How to Calculate Effective Rate of Protection

Effective Rate of Protection (ERP) Calculator

The tax rate applied to the final imported good.

The tax rate applied to the raw materials or intermediate parts.

The ratio of the cost of imported inputs to the final product price (under free trade).

Calculation Result:

function calculateERP() { var t = parseFloat(document.getElementById('nominalTariffFinished').value); var ti = parseFloat(document.getElementById('nominalTariffInputs').value); var a = parseFloat(document.getElementById('inputShare').value); var resultDiv = document.getElementById('erpResult'); var resultValue = document.getElementById('erpValue'); var resultInterp = document.getElementById('erpInterpretation'); if (isNaN(t) || isNaN(ti) || isNaN(a)) { alert("Please enter valid numbers for all fields."); return; } if (a >= 1 || a t) { resultInterp.innerHTML = "The Effective Rate of Protection (" + g_percent + "%) is higher than the Nominal Tariff (" + t + "%). This indicates that the domestic industry is receiving more protection for its value-adding process than the flat tariff suggests."; } else if (g_percent 0) { resultInterp.innerHTML = "The Effective Rate of Protection (" + g_percent + "%) is lower than the Nominal Tariff (" + t + "%). This happens because high tariffs on inputs are increasing production costs for local manufacturers."; } else if (g_percent < 0) { resultInterp.innerHTML = "The Effective Rate of Protection is negative. This means the tariff structure actually penalizes domestic production by taxing inputs more heavily than the finished product."; } else { resultInterp.innerHTML = "The Effective Rate of Protection equals the Nominal Tariff."; } }

Understanding the Effective Rate of Protection (ERP)

In international trade, the "Nominal Tariff" only tells part of the story. While a 10% tariff on a finished car might seem straightforward, the actual protection given to the local car manufacturer depends heavily on the tariffs applied to the steel, glass, and electronics they import to build that car. This is where the Effective Rate of Protection (ERP) comes into play.

What is the Effective Rate of Protection?

The ERP measures the total effect of the entire tariff structure on the Value Added per unit of output in a specific industry. Value added is the difference between the price of the final product and the cost of the imported intermediate inputs used to produce it. The ERP tells us how much more domestic producers can spend on processing and manufacturing costs while still remaining competitive with imports.

The ERP Formula

g = (t – a × ti) / (1 – a)

• g = The effective rate of protection.
• t = The nominal tariff on the finished product.
• a = The ratio of the value of imported inputs to the value of the finished product.
• ti = The nominal tariff on the imported inputs.

Example Calculation

Imagine a country that produces bicycles. The world price of a bicycle is $100.

1. The government places a 20% nominal tariff on finished bicycles (t = 0.20).
2. To make a bicycle, components like tires and gears cost $60 (a = 0.60).
3. The government places a 10% nominal tariff on these components (ti = 0.10).

Using the formula:

g = (0.20 – (0.60 × 0.10)) / (1 – 0.60)
g = (0.20 – 0.06) / 0.40
g = 0.14 / 0.40 = 0.35 or 35%

Even though the nominal tariff is 20%, the Effective Rate of Protection is 35%. This means the domestic bicycle assembly industry is much more protected than the nominal rate suggests.

Why ERP Matters

Economists and policymakers use ERP to identify "Escalating Tariffs." If a government wants to encourage domestic manufacturing, it will typically set low tariffs on raw materials and high tariffs on finished goods. This creates a high ERP for local factories. Conversely, if tariffs on inputs are higher than tariffs on the finished product, the ERP can become negative, effectively "taxing" the local industry and making it harder for them to compete with imported finished goods.