic producers at each stage of production, i.e., how much extra they can charge and still be competitive with imported goods. If the total value of the tariffs on importable inputs exceeds that on the output, the effective rate of protection is negative, i.e., the industry is discriminated against in comparison with the imported product. In this context, it does not matter whether the final product or the inputs used to make it were actually imported or not. What is important is that they are importable. If so, the implied tariffs should be included in the above formulas because, even if the item was not actually imported, the existence of the tariff should have raised its price in the local market by an equivalent value. The effective rate of protection reveals the extremely adverse effect of tariffs that escalate from low rates on raw materials to high rates on intermediate inputs and yet higher rates on the final product as, in fact, most countries' tariff schedules do. Less developed countries complain that such tariff schedules gravely impede their access to developed countries' markets.

References

{{DEFAULTSORT:Effective Rate Of Protection International trade theory Protectionism Theory of taxation

Protection Protection is any measure taken to guard a thing against damage caused by outside forces. Protection can be provided to physical objects, including organisms, to systems, and to intangible things like civil and political rights. Although t ...

History

Explanation

See also

References