Based on free trade (world) prices. Must be less than 100%.
Please enter a valid share between 0 and 99.9.
Effective Rate of Protection (g)
0.00%
function calculateERP() {
// Clear previous errors
document.getElementById('errorFinal').style.display = 'none';
document.getElementById('errorInput').style.display = 'none';
document.getElementById('errorShare').style.display = 'none';
document.getElementById('resultBox').style.display = 'none';
// Get Input Values
var t_final_raw = document.getElementById('nominalTariffFinal').value;
var t_input_raw = document.getElementById('nominalTariffInput').value;
var share_raw = document.getElementById('inputShare').value;
// Validation
var isValid = true;
if (t_final_raw === "" || isNaN(t_final_raw)) {
document.getElementById('errorFinal').style.display = 'block';
isValid = false;
}
if (t_input_raw === "" || isNaN(t_input_raw)) {
document.getElementById('errorInput').style.display = 'block';
isValid = false;
}
if (share_raw === "" || isNaN(share_raw) || parseFloat(share_raw) >= 100 || parseFloat(share_raw) parseFloat(t_final_raw)) {
interpText = "The domestic industry is protected more effectively than the nominal tariff suggests because tariffs on inputs are low relative to the final good.";
} else if (g_percent 0) {
interpText = "The protection is dampened by tariffs on intermediate inputs, but value added is still positively protected.";
} else if (g_percent < 0) {
interpText = "Negative Effective Protection! The tariff structure actually penalizes the domestic industry (tax on domestic production) because input tariffs are too high.";
} else {
interpText = "The effective rate equals the nominal rate.";
}
interpElement.textContent = interpText;
}
Understanding the Effective Rate of Protection (ERP)
In international trade economics, the Effective Rate of Protection (ERP) is a critical metric that goes beyond simple nominal tariff rates. While a nominal tariff tells you the tax rate on a final imported good, it does not reveal the true level of protection afforded to domestic producers. To understand the real economic advantage given to a domestic industry, we must account for tariffs on the intermediate inputs used in production.
What is Effective Rate of Protection?
The Effective Rate of Protection measures the percentage increase in domestic value added per unit of output that results from a given tariff structure. It considers two opposing forces:
Subsidy Effect: Tariffs on the final good allow domestic producers to raise prices, increasing their value added.
Tax Effect: Tariffs on imported inputs (raw materials) increase costs for domestic producers, decreasing their value added.
If the tariff on the final product is higher than the tariff on inputs, the effective protection is generally higher than the nominal rate. Conversely, if inputs are taxed heavily, the effective protection can be negative, harming the domestic industry.
The Formula
The calculator above uses the standard formula for the effective rate of protection (g):
g = (tf – a × ti) / (1 – a)
Where:
g: The Effective Rate of Protection.
tf: The nominal tariff rate on the final good.
ti: The nominal tariff rate on the imported input.
a: The share of the cost of the imported input in the price of the final good (calculated at free-trade world prices).
1 – a: The value-added share at world prices.
Real-World Example: Bicycle Manufacturing
Let's assume a country manufactures bicycles. Under free trade, a bicycle sells for $100. The cost of imported aluminum and rubber (inputs) is $60. Therefore, the domestic value added is $40 ($100 – $60).
Now, the government introduces tariffs:
Tariff on Bicycles (tf): 20%
Tariff on Aluminum/Rubber (ti): 10%
Calculation Steps:
New Price of Bicycle: $100 + 20% = $120.
New Cost of Inputs: $60 + 10% = $66.
New Value Added: $120 – $66 = $54.
Increase in Value Added: $54 – $40 = $14.
ERP: ($14 / $40) × 100 = 35%.
Even though the nominal tariff on the bicycle is only 20%, the Effective Rate of Protection is 35%. This shows the industry is heavily protected because the tariff on the final good is higher than the tariff on the inputs.
Why is ERP Important?
1. Resource Allocation
ERP is a better indicator than nominal tariffs regarding how resources (labor and capital) move between sectors. Industries with high ERP tend to attract more resources, potentially leading to inefficiencies if those industries are not naturally competitive.
2. Negative Protection
It is possible for the ERP to be negative. This happens if tariffs on inputs are significantly higher than the tariff on the final product. In this scenario, the trade policy effectively taxes the domestic producer, discouraging domestic manufacturing.
3. Trade Negotiations
During World Trade Organization (WTO) rounds or bilateral trade agreements, negotiators look at ERP to understand the true impact of tariff reductions. Reducing a tariff on a final good without reducing tariffs on inputs can drastically slash the effective protection, leading to rapid deindustrialization in that sector.
Interpretation of Results
Scenario
Result
tf > ti
ERP > tf (Positive Protection). The industry is protected more than the nominal rate suggests.
tf = ti
ERP = tf. The effective rate equals the nominal rate.
tf < ti
ERP < tf. Protection is reduced. If inputs are taxed too high, ERP can become negative.