International Trade GSM 5123 Effective Rate Of Protection

LECTURER : PROF. A.K.M AZHAR NAME : CHAN SHI YUN ( GM04045)

Overview
0 ERP Definition 0 Measure total effect of entire tariff structure on value added/unit of output in the related industry, when both final goods and intermediate goods are imported. 0 Formula
0 =
0V 0 V 0 0

, where =

: value added with free trade : value added with tariff : final good selling free trade price : cost of intermediate good at free trade price
2

Derivation
0 Suppose that 0 V= - 0 = ( + . )- ( . + ) 0 Apply (1) and (2) into =
0 : nominal tariff for final good 0 : nominal tariff for intermediate good

-------------(1) -------------(2)

. .

( 1 )

, where =

, that is value of imported input as share

of final good output under free trade

3

Illustration
0 In this example, industry : shoe
0 World price for shoe ( )= $50

0 Cost of leather ( )= $30

0 V = $50 - $30 = $20

0 (1) Suppose 10% nominal tariff being imposed on imported leather, and 20% tariff imposed on shoe
0 Domestic price for shoe = $50 x 1.2 = $60 0 Price of imported leather = $30 x 1.1 = $33 0 V = $60 - $33 = $27

0 =

$27 $20 $20

= 35%
4

Illustration
0 (2) Suppose 20% nominal tariff being imposed on imported leather, and 10% tariff imposed on shoe
0 Domestic price for shoe = $50 x 1.1 = $55 0 Price of imported leather = $30 x 1.2 = $36 0 V = $55 - $36 = $19

0 =

$19 $20 $20

= 5%

0 (3) Suppose 20% nominal tariff being imposed on imported leather, and 20% tariff imposed on shoe
0 Domestic price for shoe = $50 x 1.2 = $60 0 Price of imported leather = $30 x 1.2 = $36 0 V = $60 - $36 = $24

0 =

$24 $20 $20

= 20%

Explanation
0 From (1) to (2): 0 Nominal tariff for output , Nominal tariff for input 0 ERP 0 From (2) to (3): 0 Nominal tariff for output , nominal tariff for input 0 ERP 0 From (3): 0 Nominal tariff (input) = Nominal tariff (output) 0 So, ERP = Nominal tariff 0 From (2): 0 Nominal tariff output < nominal tariff input 0 So, ERP < 0 0 From (1): 0 Nominal tariff output > nominal tariff input 0 So, ERP > Nominal tariff output

Conclusion
0 ERP is used to estimate protection for local producer as to how

much extra producer can charge and still competitive with imported goods 0 If ERP < 0, means industry is effectively taxed rather than protected. 0 Producer can raise for higher ERP either by: 0 Seek for higher nominal tariff on output 0 Seek for lower nominal tariff on input