The percentage of the final product's value (at world prices) accounted for by imported inputs.
Nominal Rate of Protection:
Value Added (World Prices):
Value Added (Domestic Prices):
Effective Rate of Protection (ERP)
function calculateProtectionRate() {
// Get input values
var tFinalInput = document.getElementById('nominalTariffFinal').value;
var tInputInput = document.getElementById('nominalTariffInput').value;
var shareInput = document.getElementById('inputShareCoefficient').value;
// Validation
if (tFinalInput === " || tInputInput === " || shareInput === ") {
alert("Please enter all required values to calculate the Effective Rate of Protection.");
return;
}
var tF = parseFloat(tFinalInput) / 100; // Tariff on final good (decimal)
var tI = parseFloat(tInputInput) / 100; // Tariff on input (decimal)
var a = parseFloat(shareInput) / 100; // Share coefficient (decimal)
// Safety check for division by zero or invalid economics
if (a >= 1) {
alert("The share of imported inputs cannot be 100% or greater of the final value at world prices, as this implies zero or negative value added.");
return;
}
// Calculation logic using Corden's formula: g = (t_f – a * t_i) / (1 – a)
var numerator = tF – (a * tI);
var denominator = 1 – a;
var erpDecimal = numerator / denominator;
var erpPercent = erpDecimal * 100;
// Abstract Value Added Calculation for display (assuming Base 100)
var basePriceWorld = 100;
var inputCostWorld = basePriceWorld * a;
var valueAddedWorld = basePriceWorld – inputCostWorld;
var basePriceDomestic = basePriceWorld * (1 + tF);
var inputCostDomestic = inputCostWorld * (1 + tI);
var valueAddedDomestic = basePriceDomestic – inputCostDomestic;
// Update UI
document.getElementById('displayNominal').innerHTML = tFinalInput + "%";
document.getElementById('displayVaWorld').innerHTML = "Index " + valueAddedWorld.toFixed(2);
document.getElementById('displayVaDomestic').innerHTML = "Index " + valueAddedDomestic.toFixed(2);
document.getElementById('finalResult').innerHTML = erpPercent.toFixed(2) + "%";
// Interpretation Logic
var interpText = "";
if (erpPercent > parseFloat(tFinalInput)) {
interpText = "Positive Protection: The effective protection is higher than the nominal tariff (" + tFinalInput + "%). The tariff structure effectively subsidizes the domestic value-added process more than the final price suggests.";
} else if (erpPercent < 0) {
interpText = "Negative Protection (Disprotection): The domestic industry is effectively taxed. The tariffs on inputs outweigh the protection on the final product, making domestic production less profitable than under free trade.";
} else if (erpPercent 0) {
interpText = "Moderate Protection: Positive protection exists, but high tariffs on inputs reduce the effective benefit compared to the nominal tariff rate.";
} else {
interpText = "Neutral Protection: The effective rate equals the nominal rate, likely because input tariffs match output tariffs or inputs are negligible.";
}
document.getElementById('interpretationText').innerHTML = interpText;
document.getElementById('result-area').style.display = 'block';
}
Understanding the Effective Rate of Protection (ERP)
In international trade economics, the Nominal Rate of Protection only tells part of the story. It measures the tariff applied to the final product. However, domestic producers are concerned with the Value Added—the difference between the selling price of the good and the cost of intermediate inputs used to produce it.
The Effective Rate of Protection (ERP) measures the percentage increase in domestic value added per unit of output resulting from a country's tariff structure compared to value added under free trade. It essentially quantifies how much protection the tariff structure provides to the process of production rather than just the final product.
The ERP Formula
This calculator uses the standard formula for Effective Rate of Protection:
ERP = (tf – a × ti) / (1 – a)
Where:
tf = Nominal tariff rate on the final product.
ti = Nominal tariff rate on imported inputs.
a = The share of imported inputs in the value of the final product under free trade (Values between 0 and 1).
1 – a = The value-added share under free trade.
Why is ERP Important?
Policymakers and economists use ERP to understand the real impact of trade barriers:
Tariff Escalation: Often, countries set low tariffs on raw materials and high tariffs on finished goods. This results in an ERP that is much higher than the nominal tariff, heavily protecting domestic manufacturing.
Negative Protection: If tariffs on imported inputs (like steel or electronic components) are higher than the tariff on the finished good (like a car or computer), the ERP can be negative. This discourages domestic assembly and production.
Resource Allocation: Resources (labor and capital) tend to move toward industries with higher effective rates of protection, as they allow for higher returns on value added.
Example Calculation
Scenario: A domestic bicycle manufacturer.
Price of a bicycle (free trade): $100
Cost of imported aluminum/parts (free trade): $50
Value Added (Free Trade): $100 – $50 = $50
Tariffs Imposed:
Tariff on Bicycles (tf): 20%
Tariff on Parts (ti): 10%
Domestic Prices with Tariffs:
New Bicycle Price: $120
New Parts Cost: $55
Value Added (Domestic): $120 – $55 = $65
The Calculation:
The Value Added increased from $50 to $65, an increase of $15.
ERP = ($15 / $50) × 100 = 30%
Note that the Effective Rate (30%) is higher than the Nominal Rate (20%).
How to Interpret the Results
ERP > Nominal Rate: Occurs when the tariff on the final good is higher than the tariff on inputs. This is common in manufacturing.
ERP < Nominal Rate: Occurs when tariffs on inputs are significant, eating into the protection provided by the final good tariff.
Negative ERP: The industry is effectively taxed by the trade policy; value added at domestic prices is lower than at world prices.