Background
Effective protection measures the impact of a tariff system on an industry’s value added, which refers to the net output value of the goods and services produced by the industry after accounting for inputs and other intermediary costs. This concept considers the tariffs applied not only to the final goods but also to the imported inputs used in their production. Essentially, it adjusts the nominal tariff rates to reflect their true economic impact on the domestic value added.
Historical Context
The term “effective protection” became prominent in economic discussions during the mid-20th century, particularly in the context of developing countries exploring import substitution policies. Economists sought to understand not just the face value of tariffs, but how these tariffs influenced local industries’ competitiveness and profitability. By focusing on effective protection, policymakers could design trade policies more strategically to foster industrial growth.
Definitions and Concepts
Effective protection rate (e) is defined mathematically by the formula:
\[ e = \left( \frac{{(1 + t) - a(1 + s)}}{{1 - a}} \right) - 1 \]
Where:
- \( t \) is the nominal tariff rate on the output.
- \( s \) is the nominal tariff rate on imported inputs.
- \( a \) is the proportion of imported inputs used per unit of output.
This formula essentially calculates the percentage change in the industry’s value added due to the tariff system.
Major Analytical Frameworks
Classical Economics
In classical thought, the focus was typically on the broader implications of tariffs and trade rather than nuances like the rate of effective protection. Classical economists emphasized free trade and minimal government intervention.
Neoclassical Economics
Neoclassical economists, with their emphasis on microeconomic foundations, helped quantify and formalize the concept of effective protection. They provided tools to measure the distortions caused by tariffs on both inputs and outputs, emphasizing the efficiency losses and potential comparative advantage distortions.
Keynesian Economics
While Keynesian economics primarily focuses on macroeconomic issues such as aggregate demand and fiscal policy, effective protection can interfere with key aspects like employment and output levels, as it affects industries’ competitiveness and production decisions.
Marxian Economics
Marxian economists might interpret effective protection as a form of state intervention that could both benefit and exploit the working class, depending on how gains from protected industries are distributed.
Institutional Economics
Institutional scholars would explore how institutional frameworks, like laws and regulations about tariffs, influence the actual and perceived benefits of effective protection, potentially stressing different outcomes for various industries.
Behavioral Economics
Behavioral economists may examine how firms’ perceptions and reactions to tariffs, including cognitive biases, differ from the perfectly rational responses assumed in traditional models of effective protection.
Post-Keynesian Economics
Post-Keynesians might critique effective protection from the perspective of demand-driven growth models, questioning its impact on industries’ long-term sustainability and broader economic stability.
Austrian Economics
Austrian economists, favoring minimal government intervention, likely oppose high tariffs and effective protection altogether, arguing that such policies distort market signals and lead to inefficient resource allocation.
Development Economics
Effective protection is particularly relevant here, as developing nations use it to nurture infant industries. Analysis of effective protection helps evaluate whether such policies achieve intended industrial growth and diversification objectives.
Monetarism
Monetarists focus on the adverse effects of tariffs including effective protection on the price stability and overall efficiency of an economy, highlighting how such barriers can lead to inflation and misallocation of resources.
Comparative Analysis
Comparative studies of effective protection rates across various countries and industries help evaluate the success and failure of different tariff structures. For example, countries with higher levels of effective protection might show more pronounced domestic industry growth, but also potentially greater inefficiencies and higher consumer prices.
Case Studies
Notable case studies often involve countries that implemented comprehensive trade policies. Examples can include:
- The experience of Latin American countries during the 20th century with import-substitution industrialization.
- The impact of protective tariffs on the technology sector in emerging Asian economies.
Suggested Books for Further Studies
- “Trade Policy and Economic Development” by Anne O. Krueger
- “Developing Countries and the Multilateral Trading System: From GATT to the Uruguay Round and the Future” by T. N. Srinivasan
- “Politics and Trade Policy: An Institutional Approach” by Taiji Furusawa et al.
Related Terms with Definitions
- Nominal Tariff Rate: The published tax imposed on imports and exports.
- Value-Added: The net output of a sector after adding up all outputs and subtracting intermediate inputs.
- Free Trade: The unrestricted import and export of goods and services between countries.
